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Stock investing is about how much you bought or sold when you got it right

Stock buying and selling has become as easy as sending money with UPI.

, ET CONTRIBUTORS|
Updated: Nov 21, 2019, 07.36 PM IST
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The key benefit of being a professional investor is to know the difference between correlation and causation.
Being an equity investment professional has a few non-obvious drawbacks and benefits. Many people, who are non-market professionals, sometimes assume that we know if the market is going to go up or down from where it is today. Eventually, after a few polite responses regarding being a bottom-up thinker and not a top-down one, the next question comes, almost like clockwork: “OK. So which stocks should I buy or sell?“

The key benefit of being a professional investor is to know the difference between correlation and causation. Just because someone is a professional investor, she will not necessarily know market movements. Her guess could be as good as the person asking the question.

Where it gets tricky is at stock-specific discussions, when there can be a huge gap in understanding the risks or opportunity of evaluating a security from the point of view of a portfolio; let me repeat, from the point of view of a portfolio.

Stock buying and selling has become as easy as sending money with UPI or posting on social media. What has not changed is the effort needed to understand a business, figure out the character and the ability of the management, understanding the opportunities and risks of being involved in such a business, and lastly, portfolio allocation style that will lead to the buy or sell decisions.

Stock research has also become democratised to some extent with the availability of free online tools and websites that provide preliminary financial analysis. Almost every company worth tracking hosts conference calls and websites maintain archives of these calls. Countless blog posts and podcasts provide the means for any amateur investor to build the capabilities of a research analyst.

Online portals provide latest company updates and announcements and allow investors to build tracking portfolios of the businesses they are interested in tracking. All this without having to open a spreadsheet even once.

This has certainly helped grow interest in the markets and in tracking stocks. Sadly, it has done nothing to help an investor learn how to build a portfolio of good businesses. The biggest differentiators in portfolio allocation is not which stock you bought or sold, it is how much did you own when you were right or wrong about it.

Unfortunately, this can’t be taught beyond providing general rules. Just like a person who learns to ride a bicycle as a kid can be taught very general rules about riding the bicycle and they’ll pick up the basics, but whether the person will evolve into a commuting biker or a professional bike racer depends on their own motivation and application of those general rules.

All the tools in the world can’t make us a good investor, just because they exist. The ability to learn by doing, understanding how to judge and tolerate risks, tailoring the allocation to our individual financial goals are all rooted in experiencing the effects of investing ourselves.

The tools required to build this experience also exist. They are, time to put in the effort, focus on sound business and valuation principles, patience to stay the course, judgement of risk and capital allocation and after a few years of experience, intuition of when to invest or not invest. None of these can be scaled and that’s our limitation as well as opportunity as an investor.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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