Latest stories

Timing the market

By Rohit Chauhan
In General thoughts
6 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
7 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
10 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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