My Learning Curve
If the title implies that I had a learning curve, and now the curve’s over and I am all ready, then dispel those notions right away. As I know more, and I think more, in fact I grow more aware of my limitations, and I become more aware of how much more learning (and wisdom) I need to succeed in this Equity Investing pursuit.
So much of the learning curve has been about discovering how much I don’t know. I think I have also learnt several lessons, and in a separate post, I shall soon try and detail these lessons.
Coming back to the learning curve, I think I can point out at least 5 different distinct learning phases in my lifetime:
a) The first phase was when I was a student. My father always had a nice equity portfolio. We used to get Annual Reports of Companies by mail. I was an inveterate reader, and would quickly run out of things to read. And so I used to read annual reports. I have never learnt accounting formally, but I used this time to figure out the rudiments of balance sheets and profit and loss statements. By the time I got to college, I was actually quite familiar with several listed companies, and their stock prices.
When I entered IIT, Bombay, I was actually quite nervous about ragging. But my tormentors quickly realized that I knew a lot about stocks, and I spent the first couple of weeks at college explaining to seniors about investing in stocks. I don’t remember what the hell it was that I told them, but till recently, this was the only time that knowledge of equity markets ever helped me.
Also at college, having had this reputation, the Dean, Student Affairs once asked me which stocks he should buy. I asked a broker friend of my father, and he suggested Balkrishna Tyres, I think. Anyway, the stock kind of doubled, and my reputation as a finance whiz on campus was made. Nothing could be further from the truth, however. The only stock which I personally identified in those 5 years as worth buying was Kesoram Industries, which I thought was valuable because it traded well below its book value. A few friends of mine even got their fathers to invest in this, and I don’t think this company ever made money for anyone. Luckily, no one has blamed me yet.
b) The second phase was when I returned from studying abroad, and joined my family business. I used to stay with my parents, and I used to get a small salary from the company, which I essentially just saved. I started dabbling in stocks. How I wish I had read a good book before this, something like the The Most Important Things by Howard Marks. This was the time of the Harshad Mehta madness, and of course, it was very addictive, since we all got crazy returns everyday. I remember I bought 100 Ferro Alloys @Rs. 100 for both myself and my fiancé (who is now my wife), and it went up. It became a penny stock, and I still owned it till recently, more than 20 years later.
As for the gains, well, they all disappeared. Not because there were no real gains, but the broker in those days, could not find any stock certificates, my stocks got mixed up with my uncles, and I eventually just lost everything. It was not much, but it was all my savings. Luckily, I was not dependent on these savings. A friend of mine, on the other hand, gave me a chance to buy Sun Pharma in a preferential allotment in those days. In laziness, I did not fill the form. I was getting shares worth Rs. 14000, I remember. Had I actually sent the form, those shares would have been worth something around a crore, I think.
c) Eventually, I got settled in business, and my wife in her profession, and both of us started saving money. It was not much, but I bought a flat in Vadodara (which also turned out to be a horrendous investment). But I never really dabbled in stocks till after the internet bust. Now I think I was lucky to have not been in the market during the 1999 tech boom. Given the haphazard way I was investing, I am sure I would have gotten in at the highest point, and gotten out during the bust.
I then started buying a few stocks and I started with equity SIPs. With the advent of online brokerages, it was much easier. But again, I never really made any money. I always needed money for some investment, or something in business, and I sold my stocks or mutual funds, usually just before a big move up, or during a severe downturn. I wanted to buy a flat in Mumbai, so I sold all my mutual funds in 2004. In 2008, during the market crash, no one was willing to lend me money for business, and I had to sell my stocks to take care of this business need. Finally, in 2012, as I was preparing to sell my company, and I needed to buy a guy who had a small stake, and I had to sell all my SIP MF’s at this time. But the money was never substantial, and was never material to my life. My real estate investments, and the value of my business was always much much higher than my equity investments. Even though I was very involved with the equity investment process, I never really put in substantial money into it.
d) Things changed in the fourth phase. In 2012, I sold a substantial stake in the company my wife and I had built. And I am committed to selling all of it. But now, the amount of investment money I had was substantially more than before. Before long, I was surrounded by bankers, and wealth management firms. In retrospect, I should have first developed a capital allocation framework, and worked within this to invest into equity. Instead, I took a random route, and I decided to allocate a about 15% of the money we received into equity. I decided I would buy shares of 15 top companies, like TCS, BHEL, Colgate, GSK, JP Associates, IDFC, ITC, L&T, Reliance, NTPC, DLF, Reliance Power and so on. I did not pay attention to valuations, I did not pay heed to the business quality, or the quality of the balance sheet. In 2012, many of them did ok, but not as well as the mutual funds I purchased also at this time. Much of the money also went towards real estate investments and towards buying debt securities.
In December 2012, I looked back at the previous six months, and realized that I had substantially underperformed the mutual funds, even though in an absolute sense, I was still positive. I was also totally enamoured with a company called SJVN, and had resolved to allocate a substantial part of my capital in it. At one time, nearly 30% of my portfolio was SJVN. Eventually, SJVN did not do badly for me ( I still own a small quantity), with a 5-6% dividend yield, and some 25% capital appreciation. Indeed, my original investment thesis was correct, and remains correct. And I expected only this appreciation. I am not selling down on SJVN because it gave poor returns, but because my expectations of return have changed. And I don’t think SJVN can give such returns going forward.
In any case, since the MF’s did better than my portfolio, I had a brainwave. Why not look at the disclosed portfolio’s of a few funds, and buy the common stocks? And I did this, except that this time, I did not buy anything “expensive” meaning with high PE’s. So I ended up buying a bunch of PSU Banks, some stocks like GMDC, Bharat Forge, ITNL. All in December 2012, at the height of the midcaps. Many stocks have still not returned to those prices.
e) In July-August 2013, I was staring at the abyss. I was now actually down significantly (around 10%) in my portfolio, with capital loss. My MF and SIP portfolio was also down, of course, but was still outperforming my portfolio by a mile.
This was a great sense of sorrow for me. It was also a source of ego hurt. Here I was, the guy who knew about stocks since Childhood, a sharp mind, a great grasp of business models. And I, because of my personality or my lack of hard work, could not beat mutual funds at the game. And I was losing money. There was something wrong in my approach.
So I started reading. I first came across the Valuepickr site. And that was great help. And I read The Intelligent Investor, and Margin of Safety, and The Most Important Thing. And I became a value investor.
Luckily for me, the market was down substantially in July August, and I had some money to invest. And I started investing. In ValuePickr stocks, and in other stocks which I identified. I also looked at the stocks which I had invested in and had fallen, and I decided to double down on many, and average down. And I started to spend substantial time, and mental effort at this game. I started getting success, which reinforced all the learning. Now I have to see whether I can sustain this.
Equity is still only a small part of my portfolio. Including my own equity holdings(80%), and my Equity MF Holdings (10%) and ULIPS (10%), my equity exposure is still only around 15% of my family net worth. But I fully intend that it will be around 30-40%, in a couple of years, either because of capital appreciation, or because of added investments (but not because, I have learnt), of both.