Focus Dude, Focus...

Two days back, I cleared some deal of confusion in my mind, and I was trying to find some time to analyze how importance or dangerous is market timing for value investors, but even before I could read and assimilate that topic, a new doubt has emerged, and it's high time I write about it and try to clear it up as well. This came up from here, and the comments from Ajay in that post, and then some discussions at home, and further, Vishal's reply have given some direction to the thoughts.

So, the new doubt is - that I still have a long way to go; I need to read the following:

- Letters from Mr. Warren Buffet
- Mr. Charlie Munger's work on mental models
- Howard Marks's memos to investors
- Security Analysis by father of Value Investing, Mr. Ben Graham
- A few books on behavioral finance and history of market manias and crashes

All this needs a good deal of time, and more importantly, focus, and considering my day job, it's not so easy to get ample time. On top of that, my sizable investments into some "decent" stocks where I've not done detailed analysis and have committed few mistakes while building this portfolio keeps me slightly worried, at least so much that I spend a majority of time that I get on analysis of my portfolio and what should I do about it - forget about it, book profit in stocks that're in positive, cut losses or look for bottom fishing opportunities in stocks that've lost over 40% since I invested in them, thinking they were undervalued, or just liquidate everything and step aside (but slowly move money into mutual funds since I'm convinced I don't want to have too low an exposure in equities at any point in time).

So this time, it's a clear resource problem, more than anything. let us see how to resolve it. First, we write down scenarios, performing a sort of pre-mortem:

A. I spend (or waste) all of my time in analyzing stocks I already hold, and worry since I'm not able to take a clear decision whether to hold or sell them (it's far more difficult to control emotions when you see 50% losses in stocks you did not analyze well enough before buying). Since no actionable outputs emerge from such an analysis, it's definitely a waste of time

B. I analyze my existing portfolio and I'm able to decide on cutting some positions (either because I've strong reasons to believe that the business will deteriorate further in coming months and it'll reflect in the stock prices, or I believe that stock prices are a bit over-priced and there could be pain the medium term, in summary identifying stocks which I don't think can be held for next 5 years). If this can be done, it'd be a useful outcome of time spent. However, this would easily take over 2 months of my time if I can regularly analyze the stocks and underlying businesses, and I'm worried that in these two months, markets may move much lower leading to further losses to my portfolio

C. I spend couple of days, and try to use process of elimination, and find stocks where I've even a small doubt in holding for long term, while writing down my reasons on why I think so. Or, even those stocks where I believe there're strong reasons that they might under-perform for many months to come, even if they might be good bets for long term. Well, this might be a smart thing to do, but it has a risk of going grossly wrong about many points since it's effectively a short-cut. Let's come back to this point in a while.

D. I conclude that I've made few mistakes in picking stocks without detailed analysis, and I'm in general uncomfortable, and I'd better do by moving funds into mutual funds. However, I also weigh the fact that Vishal pointed about Icarus' Deception today, and decide to balance out investments in mutual funds and direct stocks, by remaining invested in the stocks where I feel there's good potential and I've not made a big mistake.

E. I don't do anything, and just decide how to NOT get de-focussed by looking at my stock portfolio, and only focus on reading. However, am I not trying to find just this "method" for so long now? To some extent, Vishal's post and then my introspection helped, but the realization that my analysis in many stocks is not that detailed and the worry about my portfolio being concentrated in sectors which may suffer for many months, possibly couple of years adds to the confusion.

Ok, having written in this post so far, one thought emerges - let me not look at every stock in my portfolio the same way, and rather write down about each of them, while recognizing that what's in profit today may not remain so, and what's down 60% may show a smart bounce back. So here's the list:

Well analyzed Stocks

1. MCX
2. IL&FS

Moderately Analyzed Stocks

3. CARE RATINGS (CARE)
4. AMARA RAJA BATTERIES (ARBL)
5. PIRAMAL ENTERPRISES (PEL)
6. MAZDA LTD (MAZDA)

Not Analyzed So Well

7. BHEL
8. CROMPTON GREAVES (CG)
9. BHARTI AIRTEL (AIRTEL)
10. INFOSYS (INFY)

Now the interesting fact. The deeply analyzed stocks are either under-held (IL&FS), or in large losses (MCX). Then within moderately analyzed stocks, PEL is a side-car investment which may perform contra to the general market and I'm not much worried about this investment, and ARBL is only a negligible percentage of my portfolio. I'm neutral about holding MAZDA, a decent dividend yield being the only attractive reason, and CARE RATINGS is a confusion which I'll talk later about. Finally, the "not so well analyzed" stocks are popular large caps which earlier became out of favour when I picked them (INFY and AIRTEL) and the other two, CG and BHEL which comprise of more than 35% of my portfolio (by cost, but not by price) are reeling under an industry wide pressure (capital goods), which otherwise are decent businesses with a decent management quality.

Let me then eliminate stocks about which I'm not much worried:

a. PEL: A side-car investment, contra to market due to being a pharma company and in the hands of a solid management. However, since my exposure is large, I may consider trimming a bit and take some profits home if I decide to size down.

b. Negligible investments, so not much worry: IL&FS, ARBL

c. MAZDA is something I had been thinking for a while to trim down, so it should be an easy decision.

Now, the tougher ones:

d. INFY and AIRTEL are generating some handsome profits in my portfolio, and based on what I hear, these would keep going up in months and days to come, and while there're problems (and these businesses may again turn negative), there are some good positives that've emerged for both the businesses, and hence I'll be comfortable holding them for long term. The only point is that they're both 10% each in my current portfolio, and I'd find it easier to trim down if I've to sell other shares and trim down my exposure into direct stocks.

e. BHEL and CG, even though they're quite down, I still continue to remain positive about their long term future given the large need for India to grow it's energy infrastructure and tackling power shortage. However, there're challenges in the environment today which may keep this sector under pressure for many more months, and hence it may be prudent to trim exposure to these stocks and return back after a deeper analysis, and there's little risk of not being able to buy them at sufficient margin of safety even after 6 months.

f. CARE and MCX, well, toughest calls since I somehow feel positive about their long term prospects, but there're some short to medium term concerns that may take these stock prices further down, and I may loose as much as 90% of my investment into these two names. Further, both are associated with some form of "financial leverage" which is one big thing which makes me worried these days.

To summarize so far, I'm comfortable in:

1. Maintaining my small investment in ARBL and IL&FS
2. Trimming about 25-30% of my investment in PEL, BHARTI and INFY
3. Trimming down upto 50-60% in MAZDA, BHEL and CG
4. Not yet sure about what to do about CARE and MCX. Possibly buy more after further analysis since I still hold a positive view in the long term about these businesses.

Let's say I do this re-allocation. I bring down my exposure into direct stocks by about 30%, and even then, I'd have about 30% of my overall portfolio invested directly into stocks. Is it a comfortable level? Does it then allow me to not worry about these investments and focus on studying? Let me find that out, again by analyzing probabilities:

Scenario A: Leave portfolio as it is won't work - I've seen that now for last 3-6 months.

Scenario B: Trim down direct equity exposure as described above, and then leave those stocks there, and analyze them as I get time (while maintaining a regular study routine). This sounds more comfortable since it meets both goals - first to reduce exposure and hence risk of a wash-out (I still stand a chance to loose 30% of my portfolio, but that's a low probability event since these are still good quality businesses, maybe I'll lose 20-30% of direct equity portfolio, but not majority of it, and in such a more realistic worst case scenario also, I only loose 10% or lesser of my overall investments in equity, Mutual Funds and Debt); and second that I'm still decently invested in equity in case my worries of having picked wrong stocks by doing an incomplete analysis turns out to be wrong and some of them turn out to be multi-baggers in next 10-15 years. Finally, there's another indirect benefit, that I won't quit value investing, which could be a risk if I sell off all the direct stocks (and rely on good fund managers and not worry about learning some great knowledge about investing)

Scenario C: I say good-bye to all the individual stocks, and focus only on studies. But as I just said, there's a risk that I'll quit completely from value investing and my procrastination may rule and take me away from value investing and learning some great knowledge.

So, Scenario B seems to work the best. Let's now do a pre-mortem as final step - what can kill this plan? Let's see

- I still continue to worry about the remaining 30% of my money invested directly in stocks, and can't focus on studies. This is possible since if I assume I won't lose more than 30% of my equity portfolio over long term as a worst case, today I stand a chance to lose about 15% of my investments, and after this re-allocation, under the assumption that mutual funds won't lose any amount, I'd lose 10%. So the difference is only 5% of my current investments, but that's not a small amount. Let's see...
- I start moving funds from stock sale into mutual funds and then start worrying about mutual funds. Probably unlikely since I'd move funds gradually using SIP and then mutual funds can't lose a major part of capital, unless we're heading into a great depression for next 20 years! Again, a very low probability event.
- I don't worry about stocks, and I don't study also. Well that means I quit value investing anyways, but again a very low probability event given my strong and growing interest.

Phew, so much that I wrote. Let me now go and take rest, read this post 5-10 times again and then sleep over the idea, and finally act once I'm convinced about what I want to do :)

If not anything, it'll give me better clarity about my doubts and problems and a better way to pursue forward.

Wish me best of luck, bye bye :)