Wednesday, March 26, 2014

Investing like Rip Van winkle


Rip Van Winkle is a story that is 195 years old. I loved it for the sheer idea. Of sleeping through the harder times only to emerge in a different era of greater positivity. I always wondered what it would be like if one played Rip Van winkle in the stock market and still emerged successful without doing the drudgery of profitable labor. That idea struck me as a powerful concept. If I could do a few things right and think that I would be lost in time for several years only to wake up, would my investments still be taking me to a much happier place. The idea struck me long after I entered the stock markets and spent long years of my time in 'profitable labor'. So, I looked around for answers . The first thing that came to my mind was the power of duration. Let me start asking you a few questions. Do you still hold stocks which you bought in your early years in the market ? Have you tried asking this of someone who has done over two decades in investing. I did . The findings were quite revealing. Few people actually still own the stocks they first bought. Even fewer hold on to stocks they bought in their early years. Even their best picks usually get sold when they perform. Though they bought some of the great companies early on , they sold them when they delivered generous returns and turned multi baggers. I did the same thing several times in my first decade on investing. I always looked to make those smart moves from one company to another . Like switching buses many times on one journey , I shifted from one company to another more lucrative one. The result has been that I have been very busy ideating stocks , understanding relative value and moving capital from a stock enjoying higher valuation to one enjoying lower valuation. That is what i call 'profitable labor '. Then , in the stock market bust of 2008, I sat wondering if the whole thing was worth it. My own experience with Pidilite industries was a good test case. I identified this stock in 1994. It was a fascinating company and I even penned a research report on the company. Then four years later , it turned out to be my best performer. I sold. Ten years later , in 2008, I wondered if the sell was a good decision. It obviously made more sense to have sat on the stock despite seeing huge returns notionally. I did make very decent returns on what I bought post-sale of Pidilite . But the whole exercise seemed more like occupational therapy when I look back at my decisions. Booking profits to find similar companies seems like a futile exercise that only kept me busy pursuing work and excellence. If I did nothing and simply sat on the stock , I still would be much better off . Hindsight may be an easy tool to rationalise. But, it also taught me to appreciate where I needed to evolve . I learnt that i needed to co-exist with a few stocks for very, long extended periods of time. That was the only way I could grow and still be very comfortable with what I owned . This realisation changed my approach towards investing. Instead of focussing on turning my hunger for knowledge into investment decision making, i chose to make a distinction between the two. So though I did make several other investments post 2008, i still ensured that I raised my holding in Pidilite at every correction. How did this help ? Over time, a company where one can simply stay put, remain invested and do nothing turns into an anchor stock of the portfolio. Around a few such companies, one can establish a portfolio that will not change at the core and still grow steadily. Most investors under emphasise the importance of their anchor stocks and believe that they can find replacements. More often, the replacements are not as sound as the original. The risks rise when we replace stocks with other bets which are relatively cheaper. When anchor stocks fail because they weren't meant to be, the portfolio crumbles. So , the desire to be Rip Van Winkle in the stock market is much more than an idea . In fact , it is a powerful tool that helps you screen your own investing , understand your own notion of a long life spent patiently in investing and to correlate who you think you are to the reality. When we believe we are value investors , we often fail to reconcile our beliefs with our own behavior . Rip Van Winkle bridges that perception gap and restores us to who we believe we are. That is my personal experience.

3 comments:

Muthukumar said...

This is very good read. Thanks for sharing it. This process will reduce the amount of switching cost payment to brokerage and keep ourself remain invested in the wonderful business.

Khambatta said...

This was enlightening. Thanks.

rajdori said...

Loved this post. ,I am just scared calculating brokerage fees and time spent in finding next great businesses all these years...