The tail can wag the dog too

Investors believe that it is their top holdings that matter the most. The top picks are expected to make all the difference to an investment portfolio. So, all energies get spent focussing on the top bets. Investors guard them possessively spending disproportionate time on detail and debate related to their top holdings. But, if one's largest holding is a HDFC bank or Coca Cola company, there isn't much to do really. One just needs to sit patiently and watch time pass by. Inactivity is what will make all the difference to outcomes. Yet, the moment an investor finds a new idea that excites him, he starts looking for capital to buy it. A natural outcome is that investors tend to sell his performing stocks. He simply lets go of a good bet just because it has done him good and he wants to move on. Often, as market cycles mature, investors sell marquee stocks which form the core of its portfolio to buy untested newbies. A classic example is the selling of FMCG blue-chips in 1999-2000 to buy untested IT and dot com newbies. A more recent example is the selling of FMCG blue-chips in 2008 to buy frothy infra and power stocks. Notice that in both instances, FMCG stocks were sold. Investors tire very easily of holding stocks that are predictable and unexciting. They tend to easily let go of them only to buy exciting stocks which carry high risk. lower long-term predictability and provide activity. Often, the excitement of doing newer things is the cause for investment decisions being taken sidestepping even the real merit of selling. Investors easily succumb to the fallacy that a richly valued stock can easily be bought back as it could be in the middle of a time correction. So, selling your core stocks when they are richly valued just so you could experiment with newer ideas is simply not the done thing. Remember, Buffett hasn't traded GEICO, WELLS FARGO or COKE every time they looked richly valued. Nor, has he considered selling them to buy newer ideas. The portfolio's core must be protected and its character kept consistent over time. Changes to the core must mandate very high conviction. 

But, an investor can't remain idle. He needs to find activity. So how can an investor do incrementally productive things, innovate and experiment with new ideas? How can he do it without messing up his existing investments? How does his search for ideas co-exist with the need to keep his strategy stable , contiguous and consistent? The continuing research and search for new ideas should be done in a way they don't invade existing portfolios. So, new research must be given their own space. 

The portfolio's tail is that place one should assign for newer ideas. Turning the tail into a portfolio driver is an interesting way of making portfolios breathe fresh ideas, creating newer drivers for returns and yet not upsetting the applecart too much. 

My prescription is simple. Separate your portfolio into two parts. The first part is your core portfolio that must have a limited number of stocks. The core will usually contain long-held stocks one intends to hold even longer. The second part , which i call the tail, is a  satellite portfolio that acts as your investment lab. In your satellite portfolio,  you experiment with newer ideas, buy stocks where your conviction is still evolving and carry stocks where your conviction is growing with the idea. A stock usually spends time in a satellite portfolio before it qualifies to become a part of your core portfolio. This phase is akin to a "Cooling period" or "Silent period" when you asks yourself a lot more questions. The cooling period helps you understand the counter arguments, answer them or decide they aren't serious enough to change your conviction. As conviction grows, you add to your existing positions in the stock. Gradually, you scale up your exposure to the stock and raise its portfolio weightage. Importantly, this scale up is strictly a function of rising conviction. Capital appreciation will also play its part in raising a stocks weightage and taking it up in your allocation. A stock earns its position in a portfolio. I am a firm believer in that principle. If we identify a stock's merit correctly, we must reward the stock with a higher position in our portfolio and the stock subsequently lives up to its promise. Then, the stock will gradually rise from the tail to the core of a portfolio. 

My top holdings of today were the tail stocks of my portfolio a decade ago. I held them long years to build conviction. As my conviction grew and became stoic and unshakeable, I helped myself to own more shares of them. My hunger to own more shares grew naturally. It is important that that a stock gets more attention only when this happens naturally. Over a decade, what was the tail of my portfolio became the driver and enjoys the bulk of the credit for my investment performance. 

My portfolio has a long tail. The bottom 30% is my investment lab. That is where i experiment and give room for my investment hypotheses to be validated. Some of these ideas move very fast in very short bursts of time earning their place in the portfolio's core. The others spend more time forcing me to fine-tune my understanding and question my own investment theses more critically.  The tail of an investment portfolio is no more a doghouse. One can ill afford to think " Oh but I don't really own much of it. So why bother?"  If one own's very little of a stock, the question to ask is " Why is this not good enough to grow as a position?". If one manages the tail of a portfolio well, it could well make all the difference your portfolio needs. 

The tail can wag the dog too. 

My tribute to Parag Parikh

The passing of Shri.Parag Parikh, one of the finest investors and investment professionals of our times stunned the value investing community in India. Paragbhai, as he was affectionately called, was deeply admired by the value investing community for many reasons. Being an astute value investor was definitely a strong reason. But, there were other reasons beyond just his accomplishments as an investor. Firstly, he was much more than an investor. He worked with unmatched zeal to promote value investing at a time when few had even heard of the discipline. He was a mentor to so many young investors, a teacher to many through his writings on behavioural finance and a role model in keeping the highest professional values and ethics. He carried his achievements lightly, talked about his past learnings with utmost humility and made every person who met him carry meaningful insights about life in investing.He was the most gentle teacher and would always be ready to travel to speak to our investors. TIA had the privilege of hearing Paragbhai several times and he would always come from Mumbai on his own and generously support our efforts to educate our investors. I am sharing a few things that I observed. Parag's sense of integrity and ethics is well known in the investing community. He was a man who took tough decisions even when there was no systemic need to do so. The reason was that he felt strongly about the need to do so. He shut both his lucrative stockbroking business and later his PMS business when he started a mutual fund. The reason - he believed that there should not be conflict of interest. This was at a time when most of his peers had operations in all three businesses and the system allowed them to do so. Parag felt that he should not be in all three as there could be potential conflict. So, he stuck to just one business- mutual funds. His entry into mutual funds was hardly easy. The regulations to raise the capital adequacy only made things more difficult for smaller & newer players. He remarked jokingly that the new regulation made him a poor allocator of capital. He did not flinch to speak the truth and that is something unusual in an industry that thinks one thing and is too fearful to say it. Talking about the mutual funds business , he said " this is a knowledge business. You don't need too much capital. By raising the capital adequacy, we are making it a capital intensive business. Those with the requisite knowledge and integrity may never be able to put together Rs.50 crores. Is that really good for the investor? Are we not closing the doors to the smartest minds to come into this business?" This was when he was able to comfortably comply with the new regulations. He was able to think beyond himself and talk like a statesman rather than a businessman. He did this with a rare candour that never hurt anyone and yet did not flinch in saying what he intended to. Parag's views on mutual funds paying dividends is another vignette of his brutally honest personality. He was against the practise of mutual funds paying out dividends. He stated upfront that his funds will never pay a dividend. If any other fund manager would do such a thing at his fund launch, that would become nightmare for marketing the fund to investors? It was unthinkable for investors to accept a fund that would not give a dividend. "How can a fund refuse dividends to its investors ?" Parag had a simple answer. " You are giving me money to manage. If you want some money out of it, you are free to take it. An investor should decide for himself. The fund should not give investors money and work against the principle of compounding." Parag was clear that genuine long term investors may not need the money most of the time and when they need it, they are free to take as much as they decide out of the fund. And, that was how he ran his fund. His contribution to the value investing community was immense. He was accessible, helpful and kind to so many budding investors. He gave encouragement, ideas and moral support in the phase of life when a budding investor was building his self-belief. Parag was a master in teaching people to learn and grow. The glowing tributes by accomplished value investors and thought leaders to Parag recognises his contribution to building a community. First, he helped so many young aspirants to evolve as value investors. Then, he put together a community through his annual event Octoberquest. It was a one day conference he personally hosted. He carefully chose the speakers, the invitees and even the menu for the lunch. He loved every moment of that day and made sure he spoke personally to every participant at the meeting. The meeting worked to a clear well planned agenda, the confirmations had to be done well in advance. He was absolutely punctual in starting the proceedings ( an unusual trait in Mumbai). He always was looking to make the event better, more focussed and useful to those coming in with great expectations. At the last meeting in October, he was telling me after the meeting " We must have more interactions . We must change the format from individual speakers and have a panel.You should participate in making a different Octoberquest in 2015". Any other host will want to hear you tell the nicest things about an event he so graciously hosted. But, that was Parag Parikh. The man had a plan to make everything better. The almighty had made other plans to take him to a better place.

