The following was part of a note written to subscribers. Hope you find it useful

We bought the stock a year back and added to it in December. Since then, the stock price is up 70%+. In the interim, the price doubled and then gave up some of those gains. Our buy price and fair value did not change as much during this period, which shows that business performance does not swing as much as the price

Like several other companies, the stock went from a value/ growth to a momentum play in a matter of months

When we make an investment, it is with a 2-3 year ‘rolling’ horizon. We have a 2-3-year view, but if the company keeps performing, the horizon gets extended. After a few years, if you look at the holding, it seems to be a buy and hold position. However, the ‘hold’ part is always conditional on the performance of the company

In contrast a momentum investor buys a company, when it shows up high on their momentum list (highest returns in the look back period), with their own unique set of adjustments. The time horizon for such investors is much shorter. Momentum works for 6-9 months on average and requires such investors to exit and replace with new stocks which appear on their list

Same stock, different approach

Both the investors may be invested in the same stock but are playing a very different game with a different time horizon.

The price of the company, however, is impacted by the action of all the investors, irrespective of their motivation. A loss of momentum is further compounded by the exit of such investors/traders.

I am not making a moral argument in the above and there is nothing good or bad about it. It is stupid to accuse other investors of disturbing your game. We need to aware of what is happening but be clear about our motivations.

We have a longer time horizon with focus on the long-term performance of the company. If the execution falters, we will exit. Till then, we wait and watch

In the meantime, we will not do momentum or short-term trades with our positions. Doing so would be stupid on our part. If we want to play the momentum, then the approach is very different (regular, pre-decided exits). Mixing the two leads to the worst of the two worlds

I wrote the following as part of my half yearly letter to subscribers. Hope you find it useful

When I started investing, I thought there is some magic formulae to grow your capital. After 10 years of search, I realized that the answer was staring me in the face.

The key to wealth creation was very simple – Save aggressively and invest patiently

I had always done the first,  but was doing it wrong with the second part of the equation. Like most young, hot blooded guys, my focus was to make the highest possible return in the shortest time possible. After a decade of doing that, I realized that the stress and effort was not worth it.

In addition to the lost sleep, I was reluctant to invest most of my capital to my own stock selection. Most likely, it must have been the risk of my approach which made me cautious

Key decisions

Around the start the advisory I made a few key decisions based on my past experience

• All of my Liquid networth in India (excluding my real estate and some smaller stuff like LIC) would go into stocks (my own picks)
• I would invest my family’s capital in the same manner
• I will not shoot for the moon and my focus would be on preservation of capital above everything else

These decisions led to the following actions

• No investments in derivatives, margin trading, IPO or any high risk situation
• No reaching for yield in debt. Keep most of my capital in stocks and the rest in FD
• No short term trading

In other words, the sleep test. Can I sleep well in the night with my current portfolio ?

The decision to  focus all my investments in one bucket – A diversified portfolio of stocks lead to a simpler portfolio, lower risk and a high allocation. There is no point making 40% CAGR if you allocate only 10% of your networth to it. A 20% CAGR with 80% allocation will lead to better results is a better option

I carried the same approach into the advisory as we have always believed in eating our cooking . Outside of a few experiments which if successful, make it to the recommended list, all my investments in India are the same as the Model portfolio. It has kept my life simple and the absolute returns are good enough for me

I am now thinking on how I can simplify my financial life further. A few thoughts

• Identify a few stocks which have the benefit of a long term trend. Once you are invested, be patient, till the trend is valid
• Eliminate all debt including contingent ones. An example of contingent debt is money for your kid’s education or for your own healthcare in the long run
• Have a proper will in place so that your family doesn’t suffer if you get hit by a bus (hopefully never)
• When in doubt, reduce risk. Investing is not a T20 match. You can always bat the next day