How would it be to have a portfolio like Nick Sleep? The idea to shut your fund down and put all your money, a sizeable hundreds of millions of dollars into just three securities is crazy and scary at the same time. However, if you reverse engineer it and see how it happened, it is one hell of a journey.
So what will it be to hold just three stocks and live with the extreme results it might throw up? How is the process like to think this through? Let’s try and analyse.
If you base your decisions based on outcomes, you may forever be confused as to what led to what. If you think through with the right processes and outcome isn’t to your liking, this doesn’t mean that the decision was wrong. It just meant bad luck. Similarly, if the outcome is great based on pure luck, it doesn’t mean the decision was right.
Put simply- you have to wear seat belt while driving and not overspeed. You may meet with an accident if you were following traffic rules. Also, you may be overspeeding and still reach home safe. This also doesn’t mean you’ll never meet with an accident if you’re speeding away.
Similarly, you may do all your research and the stock is fundamentally sound, you enter at a great price and you think it’s the next multibagger. The company is doing well and everything is set. Howeve, the stock doesn’t move. Now does it mean you made the wrong decision? This happened with a lot of us with ITC/IOC or even NTPC.
Imagine it was March 2020. You had the money and the prices were depressed. Om what basis will you not buy ITC or IOC and buy let’s say Tata Elxi or Alkyl Amine? That the former didn’t move four times doesn’t mean you made a mistake in buying good businesses and if the latter turned out to be multibaggers also didn’t imply that you weren’t plain lucky.
Ofcourse you could say that you already wanted to buy Tata Elxi and it was zeroed in to be your top buy candidate and it so happened that you got a March 2020 price and made a killing. This is different from just chasing momentum, which most people do in life. You can’t say that until February 2020, metals were a lousy businesses but all of a sudden you realised that in the midst of a global pandemic, we’ll have a commodity upcycle which will propel Tata Steel and JSW and Hindalco to lifetime highs. Unless you already were ready to buy Tata Steel on the way down from 500 to 250, you couldn’t have played the upswing. And nobody but God could’ve predicted that Tata Steel would move 6x from 250 to 1500 in less than a year with decade high steel prices. It’s impossible to make such decisions.
Ofcourse, forget the experts who have to copy market moves and buy everything which goes up and try to justify it’s existence ij their portfolio on TV. I remember not one would recommend Tata Steel at 300 or TaMo at 80 while almost all predicting they’re going down further. Unless you were always looking to buy them based on your own study, you’ll keep buying and selling random stuff and that’s not makes money on longer term basis.
This is where research comes in. You’ve to keep reading about companies before buying and see if they fit in the criteria you’re looking for in a stock. As the price go your way, you should be willing to take an entry without making a prediction it to be a multi bagger on the go. I read a quote recently and it’s apt- Making money during bear markets and crashes is easy. You have to unlearn it as it doesn’t happen often. Unless you learn to keep expectations low and do the hard work, you don’t make money on a sustainable basis.
Having read an extra book, an extra annual report, following an industry closely trying to enter based on fundamental and not momentum in normal times help. And if and when the crash comes, you’ll make a forward looking decision which may not result in the best outcome but which is based on the right process and conviction. I mean if Dhoni had gotten out cheaply, and Yuvraj hit the winning six, would that mean it was a bad decision to promote himself?
Coming back to Nick Sleep’s portfolio. I can only imagine how much research he must have put in to buy just three stocks. It’s almost art like to not worry about anything else, Zen like behaviour to not sell even if it’s over 100x and hold and hold with all the intermediate corrections. This is worth a thousand years of investing lesson in one man! Google it, read it .
Life is all about Compounding! 