July 14, 2009

Patience

In an ideal world, If I expect my portfolio to return 24% per annum, I would prefer to get 2% returns per month. That way at the end of each month, I would have a nice gain and would be feeling quite good about it.

Now all of us know that it does not work that way. In the last few years, however a lot of investors have come to expect that they ‘deserve’ to make 40% per annum and that too in equal increments with minimal drops along the way. If you think I am exaggerating, look at the mutual fund inflows and outflows to confirm my statement.

Impatience and mutual funds
If a mutual does well for a few months, they have a surge of new funds. If however, heaven forbid they drop for a few months, the money starts flowing out. In such a sceanrio a fund manager cannot be faulted for having a short term view. Mutual funds and fund managers have their faults too and I am not defending those faults. However impatient investors cause a lot of fund managers to take a short term view which affects the fund performance in the long run.

The above phenomenon is not limited to the indian markets alone. You can find it prevalent in almost all the foreign markets too. There is a lot of evidence that the average holding period for investors has come down progressively. This shows up as higher volumes and more trading in the markets.

Patience and investing
Value investing requires a lot of patience, maybe more than what most investors or individuals have. I recently analysed my performance for the last 8-9 years and noticed that quite a few of my picks (maybe 80%) have taken 1-2 years to approach intrinsic value. What does that imply?

If I buy a stock for 100 and think it is worth 200, I may end up holding it for 1-2 years without any action on the stock. Then suddenly, the gap closes. I have seen the gap close in a matter of a few weeks. So my net returns after, say 1.5 years could be 5-10% at best and then in a matter of weeks the stock doubles.

Now if you think you can predict when the gap will close, then congratulations !!!. You are on your way to becoming very very rich. However I do not have such a sixth or seventh sense. So I end up analysing the stock, accumulate it slowly and then waiting patiently for the gap to close.

I think one of the key advantage, we can have over others is to have more patience. I have repeatedly seen it work, though the interimn period is painful and full of doubt. The other reality is also that patience is the rarest commodity on the stock market.

So when does patience become stubborn refusual to accept that the situation has changed and the stock price will never improve ..well that’s a post for another day

21 comments:

sumi said...

Hi Rohit,

Really glad to see an article about patience. This is my first year in value investing. Due to the sudden dip after the budget many stocks I was watching came below 50% discount to intrinsic worth. So I bought some of them. However now that they are falling even more it really takes patience to not get affected by the volatility. I am planning to hold it for a few years but watching all the red in your portfolio can be quite an experience.Your post has given me some inspiration to hold them with patience.
Regards,
Sumi

Aniruddha said...

Hi Rohit.

What would you prefer, 100% returns in 5 years (i.e. 20% pa) or 20% returns in 6 months?

If you have set your goals to exit on 100% (closing the gap created by margin of safety) in 5 years then wouldn't it be prudent to take home 20% in 6 months?

Ani

Avadhut said...

Rohit,
I agree with what you posted. It happens when the stock you bought after a lot of analysis goes down immediately after you buy. In this case,sometimes you doubt your analysis,however,as we know market is inefficient,it takes time to come to its intrinsic value.
Would 2 years be enough to wait for such stocks or you suggest to sell it and buy "cheaper" stock?

Regards,
Avadhut

Daniel M. Ryan said...

From my own sad experiences, a person who can predict when the gap will close get euchred out the next time 'round becaus the catalyst changes.

People who try both usually end up as neither fish nor fowl, so there's no real need to worry about it (I'm finding.)

Manish Chauhan said...

Very nicely written

I would like to put a famous quote here "Markets can remain illogical far longer than you or I can remain solvent" . Now comes two important things, Investors Patience and Money management .

Most of the time markets do more bad to you than the last point your patiance can take you .Investor think they are cool and patient and try to prove it by "showing" that they patient and not selling in loss , because they beleive there shares are finally going above there buy price . but finally they loose patience when they are at the lowest point .

Rohit , what are your experience on money management in Investing . How much do you think an average investor should put in markets . How much percentage of this captial ?

What do you like ? Eggs in different basket OR All eggs in one basket and looking at it closer :)

Manish

Vic said...

thanks Rohit for another wonderful post again.

You're right Patience is the key and very difficult to practice whether managing your own money or somebody else's.

Hopefully we can improve on this aspect with experience..:-)

Vikas

Rohit Chauhan said...

