Learnings from 2017 and this bull market rally

dear friends,

I am delighted that we are at new highs. The articles written last few years and the persistence to only remain bullish including in the article “don’t be a cry baby, be a buy baby” have left a lot to smile. Money has an amazing feeling of confidence and independence but is not always loyal. The best part for me to do with stocks is not just the returns but the learnings that come with it which I factor as fee for education and building experience.

I am more than happy on several fronts.

A) for having remained fully invested (and I do mean 100 percent) in equity for the last few years. Even today the position is the same- except my expectation of reruns in 2018 are more moderate than they were last few years.

b) for having outperformed the market with lots of gratitude to God and Lady Luck and not just an appropriate skill. The conviction to be in several small and mid caps and not in large caps (barring isolated examples like hdfc bank) has made all of the difference to the returns. They say every bull market has a new leader. This market showed leadership in a segment of mid and small caps and not a sector run. More to do with cost of capital to these cos and their small bases where even one sizable order altered their financials and somewhat to do with a very large participation by retail vs fii. There is generally a perception (although not correct) that stocks that look cheap in price are cheap and will reward more and hence optically sub 1000 rs shares are better than those above. Like I said this is optical and one of my core investments is today one of the most optically priced stock but which even today is reasonably valued vs its earnings, brand value, growth, capex and replacement value. The last factor being important in a world characterized by sudden deaths or take over or obsolescence of cos and hence the need for stability in business survival and growth.

c) the third factor has come at a cost to me. I love opportunity costs. Even if I out do markets I constantly analyze my errors, mistakes, oversights etc as it leaves good trail in the mind to look at patterns and avoid similar mistakes in the future. May I add, mistakes will always be made and you can only try to improve and minimize them. This article tries to focus on some.

While one side of my thought process loves the fact that I took a positive and more than rewarding look at identifying opportunities to own and invest in several sectors and leaders in those sectors ahead of their subsequent recognition such as tires, specialized chemicals, electrodes, consumption and of late hospitality (I wrote more on Twitter towards later part of 2017 how the hotel industry is shaping up well) and finally pharma (all have already outdone market except one pharma stock, which I think is not bad), the other side of thinking takes a look at several misses-

i identified a small cap stock in packaging at a phenomenally early stage. Not only identified I bought a decent starting qty into it. Just to elaborate in several small caps you may see opportunity and an indication of improving financials but you can’t fully bet till the story actually starts playing out more consistently as management bandwidth and their ability not to get “carried away” takes time to mature. As I usually do in some cases, I discussed the idea with few of those who fall in my circle of well wishers and who have a very open mind and a great history of understanding cos. The result of the discussion was most unfavorable. I usually don’t get impacted by this as sometimes I attribute this to the lack of information about cos and precise why they are being discussed and not so obvious. But here I got carried away God knows why and sold off my position. The stock went up 26 times thereafter and was big guru in teaching me this:

“There is no right view in the market (including your own). The view is right on some assumptions only. Don’t dismiss assumptions on basis other than peculiar to that co including the lure of another idea. No one is an expert on everything and no one will ever be. Each person has a circle of his likes and thus is already biased. For ex historically a sector may have caused a loss or a wash out but today the facts may not be same. Usually history is a great teacher but new history may be created a few years later. Today there is more truth to this as business models and corporate governance standards are getting better”

Another error I made was again wine respect to a stock where I even crossed 1 pct holding in the co or nearabouts. I saw the co in a segment that was niche and where I felt the opportunity was huge. The stock languished for 2 years and did nothing. No change in results, no large orders and obviously no stock price movement. In a sense it dragged a part of the portfolio return commensurate to its weightage. I assumed 2 years of nothing was being fair in terms of a holding period and sold out. Somewhere in my mind the trap of opportunity cost being high here and nothing changing played out. As they say the decisive moment in a stock can come anytime, the stock immediately saw a turn. And the story played out in one of the highest up moves amongst stock returns last few months. This left me with a learning and a question to myself: how long will I hold a stock that looks convincing in a backdrop of a rising market. Will I hold it for 2/3/4 years even if it underperforms even if “eventually” it may not only catch up but overtake market returns by far. I don’t have an answer and my deliberation continues.

I can pacify myself and feel happy that even with such errors the p/f beat the market well but the truth within is why these errors were made and what can I learn from them. Did I need the money when I sold these stocks? No. Then why did I sell them? Is comparative return a true guiding factor of a decision even after 2 years or is there more to it in temperament and time. As part of early days, we used to read “our favour te holding period is forever” but that’s not true even for Buffett as IBM and many other examples recently showed. In a tweet, mr samir Arora re-stated this as “our favorite holding period is forever as long as we have good companies with good managements” (which fact is a discovery with time and may errors can be attributed initially). There is nothing to suggest that IBM doesn’t have an excellent management and is an outstanding co. Hence to me it appears “our favourite holding period is as long as we have returns”. Here lies the patience card- until when will you sit till you discover these returns.

My third learning has been e phenomenal difference in returns by not buying for short spurts, buying on tv flashes or selling based on them, not being part of any whatsapp group and doing your best to remain confined to your pool of thoughts. Take a thought- the stock market has so many listed companies in all segments. You need a handful and will do well if they outperform. You cannot yourself know which one of your favs will run the marathon with higher speed and end up as your best return. But you expect another pool of thoughts in other sectors or companies to display characteristics of more certainty and authority.

well I intend to write more on the learnings and am closing this post with these initial thoughts. Which I may add brings a new learning to share- penning thoughts or even articulating them say at talks is a huge huge advantage to an investor. It opens new horizons, sets the mind to explore more angles and if nothing makes you a better thinker and if God be, a better prepared investor.

 

cheers and do send your valuable feedback either here or on my Twitter handle @safiranand.

Shall update part 2 soon and try and share learnings along a wonderful journey.

 

(please excuse any typos. This is an article typed in a flow and not as a stop, read, review, edit mode).