Importance of behavior while investing
Billionaire investor Chamath Palihapitiya says successful investing is all about behavior and psychology and even the best model or analysis in the world is of no use if investors press the panic button during tough times. “The most important thing you can do to maximise the odds of success is figure out what, if any, behavioral advantages you have or can create for yourself,” he says in an interview to a financial website.
Palihapitiya — a Canadian-American billionaire of Sri Lankan origin — founded a California-based venture capital firm named Social Capital in 2011. Although he holds a degree in electrical engineering, Palihapitiya has had an illustrious career in the finance industry over the past two decades. His stock picks and investments as head of Social Capital have outperformed the S&P 500 by more than 1.3 percentage points over the past few years. His firm has a diverse portfolio of investments in healthcare, financial services, education, consumer products, frontier and enterprise sectors.
The investor held important positions at American tech firms AOL and Facebook before becoming a venture capitalist. Now he is on the board of many successful companies and is also a part-owner of the Golden State Warriors NBA team.
In 2020, Palihapitiya started the Social Capital Hedosophia Holdings Corp. V, a special purpose acquisition company (SPAC), that has since facilitated mergers, share exchanges, asset acquisitions and initial public offerings (IPOs) of several businesses. The venture capitalist has gained a huge fan following on social media and has more than a million followers on Twitter and regularly appears on news media to offer opinions on the finance and technology industry.
Invest in the winners
Palihapitiya says he follows a philosophy of putting his money into the winner of an industry as success will then surely follow.
“If you try to outsmart the market, chances are you won’t win. I personally have tried this several times, without much success. Remember, the average buyer makes the simple decision to invest in the category winner. There are reasons why a certain company is the best in its industry. And there’s a reason everyone is investing in this company,” he says.
It is easier to buy the winners of a particular industry and let them grow over time instead of trying to find a company that will be able to outperform the current top company. “You can spend weeks scouring over every financial statement and drawing up theories on why you believe a company will outperform the top company in the industry. Wouldn’t it be simpler and less stressful, and probably financially more rewarding, to just pick the top company?” he asks.
Invest for the long run
Palihapitiya says people should invest for the long term as that is the key to successful investing in stocks. “Whether it’s been my job, my life or my investing, I’ve learned that long-termism is an important key to success. I’ve gotten the most back when I invested my time, vulnerability and money with very few short-term expectations but many long-term ones.”
Prioritise your needs
Investors have to priorities their needs, he stresses. It is very important to set up a proper list of needs and address them wisely so that they can make the most out of these for a better future. There are some things that will not change no matter what the situation is. Investors need to keep their focus up so that their preparation for the good times remains intact and doesn’t get derailed through discouragements and disappointments, says the veteran investor.
Do your homework
All veteran investors say it is important for investors to do their homework well enough before choosing a stock. Palihapitiya says investors will have to see the performance of companies and then decide to invest in the ones that are healthy enough and can last the distance.
Monitor data efficiently
The founder of Social Capital lists monitoring data as a sound way to make an investment. His investing style is not about looking at technical patterns or stock charts but about looking at a business to understand it and then investing in the company concerned.
Maximise the odds of success
There is no one right way to value a company, he agrees. “Most of us have no idea whether investing in an early stage company will lead to outsized returns. As a result, the best way forward is to maximise the odds of success as an investor. It’s not about guaranteeing success, it’s about guaranteeing the best odds of success.”
Palihapitiya says human psychology has a huge impact on the kind of decisions that investors make. Investors have a tendency to repeat what they are most comfortable seeing and doing. “There’s a theme in psychology called repetitive compulsion. That psychological trait actually has incredible insights in business as well, particularly in investing. What it really means is that you have a tendency to be compelled to repeat what you are most comfortable seeing and doing. So, when you have a psychological blindspot, this idea of repetitive compulsion just reiterates those loops over and over. It really takes somebody who can dispassionately, but empathetically, point at those things and say ‘Hey, why are you doing that?’ or ‘why do you believe those things that you do?’ or ‘why did that happen the way that it did?’,” he explains.
But there are some rules that investors can follow to prevent themselves from doing something irrational, he says, especially when everyone else is losing their cool:
1. Don’t trade stocks; buy companies
When investors buy stocks, they should view them as buying companies. Buying a company is like hiring a great CEO to work for investors and their families. “You can rest well knowing that Bezos, Musk, etc, are on the job. That’s not true for all CEOs so decide accordingly,” he says.
2. Try to buy companies that can potentially earn 10x in 10 years
“If I’m not willing to do that, I don’t buy it. This doesn’t mean that I will bat 100% but that isn’t the goal. The goal is to become disciplined in a process, repeat this process and don’t deviate,” he says.
3. Have patience
Once investors have bought a company, the hardest decision is to take no decision and to patiently wait to be right. “If I become too short-term focused, I am my worst enemy and will overthink, overreact and underperform my potential,” he says.
4. Try not to look at prices every day
The market has an amazing way of giving investors great opportunities to see the truth, he says. “You just need to realise that the price and the truth aren’t always the same. Looking at daily prices makes it harder for me to see the difference.”
5. Don’t play with derivatives
Options seem fun but they are like allowing a toddler to play with a loaded gun, warns Palihapitiya. “You can have a few close calls but it eventually catches up with you. In short, I have come to believe that the markets are the summation of everyone’s collective consciousness in any given moment,” he says.
According to Palihapitiya, the market constantly overreacts and under-reacts in any given moment, based on investors’ psychology. But over time, he says, sanity always prevails. Hence, by creating investment rules and living by them, investors give themselves the best chance of not losing momentum in moments of chaos, finding and sticking to their conviction and letting prices catch up, he adds.