The weight of conviction

Summary: Being right more often matters less than how much money you had riding on each call. This column studies four small-cap funds that beat their benchmark and finds that a small group of winners did nearly all the work, even though each fund was wrong more often than right.

Summary: Being right more often matters less than how much money you had riding on each call. This column studies four small-cap funds that beat their benchmark and finds that a small group of winners did nearly all the work, even though each fund was wrong more often than right. Suppose you bought two stocks last year. One doubled. The other fell 30 per cent. Did you have a good year? You cannot answer without knowing what you put into each. If the winner was 2 per cent of your money and the loser was 10 per cent, you lost money on a 50 per cent hit rate. Most investors keep score on how often they are right. Very few keep score on how much they owned when they were. That gap is where returns are made and lost. The clearest evidence comes from watching people who manage money for a living. Everyone invests inside a boundary Every money manager works within limits they did not choose. A mutual fund manager has no control over the money coming in or going out. At best, there is visibility on the SIP book and the month ahead. A manager who sits in cash waiting for better prices has to explain that choice in public every quarter. Managers running a PMS or an AIF have more room. They can screen clients and turn away money when expectations do not match how they invest. The investor managing their own savings has the most freedom of anyone, and usually makes the least of it. You can hold 10 stocks or 50. You can buy a company worth Rs 800 crore that no fund can touch meaningfully. Freedom is worth little without a method. So it pays to study what the professionals do, and what their constraints force them to do. Forty-three stocks did all the work I took four small-cap funds that beat the Nifty Smallcap 250 over both three and five years, and examined every stock they owned. They were selected because they won, which makes this a study of what winning looked like rather than a forecast of who wins next. Between them, the four owned 783 different companies, counting each company once however many funds held it. Forty-three of those produced all of the returns above the index. Fund C owned 473 stocks across

This article was originally published on November 01, 2026.