Knowledge

Being negative can be beneficial too

On September 11, 2001, Boston’s Logan International Airport is in the morning. Unbeknownst to the crowd, 19 young Saudi Arabian males are preparing to board four different flights with the intention of crashing them into iconic structures in New York City and Washington, DC. The FBI’s counterterrorism division, however, made connections in the information they had for months the day before. The extremely vigilant airport security notices the knives the would-be hijackers are carrying, and seizes them. The 19 stop their missions because they have nothing that resembles a weapon. They exit the airport building and proceed to their residences. They are all detained that evening. Newspaper interior pages hardly ever contain news, and TV news completely ignores it. Few people around the world were aware of it in the period before social media.

If you read the history of the circumstances leading up to 9/11, you’ll realize that things may have turned out differently if American security officials hadn’t disregarded numerous obvious clues. The intriguing thing is that if things had gone that way, those who successfully cracked the code would have done it with a hostile, unfavorable attitude. Find out why a stock is a bad investment when someone proposes one.

Clues and stopping the hijackings wouldn’t have made heroes out of us. The arrests would have been considered normal, low-key counter-terrorism action because nobody would have understood what a catastrophic disaster had been avoided. The conclusion of the story is straightforward: Nobody is given praise for stopping something. Nobody even learns that something was stopped. Successful mitigation is a regular occurrence in all situations, including accidents, terrorist assaults, and ransomware attacks.

Is it the same when making prudent investments? for carrying out every action that a prudent investor would take? I believe it to be true, and even more so than the alternate history of 9/11 that I have already described, being self-awarely defensive and constantly alert of what is keeping your investments secure is a crucial ability of the successful investor. Samir Arora, a well-known investment manager in the Indian markets for the past 25 years in a variety of guises, and I once had an unusual conversation. Arora has a talent for articulating investment concepts in a clever and unique way. He recently described his present 100% invested (zero cash) situation as “jab pyar kiya to darna kya” in an interview.

In my conversation, Arora classified the universe of investable stocks and the broad approach in a very teachable way that investors can easily understand and practice. The first thing to do is classify the companies into good and bad. So far, so good. Everyone does that. No, everyone does NOT do that. In reality, most investors are focused on looking at companies and seeing if they are good companies whose stocks they should invest in. It sounds like the logical thing to do, except that starting at the other end might be better.

As Arora says, you can start by choosing good or bad companies. The key point he makes is this: It’s tough to choose between good and good, but it’s easy to choose between the good and the bad. You need to look at dozens of things to decide whether a company is worth investing in, but even one or two strong negative points are enough to decide that you must not invest in a company, no matter how positive the rest of the factors are.

The point is quite interesting and helpful. When selecting a stock, you can never be 100% sure it’s worth investing in. Even when you buy the stock, you can never be sure. However, the rejects are not like that. Once you detect something wrong, then there are no more questions to be asked and no more answers to be evaluated. You have a 100% conviction that this is a stock to avoid. So, start with a hostile, negative attitude. When someone suggests a stock, start looking for why it’s a bad investment. There are a lot of positives to being negative.

By Dhirendra Kumar

( Mint Publication )

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