Seven Investing Lessons to Learn from Motorcycling
This is how my 65 year old motorcycling friend recently explained the secret of how he avoided any accidents so far.
“I ensure that I don’t knock into any hard thing!” This is how my 65 year old motorcycling friend recently explained the secret of how he avoided any accidents so far.
Jokes apart, as someone who has been investing for over three decades, I find motorcycling interesting because of the similarities between these two activities. Like a new rider who drops the bike or gets into minor accidents, I did lose money worth 2-3 months’ salary as a newcomer, to investing. Many of our young readers who ride a motorcycle would relate to this.
However, even if you have no motorcycling experience or interest, you may still find this worth some consideration.
Give yourself some time and try out different ways of approaching the market. Are you a long distance, freeway cruiser rider i.e. mutual fund – SIP type of investor who prefers a long term exposure to equities but without the bother of quick action every now and then? Or are you the opposite – a sports bike urban rider i.e. an active trader who is mentally engaged with the market every day and is potentially good at high frequency trading and derivatives? Or you are someone in-between who researches at their own unhurried pace, waits patiently and takes medium to long term positions when you see value?
It is important to understand your natural temperament and capitalise on it. There will always be market heroes sharing their stories of 100-baggers, experts with their wise words in seminars and many others sharing their tips; thus many models of potential success. But not everything will fit you or work for you. Discover your inner voice and follow only a few experts whose style appeals to you. Work on it consistently.
2. The Mechanics
Capable bikers understand all the features of their bike e.g. speed, ground clearance, torque - rpm relationship, centre of gravity, weight, mileage, tyre versatility etc. to make the best use of all features for a safe and rewarding ride. Similarly, in the investing parlance, you need to have a check list for your buy-sell-hold decision making.
For example, when I read or hear about a great investing or trading opportunity, before clicking on the ‘place order’ button, I generally review the following (a) 3-4 news items on the company’s business, promoter holding and how much they have mortgaged to borrow, (b) 3 years’ top-line financials such as sales, EBITDA, net profit, debt and total assets, (c) key valuation ratios – enterprise value (EV) to sales, EV to EBITDA, price to book value and price to earnings and (d) the share price chart to see if the movement is bullish or bearish.
If the ckeck-list does not give me happy results, either I don’t buy or I buy with preparedness for a large loss that my capital can absorb. You should devise your own tools that work for you.
If your manoeuvres exceed your skills, you are likely to crash. When a biker faces road repair sites, sharp turns, slopes, broken roads, rains or high winds or aggressive drivers, they will need experience and manoeuvring skills to maintain normal speed. Otherwise they must go dead slow!
Similarly, interest rate announcements, political mishaps and wars, US growth and employment data, Indian budget announcements, Quarterly Results etc. will cause shock movements and test your temperament and skills as an investor. Your investment decisions better be made on well-developed themes such as those recommended by various DSIJ services, rather than on what friends are doing and recommendations received on social media.
4. Speed v. Alertness
Higher speed needs greater alertness. In my case, I minimise my trades and take a 4-6 quarter view on companies. Intervening bad news and price corrections do not bother me too much so long as the original investing theme is still applicable to a particular stock. In other words, my investing behaviour is like that of a long distance cruiser rider.
On the contrary, a fast rider has to be really alert to an unexpected turn or a red light or an obstacle. If your style is quick trading, you need to ensure that the rationale on which you entered is valid every day, failing which you exit. That requires being very alert and making quick decisions.
5. Protection from risks
Everywhere including in India, smart motorcycle riders wear CE certified protective gears such as helmets, ankle high shoes, gloves, knee pads etc. Protection minimises the negative outcomes of a crash.
Similarly, an investor should be conscious of the risk of loss and have a stop loss strategy before making a buy. As popularly understood, stop loss is a price limit but you could expand the concept. In my 20s, I played within my loss capacity of 2-3 months’ salary! These days, I write down three biggest things that could go wrong with stock I am inclined to buy and eliminate the risks before selecting the stock, and if that’s not working, I eliminate the stock from my portfolio. Many wise investors consider capital preservation more important than a high potential upside.
6. Know the routes and predict the bumps
Earlier we spoke about the unexpected turns and obstacles in the path of a rider. But if you repeat the journey on a particular route, those unknowns will gradually become knowns. As you gather experience, i.e. survive through bad times such as global market crashes or losing money on certain strategies, you should be able to put that experience to future use.
In the last few years, we passed through the age of multi-billion dollar start up unicorns that produced zero cash flow and huge losses. Then a sudden turn appeared on the road. Those valuations crashed after the interest rate rise. In my view, these companies do have a future but the simple fact namely, “liquidity is key to valuations” is suddenly more understandable today than one year ago! If you remember this learning in a booming market 10 years from now, you will be better placed.
7. Take a break
Bikers take rest at intervals on a long journey when they get tired, sleepy or hungry or when the machine heats up. Sometimes, despite the best methods put to use, retail investors are likely to face losses. These losses could affect the family’s well-being and peace of mind. In such circumstances, an entirely common sense thing to do is to take a step back and withdraw from active investing. Reorganise the portfolio to weed out weak businesses and to book the losses.
Rebuild the savings in conservative assets like low risk mutual funds, bonds, gold and fixed deposits. These assets do not have equity like high upside but the downside is very low. This rest and recuperation strategy will prepare you for a fresh re-entry into the equity markets!
- Authored by Chetan Shah