Two Stories…
1. Forget averaging down, try averaging up!
True story. I’ve always come across questions on ‘averaging down’ when the stock price is lower i.e to buy a stock that has corrected so that your average cost of acquisition of that particular security becomes lower. Many a times I’ve done the same. A few years ago, a seasoned investor (while dis- cussing investment strategies) told me while discussing a private equity opportunity — ‘you can buy the good companies that have corrected but don’t be afraid to invest in an existing portfolio com- pany at a higher valuation if the business justifies it. Treat it like a fresh investment case.’ And it has paid off & how!
I’ve made mistakes of averaging lower (just because there was a price correction without reviewing the business) and more often than not, the price has always stayed lower than the average cost of acquisition. But the above conversation hit me like a light bulb — it was 100% logical, but there was the mental inertia that stopped me from investing above my original cost. But why! If it were a new company for investment, wouldn’t I invest my money then? Then why should the logic be different just because you already own it? Why have the mind anchored to my initial purchase price? Clear learning — Averaging up > Averaging down.
The same is true for the mutual funds that I’ve invested in for my family. Investment has been done at various multiples of the NAVs over the last 10 years. No doubt that luck played a role in few of them & we’ve been unsuccessful (so far) in some but atleast we know the thought process behind the decision is a justified one. Even as a business owner would you not give raise and try to retain those employees that have delivered instead of experimenting? Why should it be any different else- where?
You don’t need to have a new company or a new fund for investing new money. The old ones work just as fine. Over diversification is redundant. Stick to your portfolio & keep topping them up where execution has come through and confidence is high, at opportune times. The risk of execution in most cases is much lesser than last time. Rather than analyzing a new company with an un- known/unproven management & run the risks associated, it’s better to go with a proven manage- ment which has walked the talk.
2. Selling a growing company with no match in the industry or a fund to ’book profit’
When something moves up too fast, chances are that it must be over-valued. So, what does a logical mind do? If its over-valued — sell. And rightly so. Fail to do so, and you’ll be stuck with the stock and a correction — timewise or pricewise. This is true — just ask the investors of Wipro in 2000 or that of infra companies like DLF in 2008 or more recently the lockdown favorite stocks like Zoom, Peloton. It’s absolutely justified to sell stocks that are valued at stratosphere. But not always. You’ll always come across a handful of companies that are your ‘home run’ compounders. The ones which have a huge market to address, where growth can come for multiple years and is run by a proven compe- tent management. This is especially true for equity mutual funds. I’m often asked, especially when the markets do well, whether to book profits/switch to other funds etc and most often my answer is do nothing! I’ve observed that investors often feel the advisory fees aren’t justified if there is no ac- tion taken — buy or sell. There’s a lack of acknowledgement in the fact that hold/do nothing is a valid action in itself which more often than not pays off better than the buy/sell. One needs to re-consider that a hold action which isn’t a transaction in itself but is a conscious investment call nevertheless.
Consider the example of this chart of Nippon Growth Fund, one of the oldest funds in the history of the mutual fund industry: -
I’m sure in its journey there would have been calls to sell this fund — atleast 4–5 times in its 25+ year history. And it’s not been a smooth journey at all, the time & price corrections are mentioned in the chart. But look at the performance if you’d done nothing! The NAV of this scheme is 225x from in- ception i.e a CAGR of ~22%. To be practical, there is no one who has enjoyed this (perhaps including the fund managers at Nippon!) — it just remains a theoretical anecdote to show that we just don’t understand long term compounding. We also never calculate the reinvestment risk when you switch from a good fund to another product/asset class leave alone the switch over costs & the tax implica- tions.
I urge you to take a step back when you feel the need to switch or sell — is it worth it? Does it align with the time horizon & goal that you’ve set before you invested? Don’t itch for any action on some- one else’s saying, unless they have full context of your goals and wishes.
A mutual fund has multiple stocks in its portfolio, so leave it to the fund manager to decide what he/she should buy/hold or sell. All you must do is stay put through the duration of your investment as long as the fund manager is consistent with his/ her philosophy. I’ve had my share of such mis- takes — one of them is selling a leading NBFC at 1800–1850 in 2017. My average adjusted buy price was ~200/-. We sold the stock in 2018 as valuations went >10x price/book justifying that all the posi- tives were in the price. Fast forward to today the price is 7500/-. A 4x from my point of sale, what would have been ~40x of my original investment. So, what happened? While the quantitative measures gave one signal, the company added new verticals in lending. Grew ~35–40% YOY keeping the same quality of lending (more or less). The net interest income is up from Rs 8,000 Cr in 2018 to 16,000 Cr 2021. The company remains the no.1 NBFC in the country, the gap between itself & the next guy is just too big. Plus, I had to bear the impact cost (capital gain tax, broking fees etc).
Once you sell its improbable that you’ll ever be able to buy it again. This isn’t coming from regret, but from reflecting upon how unique investing can be. There are no fixed strategies — you’ve got to be nimble & learn from the previous mistakes.
Disclaimer: The above-mentioned mutual funds & companies are purely for the purpose of illustra- tion. They are not recommendations.
Article by:
Rushil Dedhia — Rushil is associated with Sapient for over 3 years and handles a diverse set of clients. He is an Electronics Engineer and also holds a Masters Degree in International Business. Rushil is an avid investor himself and has keen interest in cricket, football and travelling.