Hi sumi
yes it is tough mentally to see your picks drop in short to medium term and to hold onto them.
you will have to trust youself to do it. however at the same time it is important to control the risk when you are not sure

regards
rohit

Rohit Chauhan said...

Hi aniruddha
there are a lot of variables involved in making such as decision. lets assume for simplicity sake that we have bought a stock which one assumes would give a 5 yr return of 100% p.a . if the stock returns 20% in the first year i would not sell it as i expect the final gain to be more than 20% (100%). the only case i will sell it is if i find a better and cheaper opportunity.

however if i expect 100% in 5 years and get this return in 6 months, then i will go ahead and sell the stock

Rohit Chauhan said...

Hi avadhut
it is diffcult to give a simple answer to your question. the decision will be based on multiple factors such as the degree of confidence i have about the stock and how the company is doing.
i am always analysing the fundamental performance of the company and if the company is performing as expected, then i will hold, unless i can find a better idea which is cheaper.
regards
rohit

Rohit Chauhan said...

Hi daniel
agree clarity of thinking is important in investing

manish
i frankly dont have a prescription for others.however i think an investor should only put as much as he can risk and does not need in the next 4-5 years.
i personally have a sleep test ..if the market goes down by 20% and i dont lose sleep then i know i am not taking too much risk
we got a taste of it recently when the market dropped by 50%. so an individual sold out by panicking ..then they were taking too much risk

i dont have a preset %, my equity allocation depends on how cheap the market is high and if i can find good ideas. over the last 1.5 yrs my equity allocation has gone up as the markets have dropped

regards
rohit

Rohit Chauhan said...

Hi vic
good to hear from you again.
when managing other peoples money i think it is more diffcult, because you investors have to be patient ...rather than you

regards
rohit

hari vedanarayanan said...

Hi Rohit,

Talking of patience --

Bought Allied Digital - 350 and sold at 450 just to watch it move to 1100.Missed a treble in a couple of months.

Similar experiences with Kotak.rel capital,etc.
It seems that exit is more difficult than entry in the markets. Nice post.

Thanks,
Hari

saurabh said...

Dear Rohit,
I just came across your blog and could not resist reading it from the first post to last post.Thanks a lot for educating us which really helps naives like me.I have sent a mail to you on following id rohitc99@indiatimes.com from my id suru27@gmail.com.. This is regarding my doubt over one of your previous posts (in 2k7 regarding enterprize value and valuation of stock).Please go through my mail and let me know if i m following the correct way..
saurabh

bhushan said...

Hi rohit can you please analyse the stock Compact Disc India Ltd
& surya pharma inspite of having very good EPS and book value why they are not moving.
Thanks,
Bhushan

perspicacious said...

Rohit I would like to know your opinion on 4 stocks
-Cranes Software
-Geodesic
-Micro technologies
-ICSA

I have purchased them based on a few simple screens namely - Low or moderate debt,profit margin > 15% and good roe. I plan to hold them for 5-7 years at least
Obviously I have made a mistake, however I would be honored if you could provide me your insight on them.
I also have the business case file which i made for each of them and can forward them if required

Rohit Chauhan said...

Hi hari
thanks for the comment

hi saurabh
i have seen your email and will respond soon

hi bhusan
can you send me your detailed analysis of these stocks. i can give you a response based on that

Rohit Chauhan said...

Hi perspicacious
can you send me your detailed analysis of these stocks and i can have a look and respond. you can email me on rohitc99@indiatimes.com

Anonymous said...

rohit,
I can relate very much to the pattern which you have mentioned, i.e. it takes around 2 years for the stock to turn around during which one goes through various phase of doubt, and then suddenly within a few weeks it jumps around.
I had similar experience with pfizer recently.

nice post!

saurabh said...

Thanks a ton Rohit...

sagecapital said...

Rohit- Interesting article..
What do you think about discipline?
Would you hold a Coke for 10 years without seeing any returns? (just what Warren Buffet did)

Sachin
www.sagecapital.wordpress.com

Srinivas Rao said...

The concept of value investing has encouraged me to start a portal of value investing on the Indian stock markets. I am doing analysis of Low PE, High dividend yields, Low PB and Low PB with high returns. I would love to share anything which is common. I really appreciate the effort you have put in your blog.

Best wishes..