Summary List Placement
If you’ve ever been down the rabbit hole that is financial TikTok — commonly known as #fintok — you might recognize Alpesh Patel OBE, or his handle @greatinvestments.
Patel, a former barrister and founder of the hedge fund Praefinium Partners, has taken to the social media site in an attempt to educate retail investors with high-energy 60-second clips, discussing a whole host of content, from company valuation metrics to simple career advice.
The content is popular too, and after eight months of posting, he’s racked up almost 22,000 followers.
“The funny thing is that I’ve been on social media forever, but I’ve not had that level of engagement. So I love it — I’m addicted,” Patel told Insider in an interview.
The retail trading phenomenon has been one of the biggest stories this year, as day traders piled into so-called ‘YOLO’ microcap stocks. The GameStop saga boosted the stock by more than 5,000% in the last 12 months, even leading to congressional hearing that featured Roaring Kitty (aka u/deepf***ingvalue), the most prominent retail trader on Reddit, and Robinhood executives.
But, for Patel, this story is nothing new. In 1998, Patel published his book “Trading Online” with the Financial Times, underlining the birth of a new market force: the retail investor.
In an interview with Insider, Patel broke down the three biggest pieces of advice he has for retail investors, and how he’s advising his clients on bitcoin.
Are you investing or trading? Know the difference
One of the biggest issues facing new retail investors is the so-called gamification of investing. “Brokers have become like casinos,” Patel said, blurring the lines between trading and investing.
For Patel, investing is simple. You do the research, you buy the stock, hold for 12 months, and then review.
“Not for 10 years, because the world changes too quickly. You review over 12 months. You might hold it for 10 years because you reviewed it every 12 months,” he explained.
If you want shorter time horizons, then you are trading. But that is a very different affair.
“Trading, as you will see from any FCA regulated broker, 75-80% of people lose. Investing, you only need to look at long-term stock market performance to know 75-80% of the people win if the timeframe is long enough,” he added.
For those who want to trade, demo accounts are key until you’re consistently profitable.
Research a stock like you were hiring
If you’re investing and looking for stocks to buy, the best way to think about it is to consider them “custodians” of your pension or life savings, and therefore you need to interview the stocks as though they were applying for the job, Patel said.
Importantly, tactics like geography or sector exposure come after you devise your strategy.
“People mistake tactics and strategy. They invest tactically, not strategically. So they mess it up and they start chasing the latest headline,” he said.
He added, “Just like any other job interview, I’m not going to pick a narrow gene pool. I’m not a racist stock picker. I’m not going to say I only want British companies… or only from this region. I pick out of a pool of 9,000… because I want the best of the best of the best, as would anybody else when they’re hiring,” he added.
For a stock to land in Patel’s portfolio, it needs to tick every box. He looks at valuations, revenue growth, and dividend yields, but also cashflow, he explained. Citing Goldman Sachs Asset Management research, Patel argues that the top quartile of companies by cashflow generate 30% per annum on average long-term.
Patel also looks for a high sortino ratio, a variant of the Sharpe ratio, which is the average return relative to volatility. This limits his risk, identifying companies that — if the markets falls — won’t fall as far.
Do it yourself
One of Patel’s biggest frustrations comes from retail investors’ overreliance on long-only retail asset managers. He argues that the only person who knows what is best for your money is you and that you should be the master of your own risk profile.
“They’re thinking about a basket and they’re clicking a button, spraying the money around, they don’t think about you. The only person who thinks about you is you,” he said.
Patel argues that people can teach themselves to do the research and allocate capital for themselves. “Fund management is like learning to drive, which means that virtually anybody can do it,” he added.
It’s a FOMO trade
Cryptocurrencies have been long associated with the retail investors as they were used early on in protest against mainstream financial systems. But in the last year, cryptos, particularly Bitcoin, have seen more interest from institutional players, with some banks even setting up trading desks.
And as the crypto market cap tops $2 trillion, Patel isn’t shying away. But he cautions that this is a fear-of-missing-out trade, adding that he has bets on ethereum and Ripple.
“Strategically, even something which is not gold, like the money in your pocket… could be worth something… You might just get this mass delusion, which goes on forever; we live in a crazy world. There’s enough people pushing it that you could get tulip-mania, which lasts a decade/two decades,” he said, adding “equally it could go to zero.”
But cryptos will never become a currency recognised by major governments — something that some crypto bulls build into the case for the asset, Patel added. He argues that the simple reason that crypto can facilitate both money laundering and terrorism will be too much of a deterrent.
Originally published at https://www.businessinsider.com/hedge-fund-manager-tiktok-sensation-alpesh-patel-retail-investing-advice-2021-4 on .