Long years ago, I interviewed a fund manager who had done very well during the IT/dot-com boom around the turn of the century, but had done very, very badly in the crash that followed. Those were days when the current industry/sector exposure norms that limit risk were not really there. Some funds had such rules, most probably did not. Even those that did got tempted and violated them when the going in IT got too lucrative to ignore.
Unlike later bull runs, that particular time was particularly fraught with such a sectoral concentration risk because IT stocks did hugely better than the general market did. The difference in performance between funds that put large chunks of their assets in IT and those that tried to stay diversified was just too big to ignore. In retrospect, this was the reason that thoughtful investors learned much more from that boom-and-bust cycle than later ones.
In that particular interview that I'm referring to, this fund manager told me ruefully, "We bought well, but we did not sell well." At that moment, when I was two decades younger (and thus two decades less experienced) than I am now, it sounded like an interesting idea. Certainly, it has the ring of wise self-realisation, pithily expressed. Later, when I was thinking more about it, my attitude towards this idea became far less positive. In fact, it became obvious to me that this was a particularly sub-optimal (I'm putting it politely) attitude from an investor, let alone a professional fund manager.
The entire point of investing is to sell. You invest to earn money. When you buy, someone else makes money. Only when you sell do you make money! We achieve nothing when we invest in a fund or in anything else. In fact, our risk and uncertainty go up when the money in our bank account gets converted into a mutual fund holding. Only at the end of the investment, when the investment gets converted back into cash do we get to our goal.
The funny thing is that this moment, this denouement of the whole activity, never occurs for the fund manager of an open-end mutual fund. In fact, equity investors should also realise that this moment never comes for the management of the company whose stocks they have invested in. Those are perpetual activities whose success is measured by every day's NAV or the annual returns or every year's profits or something like that. Therefore, it is up to us to ensure that we do not end up 'buying well' and not selling well. There is no such thing as buying well, there is only selling well because if you don't sell well, then the buying does not matter.
So how do you sell well? The answer is obvious: not just by choosing well and buying well, but by continuously monitoring your investments and being ready to take action. This is harder said than done, especially because of the 'fund-collector' approach that most Indian investors end up having. I have often written that the two worst things that we do are one, collect too many funds and two, not monitor them properly and really, the second is mostly just a by-product of the first. When it comes to investing, 'the fewer the merrier'. As Charlie Munger said, "I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they're way above average. I think it's much easier to find five than it is to find a hundred. I call it deworsification."
However, even when you have only a handful of funds, they have to be monitored and if found wanting, changed over to other funds. Value Research now has a simple answer to that, which is to become a member of our Premium service. In one simple step, you get four capabilities:
- Provide a way for you to articulate your goals clearly
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The last one is often de-emphasised by investors as well as advisors but for us, it's actually the centrepiece. Unlike any simple way of tracking investments, keeping yourself continuously updated on the current and near-term quality of your investment takes a continuous research effort. Tracking, monitoring, changing - these are the things that will ensure that one day, you sell well.
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