What you have vs what you don't

Here's a simple yet very valuable statement about equity investing. When you read it, the self-evident correctness of this shines through. What you don't own can't hurt you. Most of us worry too much about the investments we haven't made and too little about the ones we have made.

You would have observed this - in yourself and in others - a thousand times but perhaps not noticed it. Consider these two questions about your investments.

1. Which stocks should I buy?

2. Are the stocks which I already own worth holding on to?

If you don't work hard on answering the first question, you will end up not buying stocks that you should have bought. And if there's a stock worth buying but you don't buy it, there are potential gains that you will not make. In effect, if you ignore the stocks you don't have, you are not playing the game, so you will neither lose nor gain.

In the second question, that option is not there. You already have skin in the game. If you ignore the stocks that you own, you could make money, or you could lose it. It's not an option. Or at least, it should not be. In practice, people seem obsessed with what to buy next instead of worrying about whether to continue holding what they have.

This contrast between what you own and what you do not brings to mind a comment from a fund manager (I think it was Samir Arora) who had - like many smart investors - bought into HDFC Bank years ago and held on for fabulous returns. Now that the two HDFCs are so much in the news, I suddenly remembered the comment. I'm not sure of the exact words but essentially he said that I haven't held HDFC Bank for 20 years but for 80 quarters.

He meant that despite holding any stock even for decades, psychologically, nothing is a long-term investment. Every quarter, when the numbers come in, one should re-evaluate everything. If there is a decisive shift, then in a few quarters, one's opinion can change. If a stock stays good, it's enormously important to hold on. If it turns bad, it's enormously important to get out of it. In either case, you will make more money by paying close attention to what you have.

And yet investors - myself included - are often guilty of paying more attention to what they will buy next. This comes naturally to most of us. There is an enormous thrill in 'hunting down' a stock, finding something new to do, and getting involved in some action. Passively watching what you already have is not so exciting.

There is this concept of 'bias for action'. The most successful businesses and entrepreneurs are supposed to have it. That's probably true for most things in life, not just entrepreneurship. It's true for an employee, for a student, for a sportsperson, and certainly while driving on Indian roads. Consequently, we also imagine it to be true in savings and investments. What would the activity associated with investment ideally consist of? I guess most people would think that investing consists of activities like studying investments, choosing them, looking for new ones, and so on, except that it's not.

One driving factor behind this impression is what I call the investment entertainment industry, which claims to be the investment news media. Any number of business channels, newspapers and websites generate a deluge of what they call news. The impression they try to create is that short-term events matter to investors, and the most important thing is to be on the lookout for new investments.

Sure, you have to do that. But at the same time, studying what you have is more important. A lot of upheavals have happened in the last two years, and a lot more is happening. It's not a time to stop paying attention.

Suggested read:

Getting the wrong message
News, hype and equities
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