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What is your Philosophy when it comes to Investing?

For a long time, I was a drifter when it came to investing philosophy. Value today, Quality tomorrow and Momentum the third day. The disadvantage of being a drifter is that one never is able to convince himself that when the chips are down, the strategy is still as valid today as it was yesterday.

Out goes the baby with the bathwater in search of a new medicine that can soothe these wounds and seem to be the perfect match until it hits its own roadblock that makes one once again shift gears.

We understand that everyone cannot be an expert on everything and yet somehow exclude ourselves from that limitation with the belief that we can somehow traverse the diverse fields with the agility that can lay Usain Bolt to shame.

When investors select mutual funds to invest into, the key criteria many look for is the short term returns of the fund. Higher returns from known funds have generally meant an enhanced flow of funds.

Higher the amount under management, higher the incentives for those at the top and that itself is generally enough to motivate fund managers to switch philosophies based on the flavour of the day. While this in itself isn’t wrong, what it means that the investor has nothing other than performance to back-up his investments rationale.

Churn is a factor that is dependent on the strategy being deployed. My own momentum strategy requires a much higher churn than a value strategy where churns are much lower. But when you look at the mutual fund turnover ratio’s, they tell a different story altogether.

While some funds do have a very low churn ratio, many a fund which either in name or through brochures and advertisement claim to be followers of one sort of philosophy have a turnover that is replica of another.

It hence isn’t surprising to see that investors keep getting returns lower than the fund returns for the whole logic of investment was based on returns and when returns fail, they are unable to understand the reasoning and would rather abandon ship than take the risk of sailing through the stormy seas.

Momentum, Value, Quality and Size are well known factors with tons of documentary evidence that point out to its longevity. But in such long periods are periods where the strategy under-performs other strategies and the market as a whole.

Small Cap stocks have been under the weather in India for nearly 10 months now. While last Diwali picks by experts were more in the Small and Micro cap space, this time around, most of the recommendations are in the large cap space.

But has Small Cap really been a disaster like everyone loves to point out. Here is a relative comparison chart that compares Nifty 50, the large cap Index with Nifty Small Cap 100, the small cap Index.

As you can see, from the chart, while the path has been varied, the results have been the same. A small investor would have been the object of envy of the large cap investor for a long time but once the crack came in, the large cap investor feels vindicated that his style was the better choice.

Momentum Strategy can be applied on any subset of the market. For my personal investment, I am agnostic to market capitalization which means that the choice of stocks is based on the flavour of the moment. Yet, despite the churn, the portfolio has seen a draw-down – one that will be a long time from getting back to all time high.

In earlier days, like the experts of today, I would have loved to shift to a strategy that offered more robustness in these times. Maybe Quality for the Nifty Quality Index is still making new highs even as the rest of the market seems to be immersed in its own poo.

But many a Quality stock is even today more expensive that it ever has been historically been. This means that while they could be resilient for now, their future returns will not be in-line with others as and when the market recovers – and the market always recovers.

Success in markets doesn’t require one to follow the herd when it comes to the most popular style or strategy. Success instead comes when we are able to stay the course even as the airplane hits a air pocket and there is turbulence all around.

If the current market behaviour is making you clamour to change your path, my humble advise would be to step back and see your portfolio for what it aims to be rather than what you want it to be.

Stocks, Sectors, Industries, Countries all move in cycles – sometimes in favour, sometimes out of favour. As long as you understand that, investing becomes much easier since changes are not driven by the heat of the moment but an in depth understanding of the strategy itself.

Whatever you do, Wishing you all the Success in the coming year. Wishing you a Happy & Prosperous year ahead. Happy Deepavali.

Discussion

One Response to “What is your Philosophy when it comes to Investing?”

  1. Crisp and Simple to understand as always. A pleasure to read. Thanks Prashanth.

    Posted by Kshitiz Gupta | 16th November 2018, 12:17 am

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