What kind of an investor are you?

Almost every evening, before dozing off to sleep, I get my daily ‘fix’ of TV watching. During the weekends, it is usually the live telecast of a soccer or a tennis match. Occasionally, a golf tournament. But during weekdays, it is invariably a wild life programme. The eternal game of life and death that plays out on the vast grasslands of Africa is fascinating to watch.

Human society has a hierarchical system, based on a combination of political power and money. The animal kingdom has its own hierarchical system, based on size and physical power. The lion is often referred to as the ‘king’ – but the king doesn’t mess around with an elephant or a rhinoceros.

Humans have been endowed with mature brains that can think creatively to plan and implement strategies that can enhance and improve their standard of living. Animals are less endowed in thinking skills and rely more on instinct and training to survive.

What has all this got to do with being an investor? Survival of the fittest works in the stock market, just as it does in the African savanna. To ensure survival and prosperity, you have to first decide what kind of an ‘animal’ you are and what kind of an ‘animal’ you aspire to be.

If you have not inherited a huge sum of money, don’t plan on being a lion of the stock market. If you are not the favourite relative of a powerful minister, being an elephant or a rhinoceros is out of the question. That leaves some of the less powerful and smaller animals.

The next decision – to carry the analogy a little further – is to decide if you want to be a predator, a prey, or a scavenger. A bit of honest self-analysis is needed here. If you have enough knowledge, experience and cash – you can be a leopard or a cheetah. That means playing in the same arena as the big boys, but keeping out of their territory. An example? Stay out of stocks where RJ or RD are known to have large stakes. Those who have been badly wounded in Bilcare or Delta Magnets may know what I’m talking about.

Why should you decide to be a prey? Strangely, some investors do precisely that. They hand over their trading account to a broker or a bank (mistakenly referred to as ‘wealth managers’). They are usually HNIs – meaning wealthy and may be quite powerful – who are just not bothered about the dangers that lurk among the tall grass. Like the zebras and the wildebeests, they become dinner (I mean, their money gets siphoned off by the wealth managers).

‘Scavenger’ sounds like a dirty word. But there are solid advantages to being a vulture or a jackal – if you are willing to do a little hard work. If you have the ability of spotting an investment opportunity (usually a less known mid-cap or small-cap stock) before other scavengers jump onto the bandwagon, you can be in and out with a tidy profit.

Moral of the story? Your investment success will depend on your survival skills and the amount of staying power (spare cash) you have.

Related Post

Don't be a bull or a bear in the stock market, be an African python

Don't be a bull or a bear in the stock market, be an African python

The triangular headed South African python is a truly awe-inspiring reptile - massive in length and weight, immensely strong with an intricately patterned shining skin. The other day, on the National Geographic channel, the camera followed such a beauty as it slowly slithered through the bushes and weeds and glided into a watering hole.

There it hid with only its snout above the water - and waited patiently. Day followed night and night followed day - and still it waited. Animals big and small, arrogant and shy, came to the watering hole for a drink. The python didn't move.

Six days and nights passed - and no body except the camera-person knew that the python was lying in wait. On the 7th evening a herd of deer came for a drink. A younger and frisky member ventured a little further from the water's edge - unaware of the peril.

Suddenly, the water hole exploded into action. With its immense muscle power, the python lunged out like greased lightning and in the blink of an eye had wrapped itself around its prey. The poor animal probably didn't even know what hit him.

The South African python is used to spending weeks and even months without feeding. Some times it eats the odd rodent or bird. But when it really wants to eat, it plans its every move and with infinite patience grabs a large meal so that it won't have to eat for a long time.

Like the python, a successful long term investor does not need to 'feed' (i.e. trade) every day or every month. Once in a long while, the stock market provides an ideal opportunity to grab a few frontline stocks at mouth-watering prices. Back during the 2002-2003 bear market period, stocks like Tata Steel was available at 100, M&M at 90, ITC at 60 (actually 600 for a Rs 10 share). All three subsequently offered bonus shares at 1:2, 1:1 and 1:2 ratios respectively.

There were many other shares going for a song and which made a ton of money for savvy long term investors. Since then, we had a one-way bull-market with V-shaped corrections in 2004 and 2006. But after 5 long years we are now in a full-fledged bear market which seems to have completed its first leg at 12500.

For long term investors, this is the right time to behave like the python. Don't jump yet. Conserve your muscle power (i.e. cash), decide on a few target companies and wait patiently for the market to exhaust its second leg. This will possibly happen in the 15500-16500 range. (A few 'dud' shares in your portfolio can be sold in that range.)

The Q1 results declared so far show that top line growth has been satisfactory for most companies. But margins growth has been far lower and below expectations. With inflation rate still in double digits, interest rates are unlikely to come down any time soon. The lower oil prices and political stability are the silver linings.

The Q2 results are likely to be worse than Q1. The market will probably have a third leg down to test the 12500 bottom, and panic and doom will be all around. Time frame should be around October. That will be the right time to lunge.