Can retail investors aka ‘retailers’ make life changing wealth - outsized returns - in the stock market?
It is a rhetorical question. Speaking from my personal experience, the answer is a resounding yes. As Jack Nicholson made that infamous quote in the movie ‘A Few Good Men’ (albeit, in a different context), “are you prepared to handle the truth”? If not, you will not. Firstly, do you have the psychological architecture to believe and think the asset that you are holding is worth its value and even much more. Have you done enough research independently (no, not sell-side brokers) or from the writings of some macro thinkers (again, not sell side brokers).
To get that sort of conviction, your focus just cannot be on breakouts from a triangle nor not buying something simply because its PE is too high.
Please don’t get me wrong. I am neither against technical charting nor fundamental ratios. In fact, I use them myself quite extensively. But to make outsized returns, one needs to understand the macro architecture (for the lack of a better term). That probably is spawned from a lot of experience and out-of-the-box thinking.
If your focus is predominantly on PE, you would have never invested in Amazon. For that matter, if you’d invested in Amazon and held it long enough from its IPO level of $18 in 1998, you never lost money.
In 2001, I had earmarked an allocation of around US$20,000 (my yearly bonus) to invest in Amazon but due to some technicality it didn’t happen. Had I invested and held it (like my father who invested INR 3,000 in ITC and never sold), my Amazon investment would have been worth $5 million. Reading Bridgewater Associates’ research guided me in formulating my own views on Amazon.
Later in 2013, I was presented an opportunity to invest in Bitcoin at $230 when I attended a closed-door meeting in Zurich. It was not my idea but just wanted to stick $10,000 in case the speaker was right. The speaker prognosticated a target of $100,000 in five years’ time. While the market didn’t reach the speaker’s forecasted target, Bitcoin surely surprised and surpassed everyone’s wildest imaginations on the upside. That investment of $10,000 would have been worth $2.6 million when Bitcoin hit $60,000. Again, I missed that opportunity.
Finally, I stumbled upon Tanla in 2018. While the idea came from a friend of mine, the strong conviction was solely mine. Tanla fitted very well into my investing thesis that I first discussed in 2017 later titled, A Case for Investing in India. In fact, I reread it again last week. I felt it is much more relevant now than it was then. So, if anyone who is interested in my thesis, check the link above.
I have, for most part, stuck with my core investing principles. As of writing this note, I hold only three Indian stocks and one cryptocurrency.
The scrip has to be in the digital space.
It has to have zero debt or has to be moving towards zero debt.
The company should have global aspirations and should be already have global footprints.
The management structure should be solid. It could be promoter-centric or professionals managed (lack of promoters have not hindered ITC, L&T or HDFC). Nonetheless, having a promoter who is interested in increasing his holdings and doing frequent buybacks definitely inspires more confidence.
The company should be innovative being technology-enabled and focused on exponential growth.
My core investing principles are under-girded by one singular thought. As we become more integrated globally, no other country can beat India in digital innovations and implementation due to the cost arbitrage advantage India has and will continue to hold for the next ten years or more.
I will discuss more on linear vs exponential thinking in the next part (Part 2 here) and how retailers can apply and benefit from it. Stay tuned!
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.