Plagiarise & be ordinary

Those were times when we simply didn't know who owned how much. I come from an era when we did not know what other investors were doing. Bombay was an investment citadel.There was an information advantage which naturally disadvantaged investors living in other cities. We didn't even know who were the large shareholders in companies. Those were times in which companies didn't disclose shareholding as often as they do now. Even if they did, the data was closeted information accessible only to BSE members. The regular shareholding pattern disclosures, SAST disclosures and block deal data are a very recent phenomenon.So, all one knew from poring over trading data was that there was some unusual activity in stocks. Reading trading patterns from the quote pages in newspapers was the only handle one had for a very long time to know there was heightened activity. Over a period, one stopped reading even the daily quotes and simply focussed on studying businesses and sticking to the findings. What others own is now widely known as shareholding disclosures and changes are now regular , transparent and accessible. Yet, my old habit of sticking to my own reading of businesses has continued to drive my investment approach and I don't even know what my close associates own in companies. Bombay - the distant city. Being a Madras boy, I had no Bombay connect or knew anyone who mattered in the stock market.I also intensely disliked the fact that stock brokers were the big boys of the stock market. The fact that the big stock brokers were wanting and short on ethics and relied on inside information made me irreverent of them. My irreverence only grew from my analytic perception the actions of the most respected names and I chose to remain distant from the mob. So, what the big boys were doing was simply unacceptable to me. So, a certain irreverence set in towards what the big boys did. I chose to make my own rules in the way I invested. Obscurity was a conscious choice. It was only between me, my investment ideas and my sounding boards. Playing out scenarios in my mind and among my sounding boards became a constant habit. In most cases, I did not even meet the managements. In instances where I rarely did , discussions was all about the industry , their business philosophy , their vision for their business and their views on competition. I was game for these rules and happily played by it. It was great fun playing in the dark. I worked from what I knew and put my investment judgements to constant test. That was how i learnt what will work. I simply didn't care about what I didn't know or was not supposed to. The very modest Bombay connect that I developed was in following the investment writings of a few, discerning investors whom I looked up to them and continue to this day. But, my list is very short and doesn't have any big names. Every body makes mistakes. Big boys aren't exceptions. I remember the nineties. Then , fellow investors would always reel out how someone big came from Mumbai and met the top management of Madras companies. I would often wonder why the big boys were buying some companies. One prominent case was that of DSQ software ,a company I deemed was completely investment unworthy. I quickly figured out that big boys are comfortable with companies which allow them act as insiders. So, the investment works on the premise of a cosy relationship rather than sound investment analysis. That is an area which gives me deep discomfiture and following such investors is consciously driven by weak investment rationale and a strong urge to profiteer through any means.This inevitably leads to mistakes. You end up following others into their mistakes as much as you follow them in their successes. I would rather fail with my own ideas and rise from the fall. Failing with the ideas of others wont even give me the courage to rise from that failure. The bigger an investor becomes , the more he begins to look for insider comfort and this inevitably leads to idea dilution and weak investment ideation. Big boys grow only to make mistakes. It is a fallacy to believe they are infallible. The few who are infallible build stories only to pawn them off on followers or institutional scapegoats. I would rather not leave my neck under the guillotine. Following should never be allowed to become my fault. A Mind of your own is all you need. I see several young investors dig data from databases on ownership of prominent investors in companies. A simple query on Prowess or any other software will throw out the entire list of ownership. I was amused when a young friend reeled out the list of companies in which a close associate of mine owned shares. I had never bothered to even track the investing of someone I spoke to everyday and discussed most of the ideas that were on that list. I owned very few of those companies. It wasn't that I did not respect these companies or the skill of my fellow investor. It is just that one should own ideas as much as one owns companies. It is idea ownership and independent thinking that one should learn to build. You need to build a framework to seamlessly find new ideas, learn own them and then watch them grow as you visualised . By doing so , you will create the foundation for a long, lasting and independent sojourn in investing.When I study the lives of Philip Fischer, John Templeton and Walter Strauss , my belief in being my own person only grows.

What keeps me ticking ?

Two decades is a long time in an investing career. Investing is believed to be the business which creates the most burn-outs and stock investors are prone to breakdown and bankruptcy. While i know that it can happen to anyone , i learnt that it is within my means to ensure that I dont get there. And , i have enjoyed my investing right through the two decades and this experience has been priceless. No , my saying this has nothing to do with wealth.I never sought to be a wealth creator. Actually, i never saw myself as one. But, there is no denying that the core of my work is centered around wealth and the outcome has resulted in wealth creation.

This bring us to the subject of this piece.

What keeps me ticking ?

Who you are and why you are doing something are core questions for every one of us .

if you are a brilliant techie , then the question of what keeps you passionate about your work does not arise . It is assumed that you get a kick in doing new things with technology. The fact that you are highly paid is mostly viewed as some kind of consequence of your professional excellence. Society sees your work as of greater consequence than your rewards.

If you are a great painter , then the fact that your paintings sell for crores of rupees is not the focal point of society. Society celebrates your personality and the body of your work and finds the value of your work as something incidental.

Society appreciates the skill, craft and excellence that several vocations demand . Musicians , painters , writers , scientists , techies are all seen as practitioners of an art or science and money is the outcome of their proficiency.

Society has always given primacy to proficiency over earning power and we were always taught to think that way. Money was secondary to skill and the middle class celebrated skill and took great pride in it.

So, when your profession involves the management of money , society does not view it as a vocation which involves superior intellectual proficiency and thinking skills of a high order. The management of money is somehow not given its due and viewed as something which is mechanically carried out by people who have understood numbers adequately. Managing money is seen as process involving number crunching and mechanical decision making involving limited intellectual skills. Somehow ,money is thought to be acquired by means not entirely intellectual.


The truth cant be farther than that. Investing which is the principal activity in money management is no less creative as a process than any of the other disciplines like art , music , science or writing . Ideation forms the core of investing and one must visualize the future clearly . An intuitive bent of mind and a sharp ability to develop future perspectives are critical to intelligent investing.

