Average Up!

In the midst of the bull market which we are in, it’s time for me to share some new insights which I have gained recently. This mostly is a mix from the last two books which I have read- Richer, Wiser, Happier and Masterclass with SuperInvestors.

If you study the successful investors across market cycles, there are certain similarities they all share. One, within the first five-seven years of their career, they rode a couple of stocks which went all the way up 10-50-100x and become financially independent. Rakesh Jhunjhunwala had Sesa Goa and Madhu Dandavate budget while Ramesh Damani had Infosys and Radhakishan Damani held HDFC Bank at 40rs! Secondly, once they identified a stock and the price went up, they increased their holdings at periodic intervals to multiply the eventual gains which created enormous wealth for them. And third, they held these stocks through thick and thin and didn’t panic their way out at the worst instance. Let’s look at it closely.

We have talked about multiple mistakes people do to lose money. This blog is dedicated to discern mistakes which Investors do when they’re in the money, i.e.when their stocks go up. There are three types of investors. At the bottom of pyramid is typical retail- they sell half their shares when it doubles and say I have recovered my cost and the rest of the stocks are for free. I won’t care even if it goes to zero. Well, this is the dumbest thing one does in the markets while making money.

There is a deep concept which few of us understand. This is, color of the money is same. What it means is that every penny in your bank account has equal purchasing power. Money doesn’t care whether you have won it in a lottery, or your mother gave it for your birthday or you’ve worked hard to get it as a salary. This is a Eureka moment once you realise what difference it makes to the way you think of money. So the shares which you think are worth zero are actually potential capital for you to invest somewhere else and compound it even further.

I’ll give you an example. I bought NALCO at average of 40 and sold it on the way up at an average of close to 72-75. Now my friends also did the same but he sold half his shares at close to 80 and is holding the remaining half saying it’s for free. I reinvested the money in ISEC and BSE and that money is up 50-60%. This means I have sold NALCO effectively at close to 120 as the 75 has also gone up 60%. This is the magic of consistent compounding.Today NALCO is at 88. So my rate of return has moved higher significantly.

Luckily for my friend, nalco has also gone up. Imagine the pain when he could have sold it for 85 but didn’t and now the price is 50 and he can’t sell! This is a classic case of destroying compounding.

The second type of investors are those who buy low and ride all the way up while basking in glory as their stock has turned multibagger. They gain lots of praise from friends, broker and colleagues. However, as they are too attached to their low buying price, they don’t add anymore and hold insignificant quantities and thus, don’t generate the wealth which was for them to take. Let’s take an example. You bought 100 BSE at 500 and it’s now 1200. You’ve turned 50k into 1.2l. congratulations. However, your absolute gain is only 70k. Now imagine you added on the way up and have 500 shares at and average of 800. So you turned 4l into 6l. Your absolute gain is 2l. Now let’s say you hold 1000shares at average of 900. Even then, your 9l has become 12l and your absolute wealth is higher! This is the key to riches. It doesn’t matter what you make in percentage terms, what matters is the absolute money you’ve made.

Look at RJ. He bought 1cr Tata Motors last year when the price was close to 120. He also bought 27.5lakh shares in this year March quarter when the price was close to 325. So even if his average has gone up, the real money he has made has also gone up significantly.

Third kind of investors are the genius ones. They hold stocks which they believe are worth much more than the price they’re paying now, add all the way up and aren’t rattled with a 40-60% price cut. RJ must have held Titan through multilple 70% price drops in the 23 years he has held the stock. This also means now his holding in Titan itself is worth over $ 1Billion. This is the magic of long term compounding.

So identify the mistakes you have been making and correct them in time. Otherwise, you’ll remain where you are and see other people getting rich!