In The Market, But Out Of Sync

Ever wondered why your investments are not reaping the dividends you seek? You diligently follow your broker’s advice, but still remain unsatisfied with the returns you make on your portfolio. You seek to find the solution outside but the truth is, the problem isn’t outside, it is lying inside.

At this juncture, I would like to bring in the concept of investment philosophy. But before I dwell deep on what it is and why it is important, I want you to think of the people who have been extremely successful in picking investments and have generated immense wealth for themselves. I mean if you come to think of it, you could literally count these people on your fingers.

· The Oracle of Omaha and Ben Graham’s protégé Warren Buffett, the world’s greatest stock picker is one.
· Carl Icahn, the activist growth investor, is another.

And then we have momentum investors or lemmings, as Buffett puts it. They are the people who ridicule Graham and invest based on market moods. While a value investor aims to buy low and sell high, the momentum investor buys high and aims to sell even higher.

I don’t intend to be all judgemental and write off momentum investing as plain and simple gambling (which I think it is) because clearly, we have seen enough people making a lot of money by following a momentum-based investment philosophy. The biggest example is Richard Driehaus, recognised by many as the father of momentum investing.

The point I am trying to make here is that the old philosophy of one shoe fits all doesn’t bode well in the markets. If people are so different, there is no reason that their respective investing philosophy should match. It, too, can differ.

So the point I am trying to make is that if you are frustrated from the returns you are making on your portfolio, the problem lies within.

The solution
Well, it’s quite simple. Each person is different because he thinks differently, his beliefs are different and hence, if everyone starts doing the same thing, clearly those who don’t believe in it will fundamentally stand on the losing side.

To put it precisely, like all other important things in life, your investment style should reflect your persona and your reality.

What I mean is don’t tell me off the back that you are a long-term investor or a value investor because it may not be in your hands. Maybe you have to meet urgent family needs like college tuition for your kids, a new car for your spouse or medical expenses for your parents, which may very well be the factors driving your time horizon or for that matter, the risk you are willing to take on your investments.

So what is an investment philosophy?
Simply put, an investment philosophy is an inherent way of thinking about the market, how it works, where and when it makes mistakes and how you can make money out of it. For example, Warren Buffett proclaims that markets are inefficient and it is important to study individual investments closely to make any sense of your investments. On the other hand, momentum investors think that markets are, indeed, correct and best reflect the value of the stock, and the only way to make money is to predict stock price movements based on history. The technique they use is famously called technical analysis or charting.

So which one should you choose? Well, you can choose any philosophy and be a successful investor as long as it meets two fundamental criteria:
a) It should be fundamentally consistent with the market’s behaviour.
b) It should perfectly fit your characteristics.

In case you are still not convinced if you should spend some time thinking whether you really need a philosophy to make money or not, here are a few reasons that may just motivate you to think about it.

You fall easy prey to people selling a magic strategy that beats the market. Don’t tell me you haven’t come across such people; these sharks are everywhere.
Not having a strategy makes you take brash decisions, leading to incremental costs like taxes and spreads affecting your returns.
And finally, if you are not thinking about a best-fit strategy, you will probably end up with a strategy that fits your broker more than it fits you.

About the author: Rohit Singh is the founder of www.investobharat.com, a platform dedicated to bust the jargon and offer unbiased and crowd-sourced investment analysis. This is the first in a series of articles he will write on developing an effective investment strategy, one that really drives your portfolio and matches your inherent characteristics as an individual.