November 6, 2008

A question on skill

I recently got a comment which raised the following points

- You seem to have done badly when the market went down and well when the market went up. I don’t see any special skill in that.
- The picks you have shared have not convinced me that these picks will do better than what I can achieve via indexing
- A lot of people seem to agree with your analysis. However if the stocks you have analysed do badly then the market is right and not you or the entire group, which agrees with you.

I have responded to the comment, but wanted to discuss these points via a post.

Special skills or not ?
The first and most important point for the readers of this blog is this – This blog is about ‘learning and applying value investing principles’. This blog is not about my performance or how good or bad an investor I am. Value investing is a commonly used approach to investing and my attempt has been to learn and share my learnings with everyone. My own performance (good or bad) do not change the principles.

My personal focus always has been to take publicly available data, analyse it and present the conclusions. It is not a sermon I am preaching from mount olympus. I am providing my viewpoint and analysis and opening it up for discussion – for and against it. If you are expecting stock tips or some kind of portfolio management, then you will be dissapointed.

I have never disclosed my performance on this blog and will not be doing it via this blog. My personal objective is to beat the index by 3-5% on a rolling 3 year basis. I have done that by a decent margin with low risk. I try to lose less than the index during bear markets and match the index during the uptrend. Till date, I have been able to achieve that.

You may have a different risk reward objective and may find this level of outperformance poor. Well, to each his own. Remember the following fact – A 3-5% outperformance is an annual return of 16-18% which is not easy to achieve. Over long term, this kind of annual return can add up to a decent amount. However over the last 3-4 years (till 2007), a lot of investors came to expect a return of 40% as a minimum.

How will the picks do?
How do you react when the price drops, but the company continues to perform well ? Do you think that you are doing badly?

If yes, then your approach is different from mine. My yardstick for performance is business performance. If the company does well, it is only a matter of time when the stock price will catch up with the underlying value. Sometimes it takes a few months and sometimes a few years.

A valid counterpoint can be – how are you sure that the price will converge to value ? It is based on my personal experience and based on what I have read about the experience of other value investors.

The other way of analysing performance is to compare the returns of your portfolio with the index on a long term basis ( I use rolling 3 years as 1 year is too short and more than 3 years is a bit too long). If you cannot beat the index, then you should look at passive indexing and not pick stocks. I have always maintained a
mutual fund and index portfolio as benchmark to see how I am doing. Till date the results are good.

Finally, I am not trying to convince anyone with my analysis. I am presenting my analysis and opinions. It is upto to the reader to agree or dis-agree with the analysis.

Group think
I have never derieved satisfaction with how many people agree with me or not. The success of my picks will depend on the quality of my analysis and not how many people agree or disagree with me. I personally prefer counterpoints to my thesis as it helps me in improving the quality of the analysis.

I evaluate the success based on a single criteria : Is the business performing as expected or better ? If the business is performing well, I will hold the stock even if the price has not followed the business performance in tandem as price eventually follows value. I don’t judge my ideas based on short term swings in price. However if my assumptions or analysis are wrong, I have
exited the position irrespective of the price in the past

14 comments:

Anonymous said...

Rohit
Good reply to the nasty comment.

Don't worry about the readers, they are applying their sense,skills & your advice all together.

thanks
Ani

sudhanshoo said...

Apt reply as expected from a "value investor" :)I often read many such replies (essays) where value investors try hard to make people understand these simple principles. But then the world has so many people!

Venkat said...

Hi Rohit,

Talking about the group, which agrees with you..i have personally learnt quite a bit readings your posts.

regards
venkat

Anonymous said...

Hi Rohit,

It was interesting to go through the comment and your-(initial)-sage-like reply (though I feel a shade of hurt in this post).
I have always feel that it is a great thing to disclose investment ideas because you never know who will provide that 'see-you-missed-the-point' information.

Prashanth

Anonymous said...

Rohit !!!!!!!!!!
You never got back to me on
HBL Power system
Essel Propack
Manaksia Ltd

Please!!!!! I'm eager to know of your opinion.

I now have a considerable position in Karuturi Global. Would appreciate your comment on that too!

Prashanth

VISHNU said...

Rohit,

On short term basis, any result (+/ -) is based on luck.

Buffet compares two of his partnership funds...and says "Luck plays important role in short term" (One of his fund did better than the other one).

Pabrai also said " Usually after I buy a stock , it goes down lower than the price I bought. After I sell a stock , usually it goes up higher than the price I sold".

You should judge a result based on long term basis PLUS on overall portfolio basis (not on individual stock basis).

Regards
Vishnu

Rohit Chauhan said...

ani, sudhanshoo and venkat
reason for doing the post was to set expectations for the readers, especially new readers.

Rohit Chauhan said...

prashant
sage !!! thats a new one :)

i have no issue sharing ideas ...as along the expectations are understood at both ends

regarding stocks on your list, will have look but i am tied up with some other analysis so it will take some time for me to get back

Rohit Chauhan said...

vishnu
i agree completely. my own approach is based on buffett, pabrai and other value investors. better to copy the masters ..and i have seen it work

Vic said...

Hi Rohit,

I liked Ani's response to your post "Don't worry about the readers, they are applying their sense,skills & your advice all together" As you seem to be concerned.

You have stated the objectives of this Blog clearly even though the Blog Title should convery that. There will always be some negative comments or somebody who attacks your approach.

On a different note, I read ur 2004 entries, half way through reading 2005. I love the journey..u have come a long way. Keep it up!! It is a Gem.

Thanks,

Vikas

Anonymous said...

In this fast and chaotic world - rational thinking people are few and hard to find. You are doing a very good job of learning and sharing at the same time. I still remember your discussion on 'Real Estate' prices long time back. You have been proved right. Ignore the other guy's criticism.

Rajendran

Vidyanshu said...

Hi Rohit,

Be careful of S&M its a popular pastime. Some people will always cavil and pitch stones..
About the best advice I ever received from anyone was - "You do not HAVE to respond to everybody"

Best,

Vidyanshu.

Vic said...

Rohit,

I sometimes see the list of latest responses and at times I don't.

It is a useful feature to track the latest discussions/responses as they might relate to previous posts of yours.

Is this something you turn on?

Thanks,

Vikas

drmadhupv said...

DEAR MR ROHIT
I HAVE BEEN A DEDICATED FOLLOWER OF UR PORTFOLIO AND I DONT INVEST ANYTHING ELSE AT ALL
I HAVE GREATLY BENEFITED FROM UR BOLG
I EARN EVEN IN THESE TIMES !!!