Monday, March 17, 2014

Stay Long , Fare well !

Long term is deemed to be one year in the eyes of the tax man. And, investors tend to believe that the tax man is right. So , investment horizon tends to be fixed in a manner that is connected to the investor's return expectations and the tax man's timeline. If a stock has crossed one year and has returned very decently , investors show willingness to happily part with it. Money on the table excites & entices the investor to making a move. This is something that has puzzled me as my years in investing grew upon me. "So, what is your investment horizon ?" I ask this question of investors who come up to me seeking my thoughts on investing. Most investors give me a horizon linked to the performance of the stock price. The most popular answer would be " Till my stock doubles." So, investors are conditioned to thinking that they must invest in stocks to make them double. And, one they actually double, it would be time to sell them and move on to find another stock that would do just that. Where else has double been an obsessive construct. One place I can think of is in gambling . We have all heard of " Double or quits ? " right. That brings us to the basic question . Should doubling really be a goal ? In my view doubling should hardly matter. If you bought a stock and it has doubled , all you should do is treat that as a milestone. Doubling should reinforce your belief in the stock and all you must do is again validate the price move. Did it happen because you bought into a good business ? Or, was it something extraneous like price manipulation ? As long as you bought into a good business, the fact that the stock price doubled should hardly decide what you must do with it. You need to evaluate what the stock can still do for you if you held on to it for a much longer horizon. If you still think it will deliver strong, stable business growth without altering the firm's competitive position and bargaining power with customers, you must simply stay put. But, most investors fail to stay put. The hunger and craving for activity and ever-flowing new ideas leads to exits from sound existing investment bets. This leads to investors cutting winning bets and then searching for new bets. Finding great investment bets isn't a cakewalk. So, running a great bet for very long durations of time is mostly the best option before investors. That calls for an open investment horizon. When you have an open and extended investment horizon , the only problem an investor will typically face is with his time. What do you do with your time if you have no intent of churning your portfolio ? Masterly inaction in the stock market has to find an engaging vocation that will keep you focussed. Reading on investments and investment ideation are two things investors can engage themselves in . Poring over scores of investment ideas , understanding business dynamics , looking for businesses with strong competitive positions will be the best way in which an investor must engage himself. Finding emerging investment themes is another way in which an investor can prepare himself for the future. So, what should you do with all your findings if you can't act on them ? Investment research is not necessarily done with the goal of actioning every good idea that you come up with. Investment research is meant to keep you wedded to the best ideas by understanding their superiority over peers. So, your work should tell you why a business is superior to others. And, it must give you the clarity and conviction to stick to the best ones even as you study several other good ones. I am a great believer that one should not replace his best idea with several good ones. Instead , he should stay so long with his best idea that it gives him returns beyond his expectations. If you stick to your best ideas, you will have to say no to several good ones. That is one farewell that will let you fare really well.

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