You may be a self-made man or woman but you must have come across or are still in the shade of a mentor or a guru. Since continuous learning is imperative in the field of investment, an investor needs to follow the investment gurus and understand how they are making it in this ever-volatile market.
Here following doesn’t mean blindly following anyone but understanding the concepts, ideas, and then doing your own thing in your way.
So, in this article, you will read the following investment lessons from investment gurus across the globe. Then you have to make use of these lessons in a wise manner to get the most out of the market.
Investment Lessons From:
- 1) Investment Lessons by Benjamin Graham
- 2) Investment Lessons Warren Buffet
- 3) Investment Lessons by Peter Lynch
- 4) Investment Lessons by Rakesh Jhunjhunwala
- 5) Investment Lessons by Vijay Kedia
1) Investment Lessons by Benjamin Graham
a) Learn From your mistakes and never give up
The first lesson for prospering in any field is nothing but not giving up. Benjamin Graham, the writer of “The Intelligent Investor” and the mentor to the world’s most popular investor – Warren Buffet lost all his capital in the stock market crash of the year 1929.
The Great depression followed and made Benjamin Graham realize the risk of investing the hard way.
However, he didn’t quit, unlike many who just left the market post the crash and the depression.
He started analyzing stocks and investing in stocks that had a lower price than the actual market price. It is said that even after losing so much, he generated a 20% return on an annual basis on average with the proper money management and risk management skills.
So, it is all about learning from the mistakes you make. You need to “find” the right way, and then go ahead. Quitting is not just an option if you are serious!
b) Investing is not gambling or speculating
The second lesson from this great investment guru ever is not to take investment as gambling or speculating. Gambling or speculating can lead to short-term gains, however, that is not the right approach neither would it fetch you profits in the long term.
Investing is all about understanding your risk appetite and then investing the money for the long term according to your financial goals and ideal asset allocation.
As an investor, you should ideally understand where you would like to invest and then make an informed decision by knowing all the associated risks.
c) Finding out the real value/ Intrinsic Value
Benjamin Graham is known for his famous book on investment “The Intelligent Investor”. In this book, he has mentioned value investing and the concept of intrinsic value. Intrinsic value is the actual or real value of a stock. The market price can be according to different factors but the intrinsic value is derived from the fundamentals.
For instance, the market price of ABC stock is Rs. 1500 however after thoroughly analyzing the fundamentals of the company, you found out that its intrinsic value is Rs. 2500. Then you should ideally invest in that stock as sooner or later, the market price will reach the intrinsic value.
It can, however, be the other way round as well. Suppose the intrinsic value is Rs. 1500 and the stock is currently trading for Rs. 2400. So, it is overpriced, and at some point in time, the price would drop to Rs. 1500. The concept of intrinsic value is very crucial to understand for every investor.
Understanding the concept of Intrinsic Value and then investing according to the same is very important for any investor.
d) Reducing the downside risk factor
Another important lesson from this man is that an investor must consider the downside risk of the investment every time he or she invests. The downside risk is the maximum loss that an investment can incur given the worst-case scenario.
So, as an investor, you need to plan for such a scenario and then keep a margin of safety at the time of investing. The margin of safety is the difference between the market price of the share and its intrinsic value.
Note: Thus, the lower the intrinsic value than the market price, the higher would be the margin of safety and lesser downside risk.
e) Expanding your horizon
Benjamin Graham believed in value investing. His investments’ horizons were long enough to beat the short-term volatility in the market. He believed and it is a fact as well that market in the long-term would reflect the intrinsic value if not in the short-term.
So, as an investor, you need to expand your time horizons to realize the intrinsic value of an investment instrument.
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2) Investment Lessons by Warren Buffet
a) Invest in a business that you understand
Warren Buffet, the most popular investor across the globe, a student of Benjamin Graham believes in investing in businesses that he understands. He said that if you do not understand a business, and put your hard-earned money in it, you are not investing, you are gambling.
