Multibagger returns for how long? What process? Is it repeatable?

Thousands of stocks have jumped to unjustifiable levels in the last 1-2 years. ‘Experts’ or Social Media buffs come up with 10 new stocks every week or month and take pride in 5-10% price movements. On asking what they see, they confidently answer, “It is a value buy.”

Most ideas are not exactly an outcome of a process. All that goes in is 10 minutes of financial statement analysis, that’s it. No management analysis or reading annual reports or history of business/industry. Lately, the new fantasy is to track some ‘renowned’ investors and follow him into some small cap company. Everyone seems to believe that this will generate great returns for them. They buy it for a month or so, retweet every news related to recommended stocks and when the stock crashes, they simply claim they exited the stock long back! Classic pump and dump tactic. So much for long term investing? Maybe we should classify it as gambling.

We wonder how one can find so many ideas every week or month. What they identifying seems like quick trades to hop in and out. A few claim to have the ability to bag multibagger returns. Note that most of those returns were generated in bullish market sentiment over the last 1-2 years. Whether it was a skill or luck can’t be determined over 1-2 years. What will happen to those returns when the market turns and crashes 15%?

We really need to ask ourselves do we want to generate good returns just for a short span of 2-3 years? Won’t compounding over 10-15 years generate significant wealth? We have to remember compounding generates the bulk of these returns. Since we have to be invested over long periods of time, we need to stick to a process. We may pick up any of the processes say value investing, momentum investing or growth investing. But we definitely have to keep doing it across market cycles. We don’t have to move out of it exactly at the time it will start working. The investment success of the greatest investors is the outcome of a particular process they were following throughout their investment career. They stuck to it despite underperformance because they were certain it would work eventually.

Few investors have discussed their processes in media/books like Ray Dalio, Warren Buffett, etc. Others like George Soros, etc. haven’t been explicit but do acknowledge that they follow a process and stick to it.

Many investors/advisors often can’t control behavior and tweak their process to accommodate all those fancy stocks in their portfolio. They will justify saying that growth justifies X price multiple and the stock deserves to be in the portfolio. What essentially they are doing is pleasing customers/self that they have all the winners in their portfolio. This has been observed across most mutual funds/PMS as well.

We do not believe in fantasy and don’t get influenced by the market. We take an unbiased view of any stock under analysis. We are experts in value investing philosophy and we are certain if we stick to process, it will definitely generate wealth. We won’t get rich overnight but over a long period, we will reach our financial goal. There is no award for reaching the goal early, especially if you’re taking a high risk. If we are reaching our goal by taking the lowest possible risk we are doing it right. No one can take away our goal from us.

We won’t forcefully buy Page Industries or Eicher Motors or Relaxo or Bajaj Finance if they don’t have any margin of safety at the time of purchase. The future is always uncertain and we ought to go wrong someday. The margin of safety saves us from losses in the portfolio to a great extent. The rest of the risk is diversified by holding 15-18 stocks. That’s our process and we stick to it. We have had periods of average performance for some months as the market had run up and we were holding on to liquid funds. But we come back strongly when markets correct and buy into great companies at bargain prices. Eventually, we make much more returns than the market over 5-7 years. We shouldn’t forget the market will always be like a pendulum, it will always swing from one extreme to the other.

Investing is simply about following a proven process and maintain discipline. Let's not seek excitement in investing.

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." -Paul Samuelson

"You're dealing with a lot of silly people in the marketplace; it's like a great big casino and everyone else is boozing. If you can stick with Pepsi, you should be O.K." - Warren Buffett