Lessons from a legend

The untimely passing of investing legend Rakesh Jhunjhunwala is a sad event indeed. Jhunjhunwala is an inspiration for a whole generation of equity investors. I won't say 'was an inspiration' because the inspiration will stay even though the man has gone.

While I'm reading things about him both on social media and the legacy media, I'm struck by one rather unfortunate fact. There's too much focus on how much money he made on the markets and too little on what was different about the way he invested. To you and me, or to anyone who is just starting out equity investing, it does not matter whether he made Rs 20,000 crore or Rs 40,000 crore. The real point is somewhere else entirely.

Jhunjhunwala's investing was characterised by locating good investments and then going big on them - very big. Big both in time and in volume. To be fair, there are plenty of people who invest like Jhunjhunwala. However, it was the scale of his success, as well as the personality of the man, that makes him a great example to emulate. Jhunjhunwala held on to his biggest winners for much longer than a decade. Not just that, he kept adding to them so that eventually he held sizable stakes in companies like Titan and CRISIL. This is the exact opposite of what is the norm among Indian equity investors, even those who consider themselves to be fundamentally driven long-term investors.

Quitting your losers and going as big as possible on your winners sounds like routine tactical advice but in reality, it goes to the heart of what real equity investing is all about. It's the opposite of this 'booking profits' culture that dominates equity investing. The point is that most people sell when they feel they have made enough money in a stock. You buy a stock, and when you feel it has risen as much as it is going to over whatever time period you are interested in, you sell it. This is profit-booking and investors say that it 'locks in' the gains. It is a common saying among equity investors that no one ever lost money by booking a profit.

That statement sounds like a clincher, and makes profit booking a no-brainer. Like so much else, the root of this behaviour lies in psychology, not logic. People are afraid that the profits will go away, or even just reduce. The regret and the embarrassment are not worth it. The feeling of success, of closing a trade at a high point is too valuable. Actually, from an investment perspective, booking profits is just a way of timing the markets, something that rarely works, and then only by accident. As Charlie Munger has pointed out, selling for market-timing purposes actually gives an investor two ways to be wrong: a further decline that may or may not occur, and if it does, they'll have to figure out when the time is right to go back in. Unfortunately, booking profits and avoiding a decline creates an illusion of success.

The best antidote to this self-destructive psychology is to look at examples like Jhunjhunwala. Invest in a stock for good reason, then if your logic turns out to be correct go on adding to that investment and keep holding on to it for years or decades, as long as the original investment logic holds true. At Value Research, it's been almost five years since we launched our Stock Advisor service. Over these years, we have gained a large and loyal membership and yet, there is a certain subset who are obsessed with getting out of good, profitable stocks. They continuously clamour for a 'target price', just as punters do. The idea that holding a stock is like a train journey where you must know your destination in advance is deeply ingrained. If Rakesh Jhunjhunwala had invested in this manner, he would still have been very successful as an investor, but you would not be hearing his name today.