Please find below our key points from CFA Society India YouTube video of one of the best investor "Sanjoy Bhattacharya" (Emphasis ours).
Learning not to trust in common myths is what will make you a successful investor. Common myths are:
Bhav Bhagwaan che- it is junk as Efficient market hypothesis is junk (EMH), Markets are efficient 85 to 90% of the times but they break down and when they break down is when opportunity presents itself in spades. You can make a fortune that will last 7 generations if you are smart at that time (2008 was such one opportunity).
Talking heads on CNBC who have no skin in the game- e.g.: You might have heard “Large caps are less risky than mid-caps & small-caps” but how?
You are not buying a cap, you are buying a business, it doesn't matter what the cap of the business is. It is the business and your conviction that matters!
Brain Accounts 2-3% of total body weight but consumes almost 25% of the body’s energy & is constantly searching for ways to go in energy saver mode which means that we tend to rely heavily on borrowed wisdom & cognitive shortcuts which can be profoundly damaging when making investment decisions.
One reason for the biggest number of investing errors is “Overconfidence”. We can’t accept we are wrong so we look around for evidence that supports our thesis or our point of view. To get rational you need to do one thing which Charlie Munger said “Whenever you have an idea look for things which are going to prove you wrong” (Invert/ disconfirm).
Endowment effect: We overvalue what we own and undervalue what we don’t. Selling is the most difficult part of investing because of the endowment effect. It was observed that selling in a portfolio would be less than 5-10%% but finding the next multibagger would be around 85%. We also hold on to our loser for too long & are failing to rebalance our portfolio.
Rule number one in smart investing: Never try Forecast. No one knows the future.
Overcoming Ego: One of the things you can do to protect yourself against your own ego is to “Diversify” . This doesn’t mean you lack the conviction all it means is you don’t have a portfolio highly concentrated i.e. of 8-9 stocks.
Feynman technique: If you don’t know something then try to figure it out on your own that you don’t know this thing. Secondly, Go in depth about it and educate yourself on that topic. And lastly, try to explain it to the people who don’t know anything about it like for example: a school kid or your parents or a person who isn’t connected to this field.
Best investors are the people who have humility and who are willing to accept that they have gone wrong. Once you recognize you made a mistake then think about it in multiple layers because true learning will take place when you explore that thing in depth.
1)When you buy a stock & you have conviction that this stock will compound 15-18% over the next 4 years then don’t worry about the short term volatility.
2) Banish the fear of losing
The most important thing is not how often you are right, it’s when you are right the magnitude of being right & when you are wrong then sell it off quickly so that losses are small. That’s the trick to smart investing.
There are 2 types of things:
The difference between risk and uncertainty is that in risk you can identify the area of outcome and assign probability to the area of outcome but in uncertainty you can do no such thing.
Think slowly, don’t jump to conclusions too quickly, you'll save yourself a lot of money in life by thinking slowly. If there is a mantra to investing then it is “Procrastinate”. Once you make a rational evidence-based assessment it takes a long time to make that decision but once you make it don’t just buy a very small amount to your portfolio like 2-2.5%.
Signal V/s Noise: If you have any idea then it should pass three tests:
There should be data supporting the validity of that idea.
There should be a sound theoretical foundation supporting the data.
It must be difficult for that event to be changed.
You can not outperform the market all the time.
Coping with emotions:
The best way to cope with your emotions is to meditate or do yoga everyday.
Automate the process and follow them
Learn to recognise your emotional state and understand how it impacts your appraisal of risk and opportunity.
Luck V/s Skill
Luck means you can achieve success by accident & in the stock market it is happening every day.
Outperforming Index is not the definition of success, that's the wrong definition. If a fund manager has been in the markets for more than 15 years then it is called the skill. Skill demands practice.
You don’t need to be smart to succeed in the stock market.
Build an investment process which cuts your behavioral errors.
Do less (churn less) make less decisions you’ll improve your odds.