November 24, 2018

Missing the forest for the trees

I wrote the following note to subscribers, in context of a specific position. I have made edits and additions to the original note for this post.
I have a different set of expectations from this position. The management of the company is quite conservative (rightfully so) and as a result has always grown at a measured pace without taking on too much debt. As a result, the profit growth has never been too high, but at the same time the company has always been profitable even in the worst of the times.

Due to this cautious approach, we cannot expect this position to be a multi-bagger any time soon. 

Although a lot of subscriber still look at individual positions, I prefer to zoom out and look at the aggregate portfolio level. We are not in multi-bagger business where me and kedar will run around touting our wins on social media.

Our focus is to achieve above average returns at the portfolio level with lower risk over the long run, to achieve our financial goals. 

Mania of the multi-baggers

The last three years have been all about multi-baggers.

The Media is usually fixated on multi-baggers and short term price changes as that grabs attention (which is their sole focus). Unfortunately, a lot of investment advisories and so called gurus are the in same boat. It is not too difficult to see the reason – you need to make big claims to grab attention and clients.

Touting a low risk, steady compounder which doubles every four years is not going to win too many fans and subscribers/investors. As a result, the focus of the industry is to talk about high returns and multi-baggers in the portfolio, ignoring the risk completely. 

On this count, I will not blame the media and financial industry alone for selling dreams to the general public. A vast majority of investors (if you can call them that) are searching for shortcuts to become rich quickly. Media and a lot of professionals are merely satisfying that demand.
One cannot run a business on high principles alone.

Missing the forest for the trees
In selling, what is being demanded, the financial industry ends up ignoring several other key factors which drive returns over the long run.

The key point in investing is how well are you doing at the portfolio level and if the return is commensurate with the risk. The individual wins and losses are a driving factor but not the only criteria. Overall risk driven by position size and diversification plays an equally important role. I find these aspects of investing missing in most discussions.

If you agree with the above point, then you should also consider the lower risk, moderate return ideas. In the past, I have not allocated as much as I should have to these kind of ideas as they do not have the dazzle and fireworks. However, I have slowly changed my thought process on it.

A part of the portfolio should be allocated to such low key, solid performers which act as a ballast to the portfolio and deliver decent returns over the long run (with much lower stress). This is now becoming apparent where some of the past multi-baggers have left investors holding the bag.

Confusing the means (multi-bagger picks) with the end (achieving financial goals via equity investing) had led to investors achieving neither.

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

No comments: