Hardest thing about Investing
A year back, the famous Anonymous Twitter Guru @contrarianEPS posted a list of stocks he randomly picked due to their high price to earnings ratio and called it a ticking time bomb that shall either blow up or shall undergo a time correction.
My own thought was that even though these stocks were expensive, I felt they could out-perform Nifty 50, the Index that is today the goal of every fund manager to beat.
A year is a short time in investing, but for now the randomly chosen high valuation stocks have beaten the large cap index which itself is seen as an anomaly given that more than 70% of stocks even today trade below their 200 day average.
When the dot com bubble took place, an investor / fund manager had two choices. Play the trend without giving much weight to the fact that the valuations seemed to be ridiculous even for a novice in finance or try and play with the hope that when the music finally ended, you were not caught holding the wrong set of stocks.
Warren Buffett decided to sit out of the game. With internet stocks making new highs literally every day, he underperformed big time. Media saw him as someone who had lost his grip on investing and how he was missing out on the next biggest trend. Of course, Warren had the last laugh.
Stanley Druckenmiller made his name when he was hired to run the Quantum Fund by George Soros. Druckenmiller is one of the best performing hedge fund managers of all time. Yet, when it came to the Dot com bubble, he stumbled and stumbled bad enough to get himself out of Quantum funds.
In an interview in 2015, he described his biggest mistake
Well, I made a lot of mistakes, but I made one real doozy. So, this is kind of a funny story, at least it is 15 years later because the pain has subsided a little. But in 1999 after Yahoo and America Online had already gone up like tenfold, I got the bright idea at Soros to short internet stocks. And I put 200 million in them in about February and by mid-march the 200 million short I had lost $600 million, gotten completely beat up and was down like 15 percent on the year. And I was very proud of the fact that I never had a down year, and I thought well, I’m finished.
So, the next thing that happens is I can’t remember whether I went to Silicon Valley or I talked to some 22-year-old with Asperger’s. But whoever it was, they convinced me about this new tech boom that was going to take place. So I went and hired a couple of gun slingers because we only knew about IBM and Hewlett-Packard. I needed Ventas and Verisign. I wanted the six. So, we hired this guy and we end up on the year — we had been down 15 and we ended up like 35 percent on the year. And the Nasdaq’s gone up 400 percent.
So, I’ll never forget it. January of 2000 I go into Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy. [unint.] at 104 times earnings. This is nuts. Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day and I’m out. It is driving me nuts. I mean their little account is like up 50 percent on the year. I think Quantum was up seven. It’s just sitting there.
So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again. But I already knew that.
One of my observations and one that data has repeatedly shown to be true is that most investors are unable to stick to a strategy and philosophy that they believe in. Rather, they desire to be seen doing what everyone else is doing for there is always the fear of missing out.
In 2017, Pink Papers, Blogs and Television all showcased the same thing – how great it was to be in small cap stocks. A small cap fund manager who generated 67% returns was seen everywhere extolling the advantage of picking good business with bad managements. 2 Years later he is nowhere to be seen having been replaced by another fund manager who has generated 26% returns year to date.
The hardest thing about investing is not about picking the right stocks or the strategy but to be able to stick when things aren’t flowing in your favor. All forms of investing carries the risk of under-performance at some point of time or other for otherwise, it will be a holy grail into which all money will get invested.
Just take a look at the chart below.
A sector that performed great in one year rarely turned out to the winner the next year as well. But other than a couple of sectors, every sector had more good years than bad. But only those who stayed will have enjoyed the benefit while those who tried to chase (and chasing blindly isn’t Momentum Investing) would have seen a lot of grief.
As Warren Buffett says, it’s important to stay within one’s circle of competence if one wishes to be a successful investor. Of course, that assumes you have a Edge for without an Edge, no amount of staying anywhere will get you the success you believe you deserve.
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