Times and again, it has been seen that timing the market is one of the most impossible things to do. Yet, it’s funny how much time and energy investors end up spending on just this.
Trying to time the market or to find a winning stock idea with limited knowledge is probably a waste of time, and something that is bound to backfire. This is primarily why most equity investors get an average experience on their own.
What is it that good portfolio managers do differently than average investors for a more rewarding experience?
Here are five points to keep in mind:
Focused, consistent investment philosophy
There are more than five thousand investible businesses listed on the stock market and various styles of investing to view them, such as value, growth and quality. Good portfolio managers know their circle of competence, which they base their investment philosophy on. A portfolio should be created on the basis of investment philosophy, and not stock tips.
The market as well as the economy go through different phases, but a good portfolio manager sticks to the investment philosