AuthorRohit Chauhan

Can we time it better?

By Rohit Chauhan
In General thoughts
1 week ago
3 Min read
C
We talk more about losses than winners with our subscribers. Winners take care of themselves and show up in the portfolio returns. Losses, especially in markets like now, are painful and take effort to manage.
Following note was published to our subscribers

We recently sold Company A (name withheld due to regulations) after 40% drop from the all-time highs. We got queries asking if we could have timed it better

Let’s break down the transaction in terms of how it played out rather than ‘anchoring’ to the all-time high

We invested close to 4% of the portfolio in several tranches. The exact price will vary for you based on when the transaction was executed. On average, the loss would be between 15-25% for most subscribers. This translates into a portfolio loss of 0.6% to 1%. Even in the extreme case of someone buying at the top, this amounts to 1.5% loss at the portfolio level

This is within the bounds of our risk management for individual positions. We try to keep our max loss between 20-25% of buy price and total risk at portfolio level at around 1-1.5% on cost basis. Based on historical data, this gives us a 3:1 to risk reward ratio and with a 55-60% win rate, our returns over the long run are above average

Hopefully the above live example shows how we think mathematically about individual positions and that Company A played out within our set parameters

Managing risk from all time high

We do not manage risk from all-time high for any stock

Doing so is valid for swing trades with shorter time horizons. We have done this partially with our position trades in the MA accounts, but Company A was not such a position

For our time horizon, selling a stock when it drops from all-time high, will result in jumping in and out of positions, especially in choppy markets such as now.

Trying to manage this type of risk brings up the following questions

  • At what level should one exit? 20%, 30%?
  • Do we re-enter if the stock drops 20% and resumes the journey upwards?
  • Is there a fundamental criterion to exit? Keep in mind prices react before the fundamentals
  • How about bear markets versus bull markets? In bear markets, a small miss can cause the stock to drop more than 20%

It is always easy to look at the stock price in hindsight and ‘know’ the right decision

Risk is managed probabilistically

The answer to the above questions is that ‘it depends’ and there is no perfect answer.

We aim to lose less when we are wrong but gain more when we are right. If we do this consistently over the long run, our portfolio returns will be good (as they have been for the last 15 years)

We will continue to exit positions which have not worked out, and it will be painful during bear markets. Exiting a position, even at a loss, does not mean we will not revisit it. We have made this mistake in the past and missed a 50 bagger

PS: There is a lot of nuance on this topic. We plan to publish a video post on it soon to explore it further

 

 

 

Read on

Doing the work

By Rohit Chauhan
In Quick thoughts
3 weeks ago
3 Min read
D

Following is a note we sent our subscribers

We conducted a webinar on navigating the current bear market. The following were some  points on how to invest in such a market

  1. Look for bottom’s up ideas using the value approach : Momentum does not work well in such markets
  2. Evaluate progress based on portfolio earnings growth and valuations
  3. Have patience : No one knows when the market will turn

The market peaked in September 2024 and is down 2% for large caps and 10%+ for the smaller companies. We have navigated this market with our financial and mental capital intact

During this period, we exited 10+ companies and bought 8+ companies. The exact number varies for the model portfolio versus the managed accounts. We have exited fully valued positions or companies which are not performing and bought stocks where the business is improving and valuations are reasonable

This ties to point 1 above. We are not waiting for the market to turn. We will continue to improve the quality of our portfolio as opportunities are available.

How do we assess the quality of the portfolio? A quantitative way is laid out below

Our portfolio level PE was around 40 times earnings with an earnings growth of ~ 19%. The same number is 22  with an earnings growth of 20%.

How are these numbers calculated ?

  • EPS for the company * No of shares held in the portfolio = absolute earnings for the company (each row in the table above)
  • Add earnings of all companies to get the portfolio earnings (circled number). Portfolio PE is Portfolio amount/Portfolio earning

As the market drops, we will deploy the balance cash or rotate out of existing positions into new ones such that the total earnings increase with the PE ratio dropping at the same time. Our goal is to buy growth at the cheapest possible price.

Not a physics formula

Please think of the above as a framework. We will not publish these numbers and there are qualitative aspects which cannot be captured. That said, there is a strong correlation between the portfolio PE and future returns (as it should be).

As the portfolio gets cheaper, it becomes coiled spring. When the market reverses its direction, our portfolio will rise

And this brings us to the 3rd point. No one can predict when the market will turn. Instead of agonizing over it or trying to time it, our approach is to keep doing the work

Read on

Webinar recording: Navigating a grinding bear market

By Rohit Chauhan
In Education, Webinar
2 months ago
2 Min read
W

We conducted a webinar last week on how to navigate a grinding bear market

Brief summary of the session below. Recording and ppt from the webinar posted at the end of this update

Grinding bear markets are rarely dramatic – they are slow, frustrating, and psychologically draining. This session focuses on a repeatable way to think and act when prices stop rewarding you, even while earnings keep moving

The core framework

· V-shaped ‘macro’ bear markets: exogenous shocks, sharp drops, and quick recoveries driven by policy/liquidity.

· U-shaped ‘valuation’ bear markets: endogenous grind where stretched valuations mean-revert over time.

· Key point: this is a framework to guide behavior – not a formula to forecast dates or exact drawdowns.

Practical takeaways you can apply

· Stop relying on ‘bear markets last X months’ narratives; focus on what you can control.

· In valuation-led grinds, patience is a strategy: normalization happens via earnings, time, or price.

· Do bottom-up work: hunt for reasonably priced businesses that can still compound (often 15%+).

· Measure progress with portfolio ‘look-through earnings’ (portfolio earnings growth + valuation), not just price.

Examples + discussion

The session has a walk through of illustrative cases to show how improving fundamentals + cheapening valuations can set up the next leaders. The recording also includes an active audience Q&A on drawdowns, market breadth, cyclicals, new-age businesses, and diversification

slides : Navigating a grinding bear market

recording

Navigating through Grinding Bear Market

Read on

Navigating a grinding bear market

By Rohit Chauhan
In Online session
2 months ago
1 Min read
N

Most investors prepare mentally for sharp crashes. Few are prepared for something more exhausting: a slow, grinding bear market.

These are markets where prices drift lower or sideways for long periods, narratives keep changing, and hope returns often enough to pull investors back in and then they are disappointed again. There is no single event, no clear bottom, or moment when “things turn.”  Your Capital erodes slowly or in other words its death by a thousand cuts.

I am conducting a webinar on 3rd jan on navigating such a market.

In the session, I will discuss why not all bear markets behave the same, and why approaches that work in sharp, event-driven corrections often fail in prolonged valuation-led drawdowns. We will explore  why such markets occur and why relying on historical templates like “bear markets last X months” can be misleading.

We will also discuss what an investor should or should not do and how to measure progress when the market gives no signal

Webinar timing and link is below

Topic: Navigating a grinding bear market

Saturday, 3 January 2026 · 7:00 – 9:00pm

Time zone: Asia/Kolkata

Google Meet joining info  – Video call link: meet.google.com/bev-jdpv-ruj

Read on

Manufactured urgency: The case for ignoring IPOs

By Rohit Chauhan
In behavioral finance, Investment process
3 months ago
4 Min read
M

Everything around IPOs is setup to work against an investor. Traders may profit from the initial spike, but the odds are stacked against someone who plans to invest for  2-3 years

The Math is not in your favor

Let’s analyze the numbers from a long term perspective. Around 935 companies were listed in the last 3 years and 330 of these companies beat the index over this period. In other words, you had better odds of earning higher returns in the nifty index versus a randomly selected IPO

It is worse if you dig deeper into the data – Close to 50% of all IPO in the last 3 years are below their IPO price, so investors on average broke even over a 3 year period.

It gets even worse if you analyze the data in the short term when a lot of people are buying into the hype. The return for an IPO , 60 days post listing, is negative on average due to the ‘buyer’s trap’. This occurs as most of the alpha has already been extracted by the primary allotees who were given the stock before the IPO at a lower price

Why do investors loose money ?

The reason is not difficult to understand. I wrote a post long time back (in 2007 !!) on this topic and nothing has changed since then

The key reason is that an IPO is an event where motivated sellers try their best to sell overpriced merchandise to buyers

Before we get worked up about the innocent, unsuspecting buyer, let me point out that buyers are equally to blame. The buyer is not being forced to buy anything. No one is holding a gun to your head to buy an IPO

I am neither a buyer nor a seller in IPOs and have no axe to grind. I have never bought an IPO for myself, my family or my clients in the last 25 years

The seller (existing owners/promoters) try to price their company as high as they can. What do you expect them to do ? will you do something different ? When we are sellers, we want the best price for our stuff too

I am not condoning the bad behavior of sellers and their enablers (the merchant bankers) who dress up a company to make it appear better than the reality. That said, the truth is that a company is always presented in best possible light and then priced to the extreme at the time of the IPO – The groom and bride get in their best shape before their marriage 😊

To ensure that the IPO is a success, merchant bankers pull no stops. There are roadshows (marketing events), TV interviews, influencer pitches and so on. This is similar to promoting a new movie where all marketing tools are used to generate excitement around the company

The odds are stacked against you

Lets put the various points together

  • The company financials have been dressed up before the IPO to show it in best possible light
  • The IPO is priced to the highest level the market can bear
  • IPOs are launched during during strong markets when investor enthusiasm is high
  • There is considerable marketing push generated around event to create excitement and demand for the IPO
  • Pre-allotment of company stock to preferred investors, insiders and employees at below IPO price
  • Expiration of lockin after the IPO event resulting in excess supply into the market

The solution to all of this is very simple – Don’t play the game where the odds are stacked against you. If you want to look at such companies, analyse them like any other stock. Look at the company, its performance and valuations after all the hoopla has died down

In my own case, I have bought companies which have listed long after the drama had died down and the valuations were reasonable. It was no different from buying any other company listed on the market

Read on

Sleeping well with your investments

By Rohit Chauhan
In behavioral finance
3 months ago
2 Min read
S

I have developed a few thumb rules to investing, which work for me. These have come through trial and error over a lifetime of investing.

There is no empirical evidence for it and some of these rules may not work for others (so there is no point debating them)

  • No leverage rule : 0 leverage for investing. Have never used a single paisa of debt over 25 years of investing
  • No F&O : Never invested in F&O and no plans to do so
  • Concentration versus diversification : 5-7% position size , sector concentration at 15% maximum
  • Asset allocation : 60-70% in equity, balance in debt, real estate, gold, cash etc. Annual rebalancing to maintain allocation within the bands
  • Avoid specialized investment options : No private equity, angel investing, crypto and so on. Avoid areas with low liquidity, which need specialized skills (which I don’t have)
  • No lending to family and friends: Give away money if needed, but no lending. There is no upside, only downside in such transactions

As I have grown older, I have come to appreciate the importance of simplifying my investing life as much as possible so that I can sleep well and enjoy the journey. A lot of complex investments are high on promise, but the amount of stress per unit of return is too high

Why complicate life if you have enough ?

Read on

Timing the market

By Rohit Chauhan
In General thoughts
4 months ago
2 Min read
T

We have had several meetups with subscribers in the last 2 years. One of the most common question is ‘what do you think about the market’ ?

It is important to unpack this question and on why people ask this question

Most people want to know if the stock market is overvalued (so that they can sell) or undervalued (so that they buy). The other reason is that they are concerned the market will crash and lead to losses

The above concerns are valid, but this is the wrong question to ask. If you are a bottom up investor, market levels make no difference. If the companies you hold are undervalued, then you should buy or hold irrespective of what happens to the market in the short term

The other concern is losing money at the portfolio level when the market crashes. This will happen even if your stocks are undervalued. The first change in mindset is to get comfortable with losing at the portfolio level when the market drops. There is no way to get around it and this is the price we pay to make above average returns

If you get upset when your net worth drops substantially during market corrections, review the asset allocation of your portfolio. Let’s say 80% of your portfolio is allocated to equities. If your portfolio drops by 25%, will you get upset and sell your stocks in a panic ? If yes then reduce the equity allocation to the point where you will not lose sleep over it

The right question to ask is not what will happen to the market in the near term. Instead, figure out the  asset allocation where you will not lose sleep if the market drops. This action is under your control where as no one knows what will happen to market.

Read on

Give it time

By Rohit Chauhan
In Advisory letter
5 months ago
3 Min read
G

Our long term returns, including the last 5 years have been decent, but not without the usual bumps. For example, we had a rough 2022

At the end of 2022, we wrote the following to our subscribers

I am not happy with the performance. I am not going to share excuses around the Fed increasing rates, rising inflation and so on. Instead, we will analyze what went wrong and change our process

We got a few emails which reminded us of this saying – If you torture data long enough, it will confess to anything

Some of our subscribers sliced and diced the data to point out that we had lost our edge. Our last 1,3,5-year performance was not upto the mark. On twitter, where we could still share our performance at that time (SEBI does not allow that now), the comments were even more pointed

Suffice to say, we are not getting any such analysis now. Does it mean that we have regained our edge back? That is not the case. The last few years show the volatile nature of returns over the long run and the pitfall of reading too much into near term performance

With the hindsight of 14 years of public returns (and another 12 years of private investing), it is obvious to us that an above average long-term track record will have periods of great performance (2014/2017/2023) mixed with subpar performance (2018/2022). A few bad decisions or bad luck can ruin the performance for short periods of time

As we have shared in our notes to our suscribers, we are constantly learning and reflecting on our process. This is not a one-time event.

We have been doing this every day for the last 25 years and will continue to do so. We do it because we love the process and craft of investing. If it was only for the money, we would have stopped a long time back.

There are easier ways to make money

Continuous evolution

The problem is that there is no objective way to demonstrate this progress. The only indicator is the returns which are sporadic and noisy. Even as we evolved in 2021 and 2022, our returns were sub-par. There has been no change to our mindset in the last 2 years even though the returns are better. One must give time for the effort to reflect in the results

At the risk of sounding self-serving, that is the reason why we insist on patience from our subscribers

In our personal life, we have the same auditor, tax advisors and a few other service providers. We have stuck with them as they meet our needs adequately and are easy to work with. Our hope is that our clients will operate in the same manner for their long term benefit. Those who have adopted this approach with us have benefited in the long run

Read on

Being a good loser

By Rohit Chauhan
In behavioral finance
8 months ago
3 Min read
B

A few years back, i decided to consider a radical idea for someone following the value investing religion – Stop loss

I listed all the positions for the last 5 years and put a simple rule in place – exit a position fully if it dropped by 20%. That’s it, No other fancy formulae beyond that.

I recalculated the returns and realized that this simple rule, improved the portfolio return by 2.5% CAGR. Not much for a single year, but would lead to 28% higher portfolio after 10 years

What about false positives?

A few of these positions turned around and I would have missed the upside. That is the typical objection you get on the idea of stop loss

To that my counter is – Why do you have to make money from the same idea. There are 5000+ companies out there to choose from and making money off the same idea is not worth extra points. Once you exit an existing position, you can look at it again with fresh eyes and avoid endowment bias

The reason for this objection is the desire for the hero’s journey. Long term buy and hold investors pride in taking pain. They will tell you stories about the stock they bought which no one wanted and lived through a 70% draw down and had a 10X at the end of it.  This is the hero’s journey where one is trying to prove himself against the world. I have been guilty of trying to be a hero too

Lets get nuanced

I presented last week on the topic – Process beats ideas. You can find the recording here

The last step of my process is the exit and this has been a weak spot for me in the past. I would buy and keep holding (with hope) even though i should have taken the loss and moved on.

This was due to false interpretation of Buffett’s teachings. He advises holding a wonderful business for a long time yet has a lot of churn in Berkshire’s portfolio . The reason is that very few businesses are worthy of – Buy and hold and so if he realizes that a company is not worth holding, he exits quickly and moves on

As I looked at my past performance, I realized that having a price or time based stop loss was a good idea to avoid holding onto ideas which are no longer working. I have built more nuance around it and shared some thoughts on it here and here (psychology of stoploss)

I now have a line in the sand for each company at which I will exit a position. This allows me to wipe the slate clean and re-think the idea with a clear mind even if I look stupid at that time

Read on

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