Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
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Concentrated investing done successfully is tough

Blog Blog Details
  • October 04, 2017
  • Mr. Gautam Sinha Roy|
  • MF, Fund Manager

Listed stocks are a vast asset class globally, with most countries market capitalisations close to their GDP. They also have the unique characteristic of trading on exchanges daily. Their prices at any point of time are driven to a large extent by "sentiments" of the hordes trading in them, in addition to rational expectations about their future prospects (as taught in textbooks). Also, the "tenure" of the equity instrument is very long (as long as the company exists).

Given that shares trade daily, are volatile and yet instruments with long duration, results in very diverse outcomes of investing in them for different investors. Probably, because of this, different investors have different approaches to investing in equities. Now these differences can be plotted on two very tangible dimensions (there are others too, somewhat less tangible though).

The first dimension that investors differ on is time. From day traders to multi-decade investors, you get them all in equities! The second dimension is that of number of equity securities held. From one stock to literally thousands in the same investment vehicle! Now, you can well imagine that with such diverse approaches, any particular investor will be well served (for his peace of mind, if not anything else) to choose his own niche of investment duration and of number of securities.

We invest in equities because they compound wealth faster than other asset classes. We note that if you go through the list of the richest people on the planet, they are mostly owners of one stock, which is their own company. Owning one great company with superb prospects bought at a cheap price, in your portfolio, can lead to great wealth creation. But a single stock can fail too, so there is a very high risk. Also when you are buying in secondary markets, you are most likely not getting the stock particularly cheap, nor are you in control of the company s destiny or fully cognisant of the same. So, as "minority investors" you need to "diversify".
Then the question is how much diversification is needed. If you diversify too much, say, own 50 stocks or more, you will end up diversifying away your returns and get only index returns. For the vast array of investors with no superior knowledge about equity investing and businesses, this could be the optimal choice. Own the index, keep the costs of owning stocks minimal and be happy with index returns. For the very few, who have acquired enough knowledge on stock investing, it makes sense to optimise their returns by owning only a few stocks with superior prospects.

For such specialised equity investors, it makes sense to "concentrate" their investments. Time horizon of investment plays a crucial role in this game. It is quite difficult to predict stock performance over short periods of time, as short term performance is driven to a large extent by sentiments. But if you have a long enough horizon though, the odds of the skilled concentrated investor become vastly better. Because the long-term performance of stocks is driven largely by fundamentals alone.

Remember in the short term markets are a voting machine while in the long term they are a weighing machine! Essentially, if you are skilled enough to be able to pick and choose businesses which will do very well over the next five to 10 years, then and only then you should concentrate your investments by picking and choosing those businesses within this set which you can buy enough quantity at a fair price. Invest in a few stocks, invest for the long term! That is the mantra for us.

Becoming better business analysts is the underlying skill set , which we need to continue honing. I can not over-emphasise the importance of this skill. This is practically the holy grail of successful concentrated investing over the long term. You need to be able to separate the prospective successes from the failures from the vast array of companies that the market throws at you, and keep doing this consistently. You will make mistakes in this process, accept them quickly and take corrective action, otherwise you will end up paying a high price.

Remember that the future is a continuum of probable outcomes and the probabilities can change with time. Have great faith in your hypothesis, but only as long as it remains valid. Keep a third eye open for the curve-balls, the past successes which metamorphose into failures in today s dynamic business environment. Hone your ability to judge people s character and competence, especially the business leaders- each more bullish than the other about his future prospect. Concentrated Investing done successfully is tough and hence "it must be done".

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