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.