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Winning by not losing

One of the basic tenets of investing is that avoiding mistakes is far more important than making brilliant choices

Winning by not losing

It's the season for all things football, and YouTube, WhatsApp, Telegram, etc., are full of some amazing videos of football action from the past. Obviously, the most numerous are those of great goals. A much smaller number is that of great saves by goalkeepers. This is understandable, as the part of football that is easiest to enjoy is the goals, with saves being a distant second. I came across one, which was a compilation of some truly great saves at the mouth of the goal by defenders. To my (admittedly untrained) eye, these look much more remarkable than goalkeepers' saves because, obviously, these are done without hands.

Saving one's side from a sure goal is just as much of value in football as scoring a goal and there are similar situations in most sports. In cricket, there's a saying that 'a run saved is a run scored'. Of course, all these great saves are basically lost to history. They don't show up in any scoreline and are not really remembered after a while.

As with many things, I'm constitutionally unable to move past any such thing without seeing an obvious analogy to investing, so let's talk about that. You buy a stock and later sell it for profit - that's a part of your investing story. The returns you make will forever be a part of your investing track record and you will be proud of them, and you will feel the pride when you spend the money you made. That's a goal.

So, what's a save? Here's a scenario. You buy a stock and it goes up a bit but then you find that actually, the company is not a good investment and it might be better to get out and redeploy the money. You sell and after that the stock falls and falls a lot. If you had kept your belief in your original thesis, you would have lost a lot of money. In our football analogy, that's a goalkeeper's save. It's not part of your scoreline but it's there in the record and you can justly feel proud of it.

Now let me tell you about a defender's save. Someone pitches a stock to you. You think of buying it, do some research, find something dubious and then abandon the idea. Soon, the stock crashes. That's all. It was never even an investment - just a temptation in your head. However, stopping yourself from making that investment is actually worth as much as making one which gets good returns. To paraphrase a bit: a rupee not lost is a rupee earned.

The idea is simple, 'Winning by not losing'. It means that one of the basic tenets of investing is that avoiding mistakes is far more important than making brilliant choices. Far too many investors, whether when they are choosing stocks to invest in, are obsessed with finding the absolute top performer and then sticking to it. Unfortunately, unless you are a genius and lucky, this doesn't happen. What does happen is that such investors flit from idea to idea, generally chasing past performance and buying into yesterday's winners in an effort to spot the greatest winner. Once in a while, it works out.

At Value Research, our team keeps these principles close to heart. Our entire process of analysing stocks, whether for this magazine or for our premium Value Research Stock Advisor, is strongly rooted in an elimination process. Whenever we are making any kind of selection, first we eliminate those stocks that have anything negative about them. It does not matter what the positives are, there are a set of no-go signals that really are no-go. The checklist of negatives is sacrosanct.

Later in the process or after investing, this provides great comfort. Even if an investment thesis is wrong, there is no great disaster. One can always sell a stock if it turns iffy or some better alternative comes along.

The important thing is to recognise the danger and make the save in time.

This editorial appeared in Wealth Insight December 2022 issue. To read the cover story and other insightful analyses, columns and articles

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