Developing Mindset

Dated 26/06/2021

Hello Dear Reader,

Before we start our journey to deep dive on some topics on finance, economics, valuation and of course talk about some companies I like, today in my first letter to you I would like to talk about mindset.

I feel in investing, and in life, having the right mindset is very important.

We will take investing for our example here and cut straight to the brass tacks.

When we start investing in capital markets, we usually do one or all of the below:

1. We don’t understand the rationale behind the investment we are making.

2. We fall in love with the company.

3. We do not show patience.

4. We tend to jump in and out of our positions too quickly.

5. We often at times attempt to time the markets.

6. We hold on to our losers for long in hopes of breaking even on them or perhaps even profiting from them someday.

7. We do not diversify well enough, and if we do, we tend to diworsify.

8. We let our emotions get the best of us.

I can tell you in all honestly I have made all of these mistakes in my investment journey. My biggest mistakes have been falling in love with my companies, trying to time the markets, holding on to my losers and being emotional rather than objective.

I do not want to bore you people with a lot of BS. But here are some facts that I would like to present to all of you.

• The Nippon NIFTYBEES has given a CAGR return of 12.60% over the last 10 years.

• The Nippon NIFTYJUNIORBEES has given a CAGR return of 14.17% over the last 10 years.

• The Motilal Oswal NASDAQ100 has given a CAGR return of 26.26% over the last 10 years.

• The Nippon BANKBEES has given a CAGR return of 12.98% over the last 10 years.

If an equal weighted portfolio was constructed with equal allocation on all these ETFs, the average 10 year CAGR return would be 16.5%.

This would be a return not picking up any annual report or looking at what is happening in the stock markets on a day to day/weekly/quarterly/annual basis.

Here, I would like to talk to all of you about the Rule of 72.

The Rule of 72 is one of the most useful tools to estimate, quickly and efficiently, both the number of years necessary at a given rate of return to double your money and the rate of return that would be required to double a specific amount of money in a predetermined number of years.

We calculate it as:

Required CAGR to Double Money = 72 divided by number of years in which you wish to double your money

Taking the above value of 16.5% as an average CAGR we would get over 10 years, doing nothing, we would be able to double our money every 4 and a half years. By this account, Rs. 1 lac invested in year 0 would be close to Rs. 4 lacs in year 10.

My point here is not to demotivate you from investing in direct equity.

I only want to touch upon the fact that history has proven that doing nothing you can make an absolute 4x return on your money in less than 10 years. It takes you just about the same time to double your money in an FD.

We are humans. We are by nature lazy, greedy & fearful at times, ambitious, self serving vain and ignorant. In our quest for security, comfort, leisure, love, respect and fulfilment, we often tend to take the instant gratification route.

A friend calls or messages you, or you see a message in a WhatsApp or Telegram Group or your Twitter Feed which says that a stock will go up 10-20% in the next few months, and it does and you may or may not choose to act upon it. But when such a pattern forms, it becomes a habit. Habits are easy to make, hard to break.

I am not discouraging anyone from listening to people on Twitter, Telegram, WhatsApp or even on TV Channels for that matter.

I am just asking you guys a couple of questions the answer of which you need to ask yourself.

1. Will you be able to earn more than a 10 year CAGR return of over 16.5% investing in direct equity?

2. Do you have the time to constantly:

   • Monitor the company’s performance on a quarterly/annual basis

   • Monitor the corporate governance issues in the company on a quarterly/annual basis

   • Keep track of credit rating reports and analyst reports

   • Constantly make changes in your investment rationale if and when required

   • Regularly attend con-calls, analyst meets and AGMs of the company

   • Deep dive into the company’s annual reports

   • Prepare Excel based financial models

3. Can you develop a temperament to stay away from all noise regarding the other companies in the market which can become rockets?

Basically, can you be an activist investor in your company/ies while being a passive observer of markets and still beat 16.5%?

If the answer is yes, you have the right mindset to invest in direct equities.

If the answer is no, and you have recently enjoyed a lot of gains in market out of either sheer luck or perhaps the timing of your entry or by just investing in tips and unsolicited advice you have received on Telegram, WhatsApp, Twitter, TV Channels, etc., do give heed to this quote by Mr. Buffett:

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money.

- Warren Buffett (2009). “Warren Buffett on Business: Principles from the Sage of Omaha”, p.163, John Wiley & Sons

Rgds,

Ayush Agrawal

For any queries or feedback, do get in touch with me on valueinvestorayush@gmail.com

Disclaimer: The author of this publication is not a SEBI Registered Advisor or Analyst. The information on the company and its promotor mentioned in this newsletter is provided for information purposes only. It does not constitute an offer, recommendation, or any investment advice to any person nor does it constitute any prediction of likely future movements in the company’s stock prices or business performance. It should not be used as a basis for any investment decisions or as a proposition to buy or sell any securities. Please seek advice from a registered financial advisor and do your own due diligence before making any investment decisions.