Manish Sonthalia, Director & CIO, PMS, Alternates & Offshore, Motilal Oswal AMC, shares investing insights from his career to help you become a smart investor
25-नव॰-2021 •Research Desk
Investing is all about the 'vision to see, courage to buy and patience to hold'. It all sounds very simple but is in fact very difficult to practise. 'Vision to see' implies seeing the future, which is always hazy and difficult to predict. 'Courage to buy' implies, in a way, fighting the markets, as more often than not, the markets would cause the stock to move in the opposite direction in the short- to medium-term. 'Patience to hold' is most difficult to practise after you have got the stock right and have had the courage to buy. It is the temperament to hold which in itself has to be cultivated from within, practised and imbibed. This does not come suddenly but only with experience. The urge to not trade or flip is very difficult to practise as the limiting factor in investment is always the capital and not the ideas.
Businesses don't travel in a straight line. Even very good businesses go through ups and downs. One would do well to not sell good businesses in bad times because 'tough times don't last long, but tough people do'. In the world of investing, only those businesses that have survived for a long period of time have the best chance to survive or grow longer in the future. This is called the 'Lindy effect' in the corporate world. This is particularly more relevant in the world of disruptions and disruptive innovations that we are in now. I held Pidilite Industries for a long period, made decent returns on the stock. However, after two quarters in a row, the company disappointed on margins due to very high VAM (vinyl acetate monomer, one of the key raw materials for the company) prices. I sold the stock. The stock went on to become 10 times from there.
In the world of genuine investing and not momentum investing, one is always going to be alone with his/her idea, with not many supporters to back one's thesis to own that stock. There will always be detractors to your idea and one will have to stick to one's conviction to ultimately create wealth from that stock. Real investing is really very boring. If one requires thrill, one would be better going off to a casino.
There is nothing called a high-price or a low-price in the markets; it's always relative in context. A high-price can go higher and a low-price can ultimately go down to zero. Markets can remain irrational longer than you can remain solvent. However, having said that, markets are mostly efficient. I still have Page Industries in my portfolio even after the stock has become a multi-bagger. A high stock price continues to become an even higher stock price.
There is nothing called borrowed conviction. If one listens and acts on advisors'or analysts' recommendations, it would never help. Self-confidence comes from understanding the company, its underlying business, its value-creation process. If one genuinely understands these traits, one can train one's own mind to practise patience to hold that stock in adverse times. Markets are an expert to cause emotions to throw you out of your conviction. One has to hold onto one's conviction against market moods to get it right. One principle in life which has always worked to my benefit, not only in the world of investing but also in all walks of life: 'If you don't understand something, don't do it'. If one does something which one genuinely does not understand or believe in, he or she will have nobody to blame for it except himself/herself.
'Investing' and being in the 'business of investing' are two different things. 'Investing' is to create bigger and better purchasing power in the future by sacrificing the current purchasing power. When one is in the 'business of investing', one carries the fiduciary responsibility of being better than the benchmark or peers. In the business of investing, it's a relative-return game. In the real world of investing, it's always an absolute-return game.
In today's world, the valuation metric of price-earnings (P/E) multiple has just got reduced to it being a number. Why? Because good businesses are always rare to find in the real world and when the stock market recognises some of these, nobody wants to sell them. Hence, the P/E multiple becomes redundant. P/Es become a function of the terminal value, which continues to rise for a very long period of time. As long as the investment thesis holds well, one should hold onto the stock. I had Bajaj Finance in my portfolio. It was a multi-bagger stock in the portfolio. The underlying thesis always remained good; the valuations became expensive. It doubled even from there.
One of the most difficult questions to practise in long-term investing is 'when to sell?' The buy-and-hold approach to investing can give rise to complacency. One has to train one's mind to not be complacent. If business models get broken due to Michael Porter's Five Forces model, thereby not allowing the company to achieve a particular desired growth rate, or there is visible and understood corporate governance issues that have cropped up within the company, to my mind it's game over for that stock.
Although the list of lessons that one can learn in investing is countless and is an everyday event, if one can practise some of the above, he/she can become a better investor.
This interview was conducted in June 2021