It is common experience that most of us are very fidgety about our investments. There are two traits that define our investing technique.
First, we buy a stock because someone else has bought it or recommended it. We do not study, or understand, the fundamentals of the stock. We have no conviction of our own in the stock.
Second, because we have no conviction of our own, we lack the patience to hold on to the stock. We get jittery if the stock does not perform in the short term.
To cure ourselves of this malaise, we have to pay attention to the words of wisdom of ace investor Mohnish Pabrai. His latest interview to ETNow, given on the occasion of the ET Value Investing Conference, contains valuable advice given in a friendly and unassuming manner on what we are doing wrong and how we can rectify that situation.
On the first aspect, Mohnish advised that we should strictly remain within our ‘circle of competence’ and only buy those stocks that we know and understand well. He also suggested that we write a paragraph or two on the merits and risk features of the stock that we intend to buy. This exercise of penning our thoughts down will ensure that we are buying “consciously” and with some degree of conviction.
On the second aspect, Mohnish recited an amusing anecdote (@11.55) to make his point that ‘buy-n-hold’ is the correct strategy. He pointed out that Fidelity Investments had conducted a study which showed that the best investors in the World, i.e. those who had got the best returns, are those who are either ‘dead’ or who had ‘forgotten’ their investments. Such investors did not tinker with their investments. The stocks held by such investors compounded slowly and steadily over several decades to deliver huge multi-bagger returns which out-performed by a huge margin the returns obtained by so-called ‘active’ investors.
Mohnish summed up his advice in pithy words “Investors shoot themselves in the foot not by what they buy but by their inability to be patient”. He added that the best thing that he could do for his investors is “not look at the portfolio” for the next couple of years.
The value of Mohnish Pabrai’s advice struck me a few days ago when I chanced upon a long-forgotten portfolio that I had set up on a Bloomberg app. I had bought top-quality companies but had sold them off in a short while as I thought they were ‘non-performers’. Today, just a few years later, each of those stocks is a multi-bagger several times over. I now wish that I had ‘forgotten’ that I had those stocks and had not sold them. I would be several times richer.
What about those companies that went bankrupt abruptly during a bad business cyclical phase after providing continuous dividends and bonus shares for decades. These companies became “DEAD COMPANIES” while some of the human investors survived the companies demise ! How many Indian companies that existed in the 1950’s still exist in 2014. Investors please don’t “SLEEP ” over your investments as ultimately one day you yourself have to die.Keeping a constant check on the companies business is extremely important in a ever-changing world.
I think what Mohnish Pabrai means is that we should not unnecessarily tinker with our investments. Even when the business is doing well, we tend to sell off the stock in the urge to find something better. Of course, if the business fundamentals change, that is altogether different thing which requires action to be taken.
Correct. I sold – sintex, Lupin, Sun pharma.
and will have to buy again.
he never said to sleep over your investments. he himself once said that he does checks his companies performance every 3-4 months by relating it to the 5-6 lines that he had written at the time of buying that company shares. This was just an anecdote which shows importance of long term value investment. As far as companies going dead, i think its a mistake at first place if we buy such companies.. that’s where the management analysis comes into act.. Even then if a company shuts down after decades, then its nothing you can change about. you have to move on.
Doesnt make sense. The only time people would tinker is when they see a stock going down and there is no way to know its coming back.
No some of these ideas of forgetting are outdated, the turbulences in finance world are too many and the markets have changed. Who would expected a Bears Sterns or Merrill Lynch to go bust?
Used to do that and saw some go down from 250->25. Even Reliance the best bet till 90s is not reliable.
WHATEVER CIRCUMSTANCES,WHATEVER BUSINESS CYCLES,WHATEVER THRUST AREAS OF THE GOVT, IN THE LONG TERM PLANNING,ONE HAS TO CARE HIS INVESTMENT IN THE BEST POSSIBLE WAY AND BE ALERT ALWAYS,INSTEAD OF BEING DEAD AS AN INVESTOR.
These high net worth individuals actually can get away with saying utterly stupid things.