June 12, 2008

Rear view mirror investing

Was reading this article – mutual fund NAVs take the plunge. The following caught my eye

“The high erosion in the NAVs is the outcome of heavy concentration by mutual fund industry in sectors like banking, real estate, capital goods, engineering, cement and construction which were going great guns in 2007, but have eroded sharply this year. Most schemes had comfortably ignored sectors like pharma, FMCG and IT, which have started to perform now. So, the funds that failed to tap in these opportunities then are paying a heavy price today.”

The above statement gives me such a feeling of deja-vu. History repeats itself in the stock market, again and again. I saw the same thing happen in 2000 with IT. Most of the mutual funds piled into the IT sector, right before the crash. The same seems to have happened now.

Ofcourse it takes courage of conviction to go against the crowd. It is not rocket science to figure out that a company selling at 70 times earnings could be overvalued. But then most of the fund managers, wanting to keep their jobs are more worried about their quarterly performance than doing well in the long run.

For those who say that the small investor is at a disadvantage v/s the pros, I would say it is complete hogwash. All other factors aside, as a small investor I am personally not forced to invest in the current hot stocks. At the cost of looking like a moron in the short run, I can afford to pickup undervalued scrips which will give me good long term returns. That advantage alone is more than all other advantages the big boys have such as more research, access to management etc.

This rear view approach is however not limited to the big boys alone. Unfortunately a lot of small investors do the same. However if they lose money, they end up blaming everyone except themselves.

I am guilty of doing the same thing in the past. However the sensible thing I did was to blame myself completely for the losses. It is not that I mindlessly go against the crowd ( I wont cross the road with a red signal when everyone else is standing on the sidewalk for the sake of going against the crowd :) ).

If am looking at a company, I need to convince myself why the market is undervaluing the company and what is my
variant perception. For stocks which favored by everyone else, I have generally found that the market is either too optimistic or is valuing them fairly and hence it is unlikely that I will make good returns.


Mahendra Naik said...

Exeellently put, Rohit. MF' with all their hype about being professionally managed are just as guilty of chasing flavour of the month stocks as small investors. I wonder if the term value investing has any place in their lexicon. Peter Lynch was spot on when he wrote about the edge the individual investor has over the institutional investor.

Ninad Kunder said...

Hi Rohit

And the humour is in the fact that they will rush into Infosys at 2000 and all the defensives when it almost time to exit them :-)

You are right the peer pressure is so high that its tough to take a contrarian call on sectors and the markets in general for all the big boys.

I think the small investor is better off by not having "insider information". :-)



viv. said...

Hi Rohit,

A very interesting perspective indeed. Peter Lynch also puts forth a similar perspective in his book 'Beating the Street.'
I think it is also important for small investors to understand that big financial houses are not infallible (as has been the case with large banks in the developed world) and can go wrong in their decisions.
Ideally one must research thoroughly, invest and be patient about their investments.


Rohit Chauhan said...

Hi mahendra, vivek and ninad

the interesting point that the banks and mutual fund house advertisements are constantly telling the small investor that they are not capable of investing and should leave it to the pros.

then the pros turn around and invest like blockheads and lose the money (expect they charge a fee to do so too)


Anonymous said...

Buying good (proven managements with good track record)companies during temporary unfavourable climate/unpopularity in markets would produce prices which shall in majority of the cases be with enough cushion so as to avoid massive erosion of capital which might happen when one buys what's most popular.

Having said that, I especially liked your traffic signal analogy of mindless contrarion approach.

Rohit, you've a great blog. Keep up the good work.

Rohit Chauhan said...

Hi anonymous
your comment encapsulates the essence of intelligent investing.
it is not easy, but in the end the only sensible approach in the long run

thanks for the complement too

Mahendra Naik said...

Now that markets are churning, I would like to see how actively managed funds manage to fare vis a vis index funds.
BTW I have added a link to your blog from mine.