India became independent in 1947 but it became a Republic only in 1950. The 26th of January 1950 marks the day when India formally adopted and enacted the Constitution. But what do we understand by a constitution. Remember, India and the US have written constitutions while the UK has an unwritten constitution.
A constitution, for any nation, is the set of fundamental principles and established precedents based on which the nation will be governed. It is important to be governed by a constitution because it sets the framework on which nations function and the rights and obligations of the people are recognized.
Time for an individual investment constitution
It is perhaps paradoxical, that at the time India is celebrating 72 years of becoming a Republic, its financial markets are in a state of tumult. One can argue that markets are supposed to be volatile and tumultuous by default, but that is not the answer. Millions of equity and mutual fund investors who are exposed to the stock markets find themselves unwittingly dragged into this turmoil. The need of the hour is a constitution.
Note that markets have a constitution in the form of regulatory frameworks. But that is meant to broadly protect the integrity and fairness of the markets. How can individual investors protect their investments, their assets and their long term goals. It can be done with a well-crafted investment constitution. Here is how to go about it.
12 Ideas for a Constitutional Framework for your Investment Strategy
Here are some basic ideas that can help you to document and work on a constitutional framework for your investments.
a) Do Your Homework before investing in any stock. Now, that sounds so simple, but that is what you often miss out. This should be your preamble; that you will never buy a stock without perfectly understanding what the company is doing and why they are doing it.
b) Diversifying to control risk is must. Don’t listen to people who say that they have put all their bets on a single stock. Even the best investors in the world diversify because that is your defence against the vagaries of the stock market. Spread your risk.
c) You don’t become a millionaire by panicking. That sounds harsh, but investing is about maintaining a cool head. When you panic, you subsidize the other investor who does not panic. Have doubts, ask questions and manage risk; but don’t react to events in panic.
d) Don't do bulk buying of stocks and don’t own too many stocks. To the extent possible, try to phase out your buying and selling of stocks as you invariably will end up getting a better price. You need to own about 10-15 stocks to be diversified, but you don’t have to own 100 stocks. That just makes your investments bulky and hard to handle.
e) Buy damaged stocks but not damaged companies. Even the best of stocks fall without reason. These are opportunities. But not every loss making company that is deep in debt should be bought at lower prices. Damaged balance sheets are best avoided. Some stocks are penny stocks because that is where they deserve to be.
f) Have few high conviction stocks and defend them. You don’t rush to the exits when your high conviction stocks fall. However, that does not mean that you jump to defend every stock. In the investment business what matters is how long you hold your winners and how quickly you exit your losers.
g) Be flexible to change your ideas. Nothing in the world of investments is engraved in stone. Even an investor like Warren Buffett, who is averse to technology investments, has Apple as his largest holdings. Flexibility is about accepting when your convictions are wrong and making changes accordingly.
h) Buy on hope and sell on hype. This is another way of saying buy on fear and sell on greed. When everyone in the street is buying, you can be sure you are at the end of the rally. That is not the time to buy. In fact, before everybody starts believing the hype, it is time for you to plan your exit.
i) Try and explain your decision to kids. This is a fairly interesting idea. The best ideas are normally simple and this applies to investments too. If you think a stock is a good idea, take a chalk and try to explain the idea to a young boy or girl. If you think you are able to get your point across to them effectively, then it is an idea worth exploring.
j) Don’t make losing a habit. When it comes to investing, it is not about how much you can afford to lose. You can never afford to lose. You have to be paranoid about wrong calls, bad investments and investment losses. The day you become complacent about these things; you make losing a habit.
k) Equities are not the end of the world. We often tend to equate the success of our investment strategy by the levels of the Sensex and Nifty. These indices are representative, that is all. Remember, there is a huge world of bonds, gold, REITs, liquid assets, silver, commodities and structures outside equity. Explore that world too.
l) Finally, you must remember that hope is a good breakfast, but a bad supper. It is good to start the day with hope. But keep a frequency tab of the number of days you end with just hope. The more days you close with hope, you are at risk.
The above 12 points are to give you an idea so that you start writing down your investment constitution. After all, what better day to undertake this activity, than on India’s Republic Day.
Here is you wishing you a Happy Republic Day celebration.