Investing lessons to pick from negativity

By Dhirendra KumarPeople hate stories of failure in investing. This is not surprising. Savers who are pessimists stick to bank deposits. The very act of putting money in a market-backed asset marks you out as someone who thinks that the future is going to be much better than the present.Over the past two decades, in the articles and columns that I have written in Value Research publications and newspapers like this one, I have observed that negative articles are not popular. What’s a ‘negative’ article, you might ask. A negative article or analysis tells you what’s bad in saving or investing. It explains what not to do. A positive one tells you what is good and explains what you should do. A positive article is about making money. A negative one is about not losing money. That’s a very sharp distinction.Equity investors don’t like to read about how not to lose money. They’re inherently optimists. You might think that equity investing makes people optimists, but that’s not really true. The cause and effect are the other way around. Only people who are inherently optimists get drawn to stocks.I’m sure you now understand why equity investors do not like to read negative stories. If I was worried about being a popular writer then I would also focus only on happy-happy stories. Unfortunately, investing is actually a little more complicated than that.Mistakes (bad decisions) can cause far more damage to your investment value, and far more quickly than can be countered by great investments. There are lots of stocks that have gone down to 1/10th of their value. If you invested in one of these and stayed on in mistaken confidence and optimism then you will need a 10X investment to balance it out. Of course, 10-baggers are really, really hard to find. Not just that, finding a 10-bagger and then finding enough confidence to stay with and grab all 10 bags is even harder!So it becomes clear that if you want to invest profitably and safely, what you don’t do with your money could be more important than what you do. So how do you avoid mistakes? The first step is to overcome your aversion to negative stories and read up about high profile failures!Some companies that fail are victims of bad management, some are victims of crooked management, and some external circumstances. Perhaps there’s some element of everything in most cases. Our job, as investors and investment analysts, is to look at the underlying patterns and then see if they exist elsewhere. Essentially, we should take those patterns (and many more) as warning signals and ensure that they do not exist in any stocks that we are tempted to buy.This principle of studying negativity is not just something that I write in my articles, but it is also an integral part of the analytical process that I’ve put together in Value Research. In fact, in Value Research Stock Advisor, I have made this principle a core part of our stock-selection methodology. Our analyst team has evolved a list of negative characteristics that none of our recommended stocks should have. No matter how good a stock looks, if it has any one of the red lights glowing, we will reject it without a second thought. That should be the normal way that investors should act.However, sometimes even this is not enough in equity investing. Companies will find new ways of blowing up. Promoters and managements will invent new types of malfeasance. Ultimately, the only protection you have against such negative events is diversification. In a long enough investing career, everyone will be hit by a few wealth destroyers—I have faced some personally. The only deep defence is to be diversified so that you can just shrug, accept the loss, learn the lesson, and move on.(The author is CEO, Value Research)

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