Mind Over Money: Sandeep Tyagi’s Formula to Balance Greed and Fear for Long-Term Investment Success

Drawing on decades of experience in capital markets, Tyagi emphasizes the power of simplicity, disciplined strategies, and the importance of understanding cognitive biases.

His latest book, He Little book of big profitsoffers practical insights into how retail investors can adopt the same methods used by institutional players, avoid common mistakes, and stay committed to long-term wealth creation, even in volatile markets.

Edited excerpts –

Q) Thank you for being part of the segment. Tell us a little about how you stay mentally fit.

TO) There are four things I have learned over time: 1) Meditate daily, I have a daily routine that clears emotional baggage and brings stability to the mind. 2) Read and absorb knowledge widely.I read or listen to between 15 and 20 books each year. I also read various blogs and other media to learn more. 3) Make a daily routine of crosswords, sudoku and other puzzles. That’s like going to the gym for your mind. And finally, 4) eat seven almonds a day (something my mom prescribed for me since I was a child)!

Q) You have recently released a book called ‘The Little Book of Big Profits’. Tell us more about it. What inspired you?

TO) It is a small book, 174 pages. Because a good investment consists of obtaining above-average returns with less than average effort. These are the key points that can be extracted from the book:

● The Power of Simplicity and Discipline: I advocate a simple and systematic approach to investing throughout the book. This includes starting with a basic debt portfolio and equity investments, rebalancing periodically and avoiding the temptation to follow fads or time the market.

● Recognize internal and external noise: As I discuss in “Part 2: Avoiding the Noise,” one of the biggest obstacles to investing success is noise, both internal (our own emotions) and external (market hype, stock tips, etc.) .1 Recognize and filter This noise is crucial to making sound investment decisions.

● Understanding Risk Tolerance: I use the analogy of driving a car in different gears depending on conditions, to help readers understand how to build an appropriate portfolio. I suggest using “investment gears” to tailor a portfolio to an individual’s comfort level with risk. Different Gears represent different levels of equity and debt investments, allowing investors to choose the right mix for their situation.

● Tax Optimization: I highlight the importance of tax considerations when investing and recommend strategies such as tax-loss harvesting to minimize the impact of taxes on returns.

● Liquidity Needs: I emphasize the importance of considering liquidity needs when building a portfolio. If you have a short-term goal (like buying a house next year), your portfolio should reflect it with appropriate investments.

The inspiration for the book came from my own experience in 2008 during the Financial crisis. Despite having an MBA and a fairly in-depth knowledge of the financial markets, I found it difficult to manage my investments.

Additionally, when I talk to many of my family and friends, I realize the need for a simple book that cuts through the noise and helps people create a simple systematic plan.

I also feel like this is a way to share some things I’ve learned over the years with everyone. Typically, hedge fund managers and professional investors keep their knowledge secret or only share it with large clients. Writing a book is a way of sharing.

Q) Based on your decades of experience in the capital markets, how do traditional and quantitative investing differ in terms of risk management and returns?

TO) Traditional and quantitative investment firms do not necessarily differ in terms of risk management and profitability. They differ in how they achieve them. A Quant company will have a systematic process on how to make a buy or sell decision.

It will be based on a rigorous analysis of historical data. It is typically a team effort where multiple people work together to build the data and analytics infrastructure.

Traditional companies follow a manager-centric approach. The fund manager makes the decision to buy or sell based on his thinking.

Sometimes it may not be clear why they make that decision. And the process is not as repeatable as in Quant companies.

Q) Is there a way for retail investors to benefit from portfolio management strategies normally reserved for institutional investors?

TO) The principles are the same. Creating a diversified portfolio that balances risks and returns is key for both. The only difference is that for a retail investor, the amounts may be smaller, meaning that full diversification may not be possible as for institutional investors.

For example, in our investment portfolio for retail investors, we typically recommend a portfolio of between 20 and 25 stocks, while for large investors we may recommend a portfolio of between 50 and 75 stocks.

Additionally, implementation for retail investors is more work as they have to do their own implementation. In contrast, institutional investors can benefit from the execution capabilities of a professional investor.

Q) How does your book address common cognitive biases in investing and what quantitative strategies can help investors avoid these pitfalls?

TO) We are not always rational investors and we dedicate an entire section to those biases. Overconfidence bias is the feeling that we can detect patterns where none exist.

People are constantly trying to time market cycles trying to make a decision on when to invest in the stock markets and when to stay away. This is useless for an average investor, if not absolutely impossible.

Loss aversion is another bias that causes people to hold onto their loss-generating investments much longer than their profit-generating investments. Availability bias makes us invest in things we are most familiar with in our daily lives.

Investors do not perform in-depth analysis, but instead rely on familiarity with brands and other advertisements.

In addition to these cognitive biases that make us misjudge the investment opportunity, the biggest challenge is striking the balance between “greed and fear.” Investors oscillate between these two emotions. As a result, they chase performance, placing big bets after the market rises and retreating immediately after corrections.

As a result, they lose a large portion of the upside potential. In the book, I provide an example where a fund produced very good returns, but an average investor in the fund did not.

A systematic method, such as the Quant method, allows the investor to avoid the “greed and fear” cycle. Computers and mathematics are immune to these emotions.

Q) With Sensex and Nifty hitting record highs and market volatility ever-present, how can investors maintain long-term discipline in their investment plans?

TO) Investors should rebalance their portfolios with the right mix of equities and fixed income. When markets go up a lot (as they have in the last 1-2 years), we sell some of our equity positions and rebalance them into fixed income.

Except for this rebalancing adjustment, investors should maintain a regular and disciplined investment pace, saving money regularly.

Don’t try to time the market. I know many people who sold their investments after COVID-19 started and the markets fell and then waited on the sidelines while the market went up a lot over the next 18 months.

Q) How does your book emphasize the importance of continuing financial education, especially for beginners?

TO) Some things, such as tax rules, products available on the market, product performance, and transaction costs, change over time. It is important to be aware of all of these.

However, some things don’t change over time, such as the basic principles of systematic and disciplined investing. Here less is more. They don’t need to educate themselves on the latest stock tips and tricks. They are a waste of time.

Q) How often should investors rebalance their portfolios to align with their financial goals?

TO) Once every 6 to 12 months, investors should adjust their portfolio to appropriate equity and fixed income allocations. If stock market returns have been very high, then sell some stock investments and buy fixed income investments.

Also, pay attention to tax considerations. There is a difference between short-term and long-term capital gains tax. So when an investment is about to hit the one-year mark, tax-loss harvesting should be evaluated. This allows you to keep your tax costs low.

Finally, if your situation changes, such as if you anticipate an expense or your earnings change significantly, then you should also analyze your appropriate asset allocation plan and rebalance your portfolio.

(Disclaimer: The recommendations, suggestions, views and opinions given by experts are their own. These do not represent the opinions of the Economic times)