I have come across people who most of the time are interested in getting tips or stock ideas. With the feeling that if they can get some unknown name which could become the next Asian Paints or next HDFC. Recently,I came across a similar incident when I kept a post on facebook describing about 25 years of Infosys since listing and how my father created wealth through it. In the comments, one of my school friend asked me, ‘please search the next Infosys for us’ and the other gentleman replied, ‘what would you do even if you get the next Infosys, when you don’t have the patience and conviction to hold it.
This post gave me an insight to write this BLOG. In my career of 15 years in stock market, I have seen that multi baggers come to each one of us but only few people could hold it. For e.g. I subscribed in the IPO of Maruti at Rs.125 but sold it off at around Rs.250, being interested in making a quick buck in early part of my college days in 2003. Had I been holding on to the position; the stock quotes at Rs. 9000 today. There are some other examples like Yes Bank, Britannia, VIP Ind etc. which I sold off much earlier.
Every investor wants to buy at the bottom of the stock and sell at the top. But this is not how it happens in real world. In the stock market, nobody is able to do this consistently for every stock he holds. This is because every business goes through good and bad times and none of the business has a linear growth. Some of the businesses go through consolidation period where profits stabilize or become range bound for a span of 2-4 years. To be a successful investor, one has to keep staying with this type of companies even during its tough period. One should make out first that whether the problem is structural or cyclical. One of the structural problems can be related to Balance Sheet where debt has gone up substantially and it is not able to service its interest for long time and thus the condition of the books is beyond repairable. We have many such examples of JP Associates, Punj Lloyd etc. from 2008’s Infra space. The other structural problem can be disruption of business. Cyclical problems can be related to any kind of headwinds in a particular sector or a short term mistake in strategy like strikes or USFDA warning letter in Pharma, which are all temporary and repairable. Remember there is no successful investor in this world who has made money by selling a stock during tough times and buying it again during good times. Be it Warren Buffett who held onto Coca Cola or Rakesh Jhunjhunwala who held onto Titan, during company’s tough times. Even renowned Fund Manager like Prashant Jain have held on to their conviction in Oil Marketing Companies and Metal Companies in the past or in PSU Banks currently.
Worst news and lowest prices come together. This is when patience and conviction is tested. Last year for example Infosys MD Vishal Sikka resigned suddenly and stock went down from Rs.1010 to Rs. 870 even though it had announced a buyback at Rs. 1150, just before two days of resignation. Everyone on the media was so bearish on the stock and gave a verdict that ‘Infosys lost its mojo (magical spell)’. Now here worst news and lowest price came together and today after 6 months the stock is trading at Rs.1280, almost 45% up from that price.
If a portfolio has to outperform, it has to look significantly different from the market and in that case we should not be scared of its temporary underperformance. There is a difference between uncertainity and risk. Rakesh Jhunjhunwala once said that he made a big loss i.e Rs 150 crores in A2Z Infra where he made a mistake of misjudging the management. But this has never scared him to take new investment decisions. Mistake should be such that it does not take you off the pitch and ultimately questions your survival. Allocate your capital in such a way that you survive even if you go wrong. George Soros a Legendary investor once said that “It does not matter how many times you are right or wrong. It only matters as to how much you made when you were right and how much you lost when you were wrong.”
The other thing which is most important, apart from getting the stock right, is the position sizing in your portfolio. How much you allocate initially after you research and get convinced about a particular stock and then how much you add further after tracking the stock for every coming quarter while getting more convinced about that company and industry. I have known many people who have many multibaggers in their portfolio, but the only thing they were missing on, which matters a lot, was that they never added or allocated more capital to the stock in which they had strong conviction. This happens due to higher price bias. Many people are not able to buy above their initial purchase price. Peter Lynch said that “Best companies to own are the ones you already own”. Currently Titan forms almost 40% of Rakesh Jhunjhunwala’s portfolio. This is his conscious decision of having such a high weightage in particular scrip in his portfolio. This was partly due to addition of shares as and when he got more convinced with the management or the company and partly due to price appreciation. Once he told that “When you go right on the idea you were convinced about, it should make a material difference to your balance sheet”.
So in a nutshell “Investing is simple (Knowing the rules) but not easy (Practising the known rules)” because in investing 10% is analysis and 90% is temperament. In most cases one compromise with the latter and thus lack in controlling their financial decision making behaviour.