Errors, Omissions & Commissions

The downside of strategies comes to the fore both at the best of time and the worst of times. At the best of times, the risk that suddenly pops open is disregarded as a one off incident that doesn’t entail much significance. But when similar kind of risk opens up during the worst of times, it generally is the last nail on the coffin of the strategy.

One of the stocks of my portfolio until recently was Vakrangee. Like any other stock in the portfolio, this was chosen based on just one Criteria – Momentum. And for a time, it did wonderfully indeed. While buying using a systematic plan took the average buying price higher than where I had started accumulating it, at its peak the stock had doubled in value.

All good things tend to end and this wasn’t any different though the violent ending it faced meant a bit of heartache as one saw the profits dwindle even as Exit was impossible, thanks to the stock circuiting at the lower end every day. Finally, I was able to come out at the same price I entered – tough in terms of the opportunity cost, but no damage to the portfolio.

But its instances like these that make investors worry about whether Momentum is really a good strategy for the long term and for larger capitals.

On the other hand, if I were to be trading the same system in 2008 / 2009, one stock that wouldn’t have been a part of my portfolio would be Satyam. Or for that matter, Punjab National Bank which has cratered 33% in this month alone hasn’t been in sniffing distance of getting a entry into Momentum portfolio.

Beating the benchmark Indices isn’t a piece of cake – big time professional fund managers are having a tough time beating the Index they benchmark against year after year. Active Investing requires one to beat the benchmark if only for the reason that there is no point in wasting time and energy if your returns could be generated by less action – by buying an Index fund for instance.

Concentrated or Diversified Portfolio is a question that has bothered many a brilliant mind. While Concentration can help if you get things right, Diversification ensures survival when things as usually they tend to do – go wrong.

In the latest Berkshire Hathway Annual Report, Warren Buffett writes and I quote

“Charlie and I view the marketable common stocks that Berkshire owns as interests in businesses, not as ticker symbols to be bought or sold based on their “chart” patterns, the “target” prices of analysts or the opinions of media pundits. Instead, we simply believe that if the businesses of the investees are successful (as we believe most will be) our investments will be successful as well. Sometimes the payoffs to us will be modest; occasionally the cash register will ring loudly. And sometimes I will make expensive mistakes. Overall – and over time – we should get decent results.”

As much as we would love to think ourselves as part owners, the truth is that you are not. Anyone and everyone who has held any share for any part of the company is part of a business. But it’s the Management who are the real owners – be they holding 100% or 10% for finally it’s the way they run the company that determines how (in the long term) good or bad your investment can turn out to be.

When you as an investor think of a company as “your company” and as many an analyst talk to the management of companies by using the word “our company”, you are setting up for disappointment.

When it’s time to exit an investment, the illusion of control and knowledge can make it more difficult to make the choices you would have made in the normal circumstances.

Momentum Investing comes with the same risk as Value Investing – nothing more, nothing less. But once that risk opens, how you deal with the risk is what it all matters.