If you want to excel in something, you need to have a strategy – whether you are playing professional sports or investing, if you always want to be on the winning side, you need a plan and strategy.
Let us take the example of cricket. Do you think a team can compete at the highest level if it goes into every match without a strategy? Certainly not. To be successful, they not only have to design but also implement the strategy. If the cricket team captain randomly starts taking a decision, the team will be in a mess. If he does not plan his bowlers well, there could be a situation where the best bowler’s overs are finished well before the end overs. It will give the opposition a chance to score freely.
If you have just started playing as a team or are playing for fun and learning the game, it makes sense to go out and enjoy the game and not think about strategy. If you are serious about what you are doing, having a strategy is essential.
When it comes to investing, you have to follow a strategy. You cannot randomly pick stocks and invest in them. You can, but in the wrong run, it may hurt you. Let us look at some reasons why investing strategy is better than randomly picking stocks.
Diversification – You must have a diversified equity portfolio. Before we discuss more on diversification, we would like to share one of our customer’s (Mr X) investment journeys.
Here is what he told us – ‘I started investing in 2018. For the first few months, I invested only small amounts in different stocks – I preferred not to invest more than Rs 10,000 in any stock. Gradually, I increased my investment, and by the end of the first year, I had a portfolio of Rs 1,50,000 with 12 stocks. By mid-2019, I learned a few things about portfolio creation. I evaluated my portfolio based on my learning, and I was tense to know the result. Of the 12 stocks I held, 2 were micro caps, 8 were small caps, one mid-cap, and one large-cap.‘
We asked Mr X – where did he think he went wrong? He came up with the answer immediately, ‘I was randomly picking stocks. I invested based on advice I received from different people.’
It happens with everyone who randomly picks stocks. When a TV channel expert recommends a company, it is general advice. He has no clue what kind of stocks you are currently holding and what is your risk profile.
You may end up accumulating the same type of stocks just like Mr. X. Having 80% investment in small-cap companies is very risky, and no one does it. Even the small-cap fund managers invest only 65% in small caps.
When there is an investment strategy – you invest in small, mid, and large caps in a specific ratio. How to decide the proportion for each? The answer to this is the second point.
Risk Profile – As you have seen above, Mr X invested so much in the small-cap. The first thing we do is check the risk profile of investors. When we evaluated the risk profile of Mr X, we found his risk profile is moderate. It means – he should not have high allocation in small and mid-caps. However, he was doing exactly the same. It was no surprise when he came to us in November 2019 – his portfolio was bleeding in red, and he was worried.
When you invest with a strategy, you know your risk profile, and accordingly, you select a stock.
Too many stocks – When you don’t follow a strategy, you may end up having too many companies in your portfolio. We have a few customers who came to us with more than 60 stocks in their portfolios. In some cases, the number was over 80.
Over 7400 companies are there on NSE, and for sure, a few hundred are good companies. However, you cannot go ahead and pick all the good companies you come across. You must have a filtering criterion.
Even if you put criteria of investing in large-cap companies – there are so many of them. So filtering criteria alone won’t help. You need an investment strategy to pick the best stocks.
Less monitoring – You save a lot of time when you have an investment strategy. You don’t have to monitor stocks daily.
Selling via strategy v/s randomly
Profit and realized profit are two different things, and most people fail to understand the difference. Your portfolio may be giving you 40% today, but that is not your realized profit. A month later, the portfolio can have only 30% profit. A strategy is essential while buying as well as selling stocks. In fact, buying and selling strategies are linked. When you buy a stock as part of the strategy, you know your expectation – what are you trying to achieve. You know whether it is for short-term gains or a long-term investment. For example, you bought stock ABC for a year, or 20% returns. It gives you 20% profit and you exit.
If there was no strategy, you keep on holding stocks for no reason. So having an investment strategy even helps you even in selling stocks. We hope the article helped you understand why having an investment strategy is a must. Jarvis Invest helps every investor do strategy-based investment – you buy and sell stocks as part of specific strategies, there is no random buying or selling. You can download our app and get started.