To invest wisely, you need to understand the business first, how it operates, its market, whether it has demand in the market or not, and other factors.
If you take a look at the Warren Buffet portfolio, you will find stocks of the banking sector, consumer goods, and others that are simple to understand.
b) Productive assets are the best investments
According to Warren Buffet investing in productive assets can be beneficial in different ways. It can provide a constant return, unlike idle assets which will suddenly increase or decrease one fine morning.
Warren Buffet is against investment in gold as that is an idle asset. For instance, the gold price rallied in the year 2020 due to covid-19 and reached an all-time high but then again it fell drastically.
The productive assets/ businesses can help you earn regular income as well in the form of dividends.
c) Diversify but within the right limit
As an investor, you must have heard many advising not to keep all the eggs in one basket. This is true enough, but keeping one egg in each basket would cost you a lot for the baskets as well which may wipe out all the profit.
As per Warren Buffet, diversification is good but overdoing it can reduce the value of your investment.
According to him, as an investor, you can plan your investment portfolio with bonds, mutual funds, equity, risk-free government investments like PPF and NSC, and others. Apart from these, there must be insurance for dealing with medical and life risks.
d) Don’t keep too much cash in hand
Cash is a bad investment as per Warren Buffet. You may think keeping cash is important for emergencies, obviously it is but a limited amount. If you keep all your money in cash and do not invest, you are doing it wrong as per Warren Buffet.
Since idle cash does not attract any return, which you could have otherwise earned if you had invested the cash in some profit-yielding assets – or even if you had deposited the same in the bank.
e) Stop being a part of the crowd
The stock market is highly volatile because most of the investors have a herd mentality. This means that if the market fell a bit, most investors would start selling and if it increases a bit, they start buying following others.
It is good to listen to others but following anyone blindly can be harmful. Warren Buffet never believes in this mentality. He rather believes in carving his way in the market.
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3) Investment Lessons by Peter Lynch
a) Accept your losses
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” – Peter Lynch.
The first lesson by this great investor is to accept losses in the short term to gain in the long term. He believes in staying invested in the market for the long-term and do not get disturbed or distracted by short-term gains.
According to Peter Lynch, as an investor, you must avoid two emotional states of mind – one is a concern and the other is capitulation. It will help them become successful investors in the long run. When there is a market correction, most investors become concerned and do not act wisely. Market corrections are great opportunities to invest at a lower price.
So, as an investor, you must keep your concern out of the scenario and take advantage of the market correction, as advised by Peter Lynch. The second emotion is capitulation happens when the value of your investment falls drastically due to a correction in the market.
However, staying calm and invested in the market is what is advised by Peter Lynch as the market would turn around in the long run and all the losses in the short term can be wiped out.
Moreover, selling the investments due to market correction in the short term can result in a huge loss of capital as well.
b) What, Why, and When of investment
Peter Lynch advised that investors must understand what they are buying, why they are buying and when they are buying. Suppose you are buying ABC stock, you must understand what ABC Company does, their business.
Then you must find out why this investment is good for your portfolio. Whether it is going to give you good returns in the long-term or not. Then the time or when you can buy ABC stocks. This is one of the most disciplined approaches of investment and wise too.
When you invest accordingly, you may not become a billionaire overnight but surely get good sleep at night as you need not worry about your investments much.
c) Early investments are good but not too early
Peter Lynch said “I often think of investing in growth companies in terms of baseball. If you buy before the line-up is announced, you’re taking an unnecessary risk.” This means that an investor must not jump into any investment too early.
For instance, a new IPO is coming into the market, and without knowing much about the company, just to invest at a lower price, you apply for the IPO.
If you are aware of the company, its business, its business plans, then investing in the business is feasible. However, investing too early can be risky without knowing the details of the business and prospects.
