Wednesday, June 26, 2013

Investment Fables- The Hare and the Tortoise

THE HARE AND THE TORTOISE There is a delightful movie named “Katha” that was directed by Ms Sai Paranjpe and released in 1983. It is a modern day retelling of the old fable of the Hare and the Tortoise. In the movie, the Hare wins. The tortoise keeps going at a steady pace and the hare has its fun and games and still manages to win the race. It is like retelling the story of the Ant and the Grasshopper and the Ant coming out second best. What relevance does it have to us as an investor? I often wonder, looking at fortunes that have been made and lost, as to if the person really followed a well articulated strategy or was he simply lucky in terms of what he picked, where he was and market timing etc. Often, I find that a systematic approach has given modest to below average results. More often than not, most investors who have had brilliant success were also the beneficiaries of being in the right place at the right time. However, the key to consistently being lucky was the ability to understand risks and at all times get a sense of circumstances. If we take properties, you may perhaps understand what timing is all about. Often, we see property prices going up manifold in a short span of a couple of years and then stagnating for five to ten years. So, the like or dislike of property stems from when you got in and when you got out. In some cases it is also a case of did you get out at all? And we have seen properties behaving very disparately. In Chennai, I know of people whose property prices have gone up six fold in less than ten years and some whose property is not saleable even at the price that they bought, ten years ago. Was one cleverer than the other? Similarly, for every success story of multi-baggers in mid cap stock investing, there must be at least nine stories where someone’s investment became as close to zero or gave negative returns over time. However, only the success stories go round and the failures are never talked about. And each one of us have our own stories of what opportunities we missed, that in hindsight make us look like fools. At the time a company like Infosys was listed, for every believer there were more than ten who did not. Or it was a question of being in the right place at the right time. Those who got shares of a Colgate or a SKF at the time of FERA dilution (1974) and holding on to the shares, have seen their wealth multiply thousands of times. The same stocks, if one bought much later, did not give much returns. PSU stocks are equally hated and liked. If you were lucky to have bought the shares when the shares were just listed and languishing in the mid nineties to early 2000s, you made a lot of money. Many PSU Bank shares were at close to or below their ‘par’ value. However, if you got in the last few years, you probably lost money or just managed to keep your principal intact. For every investment, whether you used a SIP or a direct investment route, the judgement of timing and some luck are essential ingredients. I always feel that whilst one can use skills to choose what to buy when it comes to stock, no one has a fail safe method that will help choose the time and price. There are charts and technical analyses, but I believe that they are as chancy as a toss of a coin. That is what keeps the industry going. No perfect answers. If you were a fan of the dot com bubble, you would either have made a fortune or lost one, depending on where you placed your bets and when you walked out of the casino after encashment. Similarly, in mid caps where I did theme based buying (land bank of old mills etc), a couple of them gave me big returns and the rest just bombed or vanished. At the point of analyses, all of them were equally bad and the bets were uniformly placed. Just a matter of luck that the greater fool theory worked in two and failed in eight instances. Someone who tracked me and happened to pick one of the two winners made very big money, many who picked up one or two of the eight, lost all and on the average, I made it fine. Better than the market, but not spectacular. I know if I pick up high quality stocks where the companies will continue to do well with reasonable profits over the next ten years or so, my downside is limited. However, if these stocks are well discovered and talked about, the prices are bound to be high at the entry point and my returns will be nothing to write home about. Yes, I will sleep peacefully, with perhaps a minimal risk of loss of capital, but nothing spectacular to look forward to. For that, I have to get in on the ground floor before someone else does and place my bets. Gold is a classic case of luck and timing. If we did some rational analysis, we will not consider investing in gold at all. I would rather invest in copper or aluminium since these metals have some use and value. Gold is purely for jewellery and value is based on fear and the strength of the rupee against the dollar. The last twelve years saw an unprecedented bull run in gold. Your experience depends on when you got in and got out. Skill and knowledge would have kept you out of gold altogether. If you want to beat the market, you have to be either lucky with direct equities or brilliant at timing. If you are in mutual funds, you will average out. If you are in theme funds, your luck of timing would decide the returns. If you take an index ETF you will be in line with the market. Some diversified funds have comfortably beaten the market so again your choices expand. In choosing a mutual fund, you are forced to fall back on past performance, which is a pointless exercise. Rather choose a good high quality fund house and expect average to above average returns as compared to its peers. In our search to preserve capital and create wealth, our search for avenues that will help us to beat inflation demands a lot of thought and effort. Simply believing in homilies like “equities beat inflation” or saying about land that “they don’t make more land” etc is pointless. We have to spend time understanding what each asset class can do. How do prices behave and what in general impact prices of asset classes. We can never perfect it the level of predicting or forecasting individual stock or land prices, but we will go in with our eyes open. This means having to spend time and effort in studying the assets that our money will buy into. Whilst it is not possible for most of us to go in to finer details, it will be a good starting point to ask “what can go wrong with the investment?”. Once we understand all (or at least most of them) the risks, then we are better equipped to handle our money. Yes, sometimes we could get lucky like the ‘hare’ in Katha. Generally, the tortoise lives longer and wins the big races. We will make better investors if we focus more on understanding where we stand to lose rather than pick winners in 100 meter races every day. The harder one works at it, there is more likelihood of getting luckier. The key to spotting opportunities lies in understanding risks. Without understanding risks, we come down to a throw of the dice.

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