Then why does society dumb-down investing as a discipline ? One possible reason could be that society is innately indifferent to the attributes of intelligent investing. Most of the investing that happens around us involves the treatment of money as `idiot money'. `Idiot money' always follows the Pied Piper of the day everywhere and gets lost in the sea of losses. We see millions of people follow stereotypes for years together hoping that the stereotypes will work. Yet, for every Warren Buffett , there are millions of losers.


Stereotypes rarely result in show-stopping performance or extraordinary outcome , right ? This works no differently with managing money . So we end up conveniently attributing our lack of results to luck or blaming the unknown for our performance ( or the lack of it ).

In a world where soft skills reign supreme , the realization that money management is as much a soft skill as any intellectual vocation is yet to happen. Most people undermine the discipline of investment research.

Investment research is the constant quest for understanding businesses , their demographic relevance to society and the envisioning of their future potential It is a combination of these that makes successful wealth management happen. This has to be adequately supported by adequate understanding of human behaviour and the ability to do the math of future performance.

It is the dynamic challenge thrown by these complex inter disciplinary studies that keeps investors like me fired up and ticking. The constant demands of learning and unlearning keep the mind on an even keel and there is no time or opportunity to feel secure that you know what it takes to win. What it takes to get your act right is dynamic and evolving. You need to be in an evolving- learning mode as long as you want to be an investor.

Jim rohn's words ` Formal education will make you a living. self education will make you a fortune ' sums up the process of investing aptly.


Footnote :
The interesting thing about this note was that i penned it on a day when stocks fell 545 points on the BSE and the mood is absolutely glum and desolate. People do not even want to talk stocks . The time to put one's learning to work is now.

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.

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.

Insider vs Outsider - My journey to wealth

My entree into the world of investing happened by chance. I started learning how to read an annual report. What started as time-pass slowly grew into an obsessive hunt for ideas and perspectives. I was guided in this process by my neighbor and mentor Pyu.Having a Mentor who is ethical and value-based was more than a divine blessing.

My curiosity led me into the big bad world of stockbroking . Then , stock brokers were actually cheating their clients everyday and making a living out of it. They never reported your Purchases and Sales to you at the actual rates and almost always took more money from you than just plain brokerage. Transparency was virtually non-existent in stock broking. The lack of regulation of the stock markets also permitted blatant rigging of stocks by the stock brokers . Penny stocks were rigged and sold to hapless and unsuspecting investors .

In the eighties and nineties , insider trading was so rampant that India's largest company was its most glowing example . This company actually did every possible wrongdoing to further its objective of growing its market capitalization. They printed duplicate share certificates, fudged earnings , traded in their own shares , diverted money from the company to buy its own stocks and more. In that environment , being dishonest was not just fashionable . It was the only way to be successful. But, i avoided formally joining that big bad world of financial services and stayed at the periphery throughout. i merely used their services to invest in companies that i believed in.


It was in this environment that i was mentored and taught the merit of trudging the path of ethical investing.The ethical anchoring that i got from Pyu right through my growing years ensured that i stayed the course laid by him after his demise. I understood over the years that being an insider was the worst curse for an investor. Knowing what a company will disclose beforehand and taking financial bets on that basis is what an Insider normally does. An outsider like me would always guess and calculate what a company's performance would look like and use my intuitive skills and computing methods to forecast performance of companies.


My investment approach evolved over the years into a process. Every learning would be incorporated into the process and the investment methodology would be honed up periodically . An important aspect of my investing is the belief in freely sharing knowledge. By sharing our knowledge freely, we learn more and our knowledge only grows. This is contrary to the belief of the insiders. Insiders are basically closet thieves who work by colluding with companies and gaining at the expense of society. Those who commit crime will obviously not discuss their work openly and they will need to avoid discussing their thoughts freely. Being an independent investment thinker made it possible to be free spirited and enjoy every moment of my work. The learnings grew and we grew with our learnings.

Ideation was central to my investment approach and remains so after two decades of investing. i visualized how things would pan out and did my math. What can go wrong with the ideation is one can end up making assumptions which are wishful and not likely to be right. Another risk is that we could be far ahead of time and our thoughts will not actualize for extended periods of time. If you are wrong in your thinking , you need to course correct quickly. If you are right in your thinking and ahead of time, you need to have people around you who support you through the excruciating wait for your thinking to actualize. The way to test ones ideas is to have a closely knit group on investors with whom we freely discuss our thoughts. By sharing our thoughts freely , we ensure that we get to hear the other viewpoint and correct our thinking wherever necessary. Sharing knowledge freely with a group of peers also fulfils the need for a support system that will keep you going.

Sharing knowledge only grows it. This has been central to my investing. I only see it remain for as long as i can foresee.

Happy investing.