WHAT IS YOUR INVESTMENT HYPOTHESIS?

Why did you invest in stock "X" or "Y"?

Why did you invest in a mutual fund?

Why do you want to invest in an FD or a Bond?

I am not much popular for my investment style or decisions related to investment because whenever I get a chance to discuss the investments with anyone, I raise the above fundamental questions. The questions, on the face of it, are very simple and straight forward.

But many people simply call me someone, who keeps on dragging the unnecessary arguments. Some polished ones call me too theoretical in my approach. In fact, yes, I am very theoretical and I am cool with that (nothing like proud or ashamed of that and bla bla).

The reasons for writing above paragraphs is that, if you, my dear reader, are also one such persons, then this article is JUST FOR YOU! I am NOT claiming to be putting forward the arguments that my way is the hi-way or my word is the final. In fact, whatever I have learnt today, is thanks to my tendency to listen to multiple view points.

So, here is one thing. Whenever we buy a car, we have hundreds of reason for buying that PERFECT CAR. Whenever we buy a house (home cannot be bought), we have THOUSANDS OF REASONS for buying that house.

But, unfortunately, we rarely ask these questions whenever we eat something (not wanting to write on it, just an example sort of) or whenever we invest money!

Yes, my point is, if we have perfect reasons (answers to the many whys), while buying a car or a house, how come, we invest our hard earned money, without asking the same basic questions?

To answer that, I have come across a fantastic concept of Investment Hypothesis. Every investment decision of yours, regardless of the choice of asset class or asset allocation, must have a reason to invest in it.

For example, I invest in PPF, because it is a government backed, tax efficient, debt scheme, which can protect (and not multiply) my money and is supposed to provide safety net to my overall portfolio.

I invest in stocks because I seek dividend income, with reasonable growth. Earlier, I used to buy the stocks, purely for the dividends. But, of late, I have realised that reasonable growth with reasonable dividend would be a better wealth generation choice.

Here are some examples, and not an investment advice, of some of such decisions:

1. I bought REC and ITC purely because of their high dividend yields.
2. I bought Swaraj Engines because I saw good growth opportunity in the stock, along with goo dividend yield as well

I invest in small cap mutual funds, to provide a "KICK" to my portfolio. Because I am basically a very conservative investor.

So, overall, I have my own investment hypothesis. I exactly know what role each asset class (equity, debt, gold etc., i do not invest in real estate, silver, commodities, bit coins and also avoid instruments like derivatives) in my portfolio.

It is somewhat like making a cricket team. Each player plays his/her role and the team performs well. Each stock, bond, mutual fund and commodity like gold plays certain role and contributes in building overall portfolio.

Of course, here are some more important points about having your investment hypothesis.

1. It must be written. You must have 100% clarity about it.
2. It must be scientific and be backed up by empirical evidence, as well as, practical insights, which fulfil your investment needs. For example, how much money should be in cash (in liquid fund or savings account) is a very personal choice, based on your overall financial condition and risk tolerance.
3. The risks and assumptions related to the risks, associated with each asset class
4. Goals of investment- short-term, medium-term and long-term.
5. Macro and global perspectives about your investment hypothesis
6. Possible built in mechanisms (like insurance, emergency funds etc.) to deal with any black swan, unforeseeable events like 2008 crisis or corona crisis.
7. It is a good idea to write in a diary, why you are investing in a particular stock and mutual fund. That will help you keep your perspective on investment alive.
8. Conclusion: Overall, it must be kept in mind, that your investment hypothesis must not be borrowed from anyone. You can always learn a thing or two from others, like I follow (and not copy) certain practical insights of YouTuber Akshat Srivastava (spelling may be wrong) but do not blindly follow him. For example, he is a great advocate of timing the market to generate extra returns. He is right in his own way, but that never suited me, so I stick to the basic ideas of disciplined investing. But, at the same time, I have grown more into confidence, to invest directly in shares, on my own, based on many of his valuable insights.
9. DISCLAIMER: THE ARTICLE IS PURELY FOR EDUCATIONAL PURPOSES AND THE NAMES OF THE STOCKS ETC., USED IN THE ARTICLE, ARE ONLY USED AS EXAMPLES.