Taking Stock

For someone in the financial services sector, I can be accused of being rather lazy in regard to personal finances. My savings largely languish in the public provident fund and bank fixed deposits, struggling to keep pace with inflation. Thanks to peer pressure, I invested, with the aid of a housing loan, in an apartment in a multi-storeyed complex in Thane three years ago. That has been ‘nearing completion’ for an year now. But the price for this apartment-in-making has apparently risen significantly over this period, as prices for most things tend to do. It creates the illusion of a tidy profit, albeit on paper, which is a nice feeling to have.

My relationship with the stock market has been more of an occasional dalliance than an enduring romance. A couple of years into my working life, I decided it was time to get into this exciting area. I had no grand ambitions of quadrupling my original investment. Being fundamentally risk averse and having read the appropriate literature on the pitfalls of putting eggs in one basket, I decided that a mutual fund was the way to go. I think it was sometime in April 2000. I put a reasonable chunk of my modest savings into two mutual funds.

I could not have timed it worse. It was as though the stock market had carefully laid out an ambush for me. Almost from the day of my investment, the Sensex went into a spectacular dive, taking my mutual funds with it. I began taking a masochistic pleasure in seeing the erosion of my money in the daily papers. After a bloodbath lasting a year or so, my mutual funds seemed to have hit rock bottom, and lay there without heading in any particular direction, licking their wounds. My experience left me wanting to have nothing to do with this sort of crazy market. I sold pretty near the bottom, and exited.

Lesson1: It does not matter if your eggs are in one basket or many, when the whole damn cart carrying the baskets turns over.
Lesson2: At the moment of investment you don’t know whether you are near a trough or a peak, so unless you have the stomach for a wild ride, its best to spread your investments over time.

Time is a great healer, and sometime in 2005 I decided to re-enter the stock market, with the view that I was now financially better able to withstand shocks. The last episode had taught me the benefit of staggering investments over time rather than doing it in lump sums, and armed with this knowledge, I started investing small investments each month into a few select mutual funds. The concept of rupee cost averaging seemed to work, and this time, when the value of my holdings fell, I did not panic. The Global Financial Crisis happened in 2008, stocks/mutual funds got ravaged, and yet I did not exit. Now, the GFC has passed and the value of the funds is back to where it was and a little better.

Lesson 3: Although it may seem counter-intuitive, when all is crashing around you, it is time not to exit, but to get in deeper.

It was not until 2006-7 that I decided to put money directly into stocks. I chose five companies to own – four were either names that I had known to be good from prior personal experience, or just respectable companies that the man on the street would recognize. The fifth was a rank outsider, an obscure cotton yarn manufacturer in the deep south, which I was informed by a colleague, was sure to at least double in a few months. The first four in the whole made some modest gains over the course of 6 months. The cotton yarn manufacturer dropped value by half, and threatened to go lower, when I decided I had enough and dumped it. I sold all my shares before leaving India, thinking I would have a fair bit on my mind with having to settle down in a new country, and lack the time or inclination to follow the Indian market on a regular basis.

Lesson 4: Don’t buy on tips, especially if you never knew of the company’s existence before.

It is now two and a half years since I owned any shares, and just last week, I decided it was time to renew the sporadic affair. The approach, even now, is not rocket scientific, and simply to shortlist “enduring, solid” companies which have been in business for years, and offer no reason to believe that they will not do well in the foreseeable future. From these, identify those which appear to be going cheap i.e. trading nearer a low than a high, based on their stock price over the last few years. I have placed my chips on the table, fastened the seat belt, and leaned back to enjoy the ride.