January 2019 Newsletter

<This is an extract from our January 2019 newsletter to clients>

Investor Behavior – We won’t sell at a loss

In the current market conditions, there are times when we must exit positions at a loss. There are periods when we book profits consistently and then there are periods, when we exit many positions at a loss.

When we give exit calls, a few investors do not exit the positions. They exit some, they hold the balance for the cost price to come. This is not the best habit to have as an investor. There are reasons why we exit a position, if we knew that the cost price would eventually come back, we would not exit! We would instead add more and hold.

The problem is that investors do not take a bird eye view when it comes to looking at the portfolio returns. They look at the returns of each stock in the portfolio. We will use the example of Cricket to explain this behavior.

India has posted a strong score of 296 and the run-rate is > 6. It is like a portfolio that has delivered a 15% CAGR over a 5-year period. As a viewer, you will be satisfied with the result. However, if this was your portfolio’s performance then you would not be impressed.

Out of 10 players, just 3 players scored most of the runs. A century, two half centuries and the rest of the players did not even cross 15 runs! Imagine if your portfolio delivered a 15% CAGR and just 3 stocks of out 10 were the reason for the return. Instead of being happy with the returns, you would question why 7 stocks failed to deliver returns.

With any portfolio, like a cricket team’s score card, you will have most of the returns coming from a few stocks. The other stocks would end up in a loss or deliver sub-par returns. You cannot expect most of the stocks to deliver a strong performance. That is why we have different allocations to each stock.

When it comes to stocks, never get emotional.

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