I have been doing this series on equity investing…so here is one more. Think in terms of probability when you are NOT very confident of your research. In case you are very confident buy incrementally. At some stage do “emotion control”.

Let me give you examples from equity and from mutual fund manager selection. Both are extremely difficult, and hence the usage of probability is useful.

Let us say I concluded in 2009 that Cholamandalam Invest and finance was (is) a good company and I should increase my holding in that. Remember I have been holding it since 1986. Yes, for me it was a value buy – I think I was getting about 10% dividend yield in 1986 – then slowly of course it became a growth share and it no longer qualifies as a value buy in the traditional sense. However if you think that the value lies in the process, growth, people, clients – it might still be a value buy.

You see the confusion? Since one of the important biases to avoid is the outcome bias, you have to bet on your process. Of course it takes time to see whether your process works! For me in case of an Nbfc I always liked a hands on promoter WHO UNDERSTOOD THE BUSINESS. So I did stay out of Tata, Birla, Chotte Nawab, Icici, Ilfs, Idfc,….and the ilk. However, this theory of mine made me cocky (lucky too) when I bet on Chola, Hdfc, Kotak, Bajaj, ….but still missed the bus in Edelweiss and Indiainfoline. I still don’t own them, and will NOT own them (bias).

So once I decided that Mahindra Holiday Resorts, Indigo, Cholamandalam, LG Balakrishna, LMW, Sun Pharma, Lupin, Eid Parry, Coromandel international are the companies in which I am going to increase my stake…I should just go and buy Rs 1 million of each, right?

NO. You then work on probability: Will people buy MHResorts or will they pay the bill of Apollo Hospital? Then over 10 years of buying (and selling). I do a lot of trading in these shares which are there in my portfolio too. I (luckily?) did not build a position in these shares unless I made trading profits (Sun gave great trading opportunity like Eid Parry). I saw my process NOT WORKING in case of Mahindra Hol Resorts. For me to make money in MHRL I will have to see the price at Rs.1000 in 2 years. So I will have to abandon an Idea that it will make money for me. Good decisions leading to bad outcomes – cannot think of a better example. Similarly luck can plan an important part – I bought Kwality for Rs. 34 and sold it at Rs. 150. I have NO CLUE on why I sold – except that I saw that the price was going up too fast. Now it is a part of history, so it can be told.

Another important thing is how much chance you are willing to take at a lower price. Kajaria Ceramics…i bought from Rs. 30 to Rs. 100. Of course I traded too..but largely it was a buy mode, and i wish i had bought more at lower prices. However, I am still holding, so no regrets. Every time I am in Mumbai domestic terminal…i am happy to see KC ads all over….

sorry…but much more to follow…Happy Independence Day!!

 

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