What's not there matters more than what's there
In the stock selection process, rejecting bad stocks is more important than picking good ones
It's the morning of September 11, 2001, at Boston's Logan International Airport. Unknown to the crowd, there are 19 young Saudi Arabian men who are about to board four separate flights, intending to fly them into landmark buildings in Washington DC and New York City. However, the previous day, the FBI's counter terrorism team managed to connect the dots on the information that they have had for months. Airport security is extra alert and the knives carried by the would be hijackers are detected and confiscated. With nothing resembling a weapon, the 19 abandon their missions. They come out of the airport terminal and head for their apartments. That night, all of them are arrested. The news hardly makes it to the inside pages of newspapers, and TV news ignores it altogether. In the era before social media, hardly anyone in the world gets to hear of it.
If you read the history of the events leading up to 9/11, you'll realise that it may well have happened like this if a lot of obvious clues had not been ignored by American security agencies. The interesting part is that had it happened that way, those who cracked the clues and prevented the hijackings would not have been heroes. No one would have known what a huge global calamity had been prevented and so the arrests would have been just routine, low-key counter-terrorism work. The moral of the story is simple: what is averted rarely catches attention, no matter how critical its occurrence would have been.
No one knows what didn't happen
So what does all this have to do with stock investing? A couple of weeks ago, at an event organised by Aditya Birla Mutual Fund in Mumbai, there were many fascinating speakers, including Subramanian Swamy and hedge fund manager Samir Arora. Till 2004, Arora used to manage Alliance funds in India before they were acquired by Birla Sun Life. He now runs an India focused hedge fund called Helios from Singapore. Arora is widely known to be one of the most feisty perma-bulls on Indian equities, one who is eternally optimistic about the Indian markets, and with good reason.
In his customarily witty and yet thought provoking style, Arora delivered some fundamental truths about the whole business of equity investing. One of the most intriguing things he said was that an investor need not have full conviction about what he invests in. That sounds like a crazy thing to say. Isn't the whole idea behind fundamentally driven investing that of having conviction in what you buy? Not quite, Arora says. Instead, he says, that you need stronger conviction in what you reject and your conviction in what you buy can be weaker.
Arora's point is quite interesting. He says that when you select a stock, you can never be 100 per cent sure that it's worth investing. If you ask 10 questions, then there could be 50 more. Even when you actually buy the stock, you can never be sure. However, the rejects are not like that. Once you detect something wrong, then there are no more questions to be asked and no more answers to be evaluated. You have 100 per cent conviction that this is a stock to avoid.
Investment decisions are like first dates
With his trademark humour, Arora explains, 'After the first date, you may say I don't like her and that is the end of the story. But if you like her, you will do more due diligence on her, which means you don't have conviction on the first date. Nobody says on the first date, I'm marrying her. On the first date, you only say I'm not interested in her. Therefore, we have turned it around. I will show you that there is no end to the conviction that you need in what is good. But in what is bad, one line is enough and that is one big way of reducing the stress, that I must have high conviction. I will never have it in what I buy. I have more conviction in what I don't own and the remainder I have in my portfolio.'
The real job of an investor is that of avoiding disasters. This makes me think of what we really do researching stocks. On the face of it, we select stocks and recommend them. However, when I look at the actual process of selecting stocks that we have, then the real activity is of rejecting stocks. We're like American security agencies in the alternative history that actually did not happen. The hidden job of any Stock Advisor is to reject stocks that look like legitimate passengers but are actually hijackers. And when we do that job well, you may not even realise that we have done so.
Source: Valueresearchonline.com
Happy Investing
In the stock selection process, rejecting bad stocks is more important than picking good ones
It's the morning of September 11, 2001, at Boston's Logan International Airport. Unknown to the crowd, there are 19 young Saudi Arabian men who are about to board four separate flights, intending to fly them into landmark buildings in Washington DC and New York City. However, the previous day, the FBI's counter terrorism team managed to connect the dots on the information that they have had for months. Airport security is extra alert and the knives carried by the would be hijackers are detected and confiscated. With nothing resembling a weapon, the 19 abandon their missions. They come out of the airport terminal and head for their apartments. That night, all of them are arrested. The news hardly makes it to the inside pages of newspapers, and TV news ignores it altogether. In the era before social media, hardly anyone in the world gets to hear of it.
If you read the history of the events leading up to 9/11, you'll realise that it may well have happened like this if a lot of obvious clues had not been ignored by American security agencies. The interesting part is that had it happened that way, those who cracked the clues and prevented the hijackings would not have been heroes. No one would have known what a huge global calamity had been prevented and so the arrests would have been just routine, low-key counter-terrorism work. The moral of the story is simple: what is averted rarely catches attention, no matter how critical its occurrence would have been.
No one knows what didn't happen
So what does all this have to do with stock investing? A couple of weeks ago, at an event organised by Aditya Birla Mutual Fund in Mumbai, there were many fascinating speakers, including Subramanian Swamy and hedge fund manager Samir Arora. Till 2004, Arora used to manage Alliance funds in India before they were acquired by Birla Sun Life. He now runs an India focused hedge fund called Helios from Singapore. Arora is widely known to be one of the most feisty perma-bulls on Indian equities, one who is eternally optimistic about the Indian markets, and with good reason.
In his customarily witty and yet thought provoking style, Arora delivered some fundamental truths about the whole business of equity investing. One of the most intriguing things he said was that an investor need not have full conviction about what he invests in. That sounds like a crazy thing to say. Isn't the whole idea behind fundamentally driven investing that of having conviction in what you buy? Not quite, Arora says. Instead, he says, that you need stronger conviction in what you reject and your conviction in what you buy can be weaker.
Arora's point is quite interesting. He says that when you select a stock, you can never be 100 per cent sure that it's worth investing. If you ask 10 questions, then there could be 50 more. Even when you actually buy the stock, you can never be sure. However, the rejects are not like that. Once you detect something wrong, then there are no more questions to be asked and no more answers to be evaluated. You have 100 per cent conviction that this is a stock to avoid.
Investment decisions are like first dates
With his trademark humour, Arora explains, 'After the first date, you may say I don't like her and that is the end of the story. But if you like her, you will do more due diligence on her, which means you don't have conviction on the first date. Nobody says on the first date, I'm marrying her. On the first date, you only say I'm not interested in her. Therefore, we have turned it around. I will show you that there is no end to the conviction that you need in what is good. But in what is bad, one line is enough and that is one big way of reducing the stress, that I must have high conviction. I will never have it in what I buy. I have more conviction in what I don't own and the remainder I have in my portfolio.'
The real job of an investor is that of avoiding disasters. This makes me think of what we really do researching stocks. On the face of it, we select stocks and recommend them. However, when I look at the actual process of selecting stocks that we have, then the real activity is of rejecting stocks. We're like American security agencies in the alternative history that actually did not happen. The hidden job of any Stock Advisor is to reject stocks that look like legitimate passengers but are actually hijackers. And when we do that job well, you may not even realise that we have done so.
Source: Valueresearchonline.com
Happy Investing
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