As a young adult who joined the financial markets in 1994, there have been numerous lessons along the way.
Do not leverage while investing
The first lesson which came relatively quickly was the damaging effect of leverage. The company that I worked for recruited from among the brightest people around. Many of them are still considered among the best in the investing field. However, the company used leverage in its equity investments and was on the verge of bankruptcy very soon. It does not matter how good an investment thesis is if there is no capacity to hold the investment through volatile times. One will have to sell the investment on account of margin calls of the broker or the banker/lender forcing a sale.
Do not trust easily
As a fresher, I was an intern in the investment-banking division and was helping with the preparation of offer documents for IPOs and so on. When I look back, I realise that many of the companies from those times are not even around today. Of course, the IPO market today is far better than the one that existed decades before. However, it is important to see the behaviour of a newly listed company over a few years before deciding to invest in it as many of these companies are otherwise unknown. This of course does not apply to IPOs from well-established business houses or public-sector companies.
Quality of the promoters/management matters
Among various companies starting almost at the same time in the same sector, there are a handful that became very successful, while the vast majority of the companies fell by the wayside. The companies uniformly had the same economic cycles, policy and regulations, competitive intensity and so on. The major factor that differentiated the winners from the losers was the management. Sometimes it is difficult to distinguish good management from the bad but most times it is fairly obvious. Straying away from good management usually gets penalised sooner rather than later.
Quality of business matters
The same business house may be extremely successful in one business, while it may be a dismal failure in some other business. Many times, it is on account of the nature of the business. You will find multiple entrepreneurs failing in a sector (wealth-destroying sectors) and multiple entrepreneurs succeeding in some other sectors (wealth-creating sectors). For example, most listed FMCG companies have delivered decent returns for shareholders while most listed airlines have lost money for shareholders. There are surely exceptions to this but the odds are in favour of investing in the wealth-creating sectors.
Investors seeking to succeed in the field of investing would do well to look at the history of the management and the sector apart from only the financial parameters.
This interview was conducted in June 2021