Back from a three day vacation at Udaipur. Excellent place and very relaxing. Happy Dussehra to all readers of the blog. May good prevail over evil Just penning down some thoughts on investing and not about the markets this time.
Identification of stocks that can outperform the markets significantly and generate a huge amount of alpha for the portfolio takes lot of time and effort. Out of 4-5 high conviction ideas there are just 1-2 which will do very well. As such selling of such ideas too early normally leads to subnormal results. Although i have always believed in holding stocks for a long time and riding the entire wave ( I belong to the pre hedge fund era) today the markets have become more about flip trades where most investors are not willing to hold on for too long and cash out too early.
The risks of selling out early out of strong conviction ideas that were bought at very cheap valuations is that the probability of making a suboptimal choice in buying into newer companies is much greater. I believe that the thing to remember is that that most of the money is made during the overshooting phase of the stock where the stock price moves above fair value and most money is made in buying stocks when they undershoot way below fair value. The dilemma that most fund managers like me face who end up buying stocks way below fair value and at an early growth stage of the company is that as the stock approaches fair value, one has already made a lot of money and when other investors are recognizing value in the stock we would already be well in money and as such would be looking to book profits in the stock when it is actually time to ride the wave. This is also borne out of an insecurity about protecting the outperformance and preventing downside risks.
I will explain this through a recent example where i have been guilty of cashing out at fair value and missing the upside –
In recent times a big multibagger that I picked out in my last assignment in was MPHASIS. This was a stock which was going to be a clear beneficiary post takeover by HP and was likely to see huge business traction over the next few years. However this stock was valued at 20% the valuation of large Indian IT companies. I picked up big quantities of this stock in the price range of 150-170 and held on for a long time where the stock did not move much. My view was that eventually the valuations of this company will converge towards that of the large cap names in the sector. However as the results started to come and other investors realized the potential in the company the stock which I left as the top holding in one of the funds I was handling shot up by nearly 250% in a period of just six months. I could capture some part of this gain for my investors in the existing PMS also but at a much higher price of Rs 330. Even from there the stock went up by nearly 60% in just around 2 months time. As the stock moved up by nearly 60% where the markets remained more or less flat and given the fact that this stock was the top holding in the portfolios I got tempted to book profits at at time when most other investors were just buying into the stock. As a result I lost out the overshooting upmove from Rs 520-530 levels to the current Rs 650 levels.
Now I will give an example of patient investing ( which is what i usually like to do). Back in the year 2000 when i used to work with SBI Mutual Fund, Pantaloon Retail was a very small company and organized retail was just about establishing itself in India. At that time I was really impressed with the vision of the management and I could also see that there is such a huge market place available for the company to grow as growth could be endless atleast of two decades. At that time the company wanted to raise some equity and I looked at it as an excellent opportunity for buying into a high growth concept stock at par value of Rs 10 per share. After we bought into the stock the markets went into a bear hug and although the company continued to grow the stock price remained at around Rs 10 for a period of nearly three long year. Subsequently as the markets recovered in the year 2003, the stock price zoomed by by over ten times in just one year and by 100 times over the course of the following bull market and even today after all the corrections and up moves in the years 2008 and 2009 trades at well over 50-60 times of the initial purchase point.
I believe that the markets as they are positioned in India today provide lot of such opportunities of long term investing into high growth mid cap companies that will multiply in value over the next five years. However it requires patient investing on the part of both investors and fund managers who manager investor funds. The idea should be ride out the entire growth story without bothering about short term underperformance. As one famous investor has said “The fear of underperformance by fund managers is worse that underperformance itself”. Essentially the fear of underperforming leads to underperformance.
“To make big money in the stock markets it is important to put yourself in the place of the management of the company and see things from both their and ones own point of view”