I have always thought why many successful people recommend to start early in almost anything which you want to pursue. Being it Investing, building a Start-Up, or anything.
I have seen a lot of people with an attitude of working towards their dream with a thought that, one fine day when they start, they will certainly succeed. All this is based on the assumption that whatever they do is going to succeed in the first go.
But I can surely tell you with my own experience of investing in the stock market that there is a valid reason behind starting early. The reason being you must fail early.
Why Is It Important To Fail?
I believe failing is very important in life. It teaches you lessons which stick with you for your lifetime. Plus these lessons come from a valid source i.e YOU.
When you fail you realize that you are not what you were thinking of and learning is a continuous process.
Sometimes when you start working towards your dream you are generally welcomed by beginner’s luck. So, you start thinking of yourself as some expert and then start playing big.
But, the party has to end right? By the time the party ends you are in the middle of the dance floor where the whole chaos is.
Why Fail Early?
In short, if you fail early you have the advantage of correcting your course. As you had just started, the cost of correction wont be high.
Let’s look at some simple examples:
Suppose currently you are in college and you decide to be an entrepreneur, as you don’t want to enter into the ‘rat race’.
So, you start working on an idea which you believe is going to be ‘a million-dollar idea’. You put in all your savings (which I am assuming would be less compared to savings done at 30’s) for covering some basic costs like setting up a website. Also, don’t forget your time is also a resource here which you need to spend.
After all your hard work of months, your idea fails. If you don’t give up on your entrepreneurial spirit then I think this is the best thing which could happen to you during your process of achieving your dream.
Failing at the early stage would expose you to, from basics to complex, problems which occur at the initial stage of starting up a company and ease out the logistical work when you try again.
My Story Of Failing Fast
(I had previously written an article about my failures in investing but there I did not talk stock specific.)
I am yet to encounter my big failure which would change my life, but I have experienced small failures which have made me realize and question my methods regarding investing.
I had started reading about value investing around 2 years ago and as I had mentioned in my previous article that I have been reading about Warren Buffett and his journey motivates me to become financially independent.
I watched his interviews and read about him but as I had just started learning about investing I never understood what his core message was regarding the filtering of companies to invest. But the most dangerous thing was that instead of understanding the full context I picked up only the part which I did understand and started applying it.
The part which I picked up was, staying invested in companies for a very long period of time (or even forever!). But the mistake which I was making here was that I missed his core principle, that this principle should only be applied to quality businesses.
Now if you are a reader who is new to stock market investing, you would be thinking that isn’t it obvious to invest in quality business? I must say, yes you are right it is obvious. Actually it is too obvious and that is what makes investing not so easy.
Investing Is Simple, But Not Easy. (Warren Buffett)
For more details on understanding why investing is simple but not easy I would recommend you people to read a memo written by Howard Marks.
First Failure: Investing Outside My Circle Of Competence
Now my first failure was investing in companies which were outside of my circle of competence. Inshort, the companies which I did not understand.
To understand what is Circle of Competence read: The Science Of Investing?
In 2018, I had bought shares of Graphite India, NMDC, NOCIL & Take Solutions.
All of the above companies fall outside my circle of competence.
Graphite India is in the business of manufacturing electrodes.
Soon, I realized that I would never understand what drives this business, How is the demand produced, why would they prefer Graphite India over HEG, what problems such companies can face, etc.
Luckily for me I made a profit in this stock. I purchased it at an average price of Rs.145 and sold at around 50-60% profits within a month of time, as I had realized I could not understand the business. (During this time I have invested more than 50% of my portfolio into Graphite India)
Another stock was NOCIL purchased at avg. price of Rs.67 and had sold for 10-15% profit.
NMDC was purchased at around avg. price of Rs.80 and had sold it at a loss of 0-5%.
Take Solutions Ltd was a much bigger loss for me. I bought it at an avg. price of Rs.103 and sold it for around Rs45-50, a loss of around 50-60% but fortunately Take Solutions Ltd was not a big portion of my portfolio.
Second Failure: Not Using Proper Valuation Methods
After understanding the concept of circle of competence and choosing quality is was still not enough.
As, I was again making a mistake while valuing such businesses.
I was sticking to only one method that is DCF valuation and the discount rate which I was using was very high. (The discount rate which I used was 26%!)
None of the companies were ‘fairly-valued’ by using a high discount rate.
I was confused. The market had crashed recently due to COVID pandemic and still all the companies seemed over-valued.
But as I started reading more and more I understood that you don’t need to discount quality businesses at such a huge discount rate.
Here is what Warren Buffett had said in his 1989 letter to shareholders of Berkshire Hathaway.
“What counts, however, is intrinsic value – the figure indicating what all of our constituent businesses are rationally worth. With perfect foresight, this number can be calculated by taking all future cash flows of a business – in and out – and discounting them at prevailing interest rates. So valued, all businesses, from manufacturers of buggy whips to operators of cellular phones, become economic equals.”
One of the greatest investor discounts at the prevailing interest rate of the U.S. treasury. So, if you want to be conservative you can discount at a slightly higher rate. But if you go too high you miss out the quality businesses.
Third Failure: Not Studying About The Competition
Now my third mistake was not studying the competition.
I had invested in VIP Industries Ltd at an avg price of around Rs 250-260 and sold it at a profit of 20%.
The reason for selling here was the problem with the Moat of the company.
In my article where I had analyzed VIP Industries Ltd I had said that the company had two Moats according to me, Economic Efficiency & Management.
They do certainly have an economic advantage over Safari Industries as they have recently shifted their plant to Bangladesh which gives them a huge cost advantage.
It took them eight years to set up the plant in Bangladesh. As the country is lacking quite behind infrastructurally, it becomes very difficult to set up a plant which would be as per their standard of products.
This is what attracted me towards VIP Industries. But soon I came to know that Samsonite, their biggest competitor had a way better distribution system than VIP.
I believe having a strong distribution system is a better Moat than economic advantage, if that economic advantage could be replicated easily.
I would consider the above mentioned stocks as failure only for me because if these stocks would run up I would not got the conviction to hold them.
After facing these small failures I understood why people value experience in any kind of thing/business.
Having experience explains that you might have faced some problems during the journey and now you might know how to solve those problems, while a beginner on the other hand might struggle with.
So, I live my life on the principle of – Start Early Fail Early.
(Thanks to https://www.mojohandykraftz.com/ for reading drafts of this.)