The danger of a single-stock spiel
Why I never discuss individual businesses, especially ones that we own.
I had explicitly stated that I will not ‘talk my book’ in my essays. I have stuck to that promise, not discussing any individual portfolio company or investment thesis. It’s easy to see why a biased view, usually peddled with dubious intent, is best avoided. But there’s more to it.
I write about a way of thinking about investing, a process. Any investment process works in a fuzzy sort of way, across an entire portfolio, that too after an interminable wait (assuming it works at all). In a specific investment, over timelines relevant to most investors, process may not work at all. It is not even intended to. I have no idea how a specific stock will fare or if that decision is right or wrong. All I know is that it is true to my process. In a given stock, at a point of time, anything can happen.
Don’t get me wrong. I’m not abandoning responsibility for what I write. Biased as I am, I believe that my process works. Some of you may have that impression too. However, that’s a half-truth. The whole truth is, my process works for me, in my context. For the team that I am a part of. With the structure I operate under. Relative to my objectives and timeframe. On average, across portfolio and over time. However, in specific cases and over shorter durations, things can get very ugly even with a generally sensible process. Let me illustrate.
How many times has a stock that I invested in declined by over 50% from where I bought it at? I can recollect at least 15 instances. There may be a few more that came close. That’s a 50% markdown, roughly 40% of the time. Most of these turned out fine eventually, but it wasn’t fun for a while. I am lucky to be in a context where optical hits can be managed and even taken advantage of. However, I am loath to foster such short-term prospects on others by talking my book.
Stock prices are fickle, but how about fundamentals. I get this plenty wrong too. Over half the time, I erred on a big part of my thesis: industry less nice, company less competent or price less attractive than I thought. Again, eventual damage was limited, because of many levels of safety built into the process. But it also had to do with how I handled something going awry (e.g. being able to distinguish transient problems from irredeemable ones). That’s not easy to convey, as a lot of it is case-specific, dynamic, lived experience. It would be a shame if I shared a rosy picture in public, while sorting out nasty stuff in private. In occasional cases where problems are irredeemable, I may exit. In such cases, my professional obligation to do so efficiently comes ahead of any personal obligation to give you running commentary on the situation. Even if I got everything right, there’s still conflict of interest. When price is right for me, I’d rather be quietly buying. So, I’ll hypocritically talk my book only when price is too high for my liking. You can see why I don’t want these sorts of things on my conscience (yes, investors have one too).
If it’s so dicey, why share at all? Because what I have learnt can be of help, in a general sense. There’s value in a way of thinking about risk that reduces chances of ruin. There is better balance if someone belabors return on capital over growth. There’s utility in sharing an approach that has led to more good than bad. Problem is that this doesn’t hold in every instance. Hence, idea is to translate my experience into food-for-thought, not specific advice or user manual.
My objective is best served if I stay at a higher level of abstraction. I’ll be so global and pretentious that I’ll not cause harm. A few ideas may resonate. At best, a few may incorporate something into their respective processes. At worst, it’s time-pass. Discussing individual companies achieves the opposite effect. No matter how many caveats I place, it morphs into stock advice, given how this sort of thing typically works. If I say great business but overvalued, it sounds like stock could go down. If I don’t comment on valuation, it sounds like a buy recommendation. If I praise something to the sky, it sounds like buy at any price (one of the most dangerous notions in investing). I’d like to avoid this sort of impression, even if it’s inadvertent and to a fraction of readers. That’s why I fall back on Asian Paints or HDFC Bank as illustrations, as everyone knows they are placeholder examples.
Why should I bother when it’s buyer-beware? Because I have to live with myself. Most of the time, stocks are peddled in a manner that is morally equivalent to robbing blind beggars. There is an insane amount of suckering of the gullible through biased, shitty stock advice, explicit and implicit. Innocuous discussions with acquaintances quickly deteriorate into what’s looking good in the market. Investor small-talk involves unsolicited “you should really look at this” advice. Sometimes, buy-side pitches more stocks than sell-side. There’s no good way for an investor to discuss a specific investment without unintended consequences or collateral damage. I may not have great power but it’s best to act with some responsibility.
At the heart of my caution lies a universal truth, underappreciated in times like these. Individual stocks are very risky, irrespective of who else bought it or how strongly they feel about it. No one knows shit. Anything can happen. Every investor gets it wrong. It can get ugly, as has happened to me many times over.
The only way to operate in such an environment is for decisions to be 100% owned by respective investors. Process, decisions and consequences are yours and yours alone. Start from first principles, whatever they are for you. Build independent conviction, using hard evidence. If opinions are an input, seek them from those with industry experience and without agenda. Ignore what other investors are doing or saying, as it’s a terrible input into any investment process. Use others’ research only for business understanding, not as investment advice, that too after discounting for bias, hyperbole and forecasts. Recognize that shit will happen and prepare for it. If it does blow up, focus on how to handle it rather than on whom to blame. A part-time investor who finds this undoable may be better off with index SIP than stock picking.
This is a place where buyer should really beware. Not merely of the stock being bought, but of the basis on which it’s being bought. In stock markets, borrowed conviction is as bad as borrowed money. In a tiny, futile way, I am trying to pass on that message through what I (don’t) do.