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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

How to become an investor (part 2) – Design your learning process

By Rohit Chauhan
In Investment process
10 months ago
3 Min read
H

In the last post, I wrote about three stages of an investor – The Beginner, Novice and Expert.

In the initial years as you learn, you will find books and courses to guide you through this evolution. After 8-10 years of this journey, if you are still investing actively and more importantly learning, you won’t find a nicely packaged curriculum to progress further

In college our learning is structured and guided by others. As an early expert – someone who knows a lot, you are now on your own and that is disorienting.

It is tempting to read more books, hoping to learn but you realize that you have reached the point of diminishing returns. You look for gurus, but soon realize that they are no different, though some sound confident online. Often these gurus are performing no better than you and make similar mistakes

Finally, the handful of super-investors who can teach you something are not accessible.

You have to develop your own learning process. There are no pre-defined guidebooks to do that, but some approaches which I will share with you

Mistakes as your guide

One of the most powerful ways to learn at this stage is reflecting on your process and mistakes. Let me explain

Once you have learnt the basics and become proficient, it’s time to start documenting your process and decision making. Write down the thesis, valuation estimate, your entry criteria, position sizing and so on. Finally, when you exit the position, review what happened versus what you expected

Reflect on what went wrong, what you got right and what you missed. Go back to your process and refine it. You have to keep doing this to keep learning

Teach others

The other well known way to learn is to teach others. Write about it, make online videos or take classes for other investors

When you make your knowledge explicit, you teach others as much as you teach yourself. You find gaps in your knowledge and can fill those gaps

I accidentally stumbled into this through my blog and have been learning/teaching others for 20 years. My plan is to expand this further

Jump boundaries

I realized this aspect of learning in 2019 when I found gaps in my understanding of the market and was unable to explain some of my failures. As I reflected on these mistakes , I started studying other types of investing. This led me down a rabbit hole of swing and position trading, Momentum investing, Quantitative and Technical analysis and more

I am still a value investor at heart, but have incorporated the core principles of these approaches into my process

Keep an open mind

This is the key to your learning process. Do not think of yourself as an expert who knows it all. Always consider yourself as a beginner – in other words, keep your ego out. Be open to learning from other investors including ones who are much younger than you

I follow all types of investors as they bring fresh ideas and new approaches which sometimes don’t make sense to me. Whenever I am confused or find something is working but doesn’t make sense to me, my instinct is not to dismiss it but to dive deeper into it

That’s the reason I am obsessed with AI and other new technologies these days. I get energized when I find something new to learn and that gets me to the final point

To develop as an investor, you must love the process of learning and getting better at your craft each day.

Read on

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