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4) Investment Lessons by Rakesh Jhunjhunwala
a) Look for companies with a competitive edge
The first lesson from the very own Rakesh Jhunjhunwala, India’s biggest and most famous investor is that you must invest in companies that have a competitive edge. It simply means that the company is having some sort of upper hand over its competitors.
For instance, in CRISIL, when Rakesh Jhunjhunwala invested in this credit rating company, most of the investors, traders were scratching their heads as why Jhunjhunwala invested in a credit rating company.
That was back in 2002 when credit rating was kind of a new concept in India. Soon, the reason got pretty cleared as the company flourished and CRISIL ratings become an integral part of many businesses. His investment grew drastically from Rs. 200 at which rate he bought the stocks.
There are many credit rating companies in the country, but CRISIL is the name that reckons with credit rating in India and that is the competitive edge.
b) Trading or investing or both
This is a question that every stock market enthusiast scratches their head upon at least once in their lifetime. However, Rakesh Jhunjhunwala made use of both trading and investing for where he is now.
When he started in the stock market, he had very limited capital. So, he started trading, which gave him short-term profits. He then accumulated all the profits in the short term and invested the same for long-term gain.
So, his advice to the investors of this generation is to build the capital by trading stocks and then using the capital to invest and accumulate wealth in the long term.
c) Patience is the key
Rakesh Jhunjhunwala never sells his investments unless the fundamentals of the company become volatile. He invests in business and thus even if the stock price of the company is dipping, he doesn’t care.
However, if the fundamentals of the company go wrong or alter, then he sells. This requires immense patience to hold stocks that are giving negative returns. But that is what makes him a great investor.
So, when you are investing, keep your patience level high this is what Rakesh Jhunjhunwala would advise.
d) Learn don’t regret
Another lesson by Rakesh Jhunjhunwala which fits perfectly for investment as well as life is not to regret but learn. Learning from mistakes is the key to becoming prosperous.
If you keep on regretting your losses, you would not be able to move forward. Instead, evaluate what went wrong, rectify, or do not make the same mistake again in the next investment. This way you grow and your investment skills become better.
e) Being passionate about the stock market is what you need
The stock market is not just a 9 to 5 job where you go just to earn money. It is something where your passion is required. You need to be a focus on the job itself, researching stocks, analyzing them, comparing them, reading the fundamentals and everything must be your passion. Rakesh Jhunjhunwala always says that to become a successful investor, you need to learn as much as possible.
Learning about the stock market would give you the best competitive edge on the business.
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5) Investment Lessons by Vijay Kedia
a) Uncertainty is part and parcel of the stock market
Vijay Kedia, another reputed investor from India believes that market will always be volatile and as an investor or trader, you need to deal with it. He also believes that no one can predict the stock market completely. It can take a complete 180-degree turn anytime.
So, planning for the worst-case scenario is important at the time of investment. He also advises that as an investor, everyone must do their research and do not believe people claiming that they can predict the market.
b) Evaluate the management of the company
While most investors are more concerned about the numbers, Vijay Kedia also stresses the qualitative aspects of the company. Management decisions affect the company’s profit and growth hugely.
So, understanding the management, their decision-making abilities is very crucial for every investor. The company you are investing in must have a sound management team. This would reduce the cost, and optimize the profits. This in turn would increase the value of the company.
Yes, SMILE is the key to successful investment according to Vijay Kedia. SMILE stands for
S – Small in size
MI – Medium in experience
L- Large in Aspiration
E – Extra-large in market potential
This signifies that choosing small companies with great potential is based on management and operations.
d) Review your investments
Vijay Kedia advises continuously monitor and review your portfolio. He says that periodically reviewing the investments, the fundamentals of the company, and management’s decisions are important.
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If the fundamentals of any company seem changed for bad, then the investor must drop that investment from his portfolio.
Investing requires patience, continuous learning, and motivation. Being aspired by famous investors, and understanding their moves in the market, their ideologies can fetch you great returns.
However, no one should follow anyone without doing their research. This is the most important lesson that every genuine and successful investor would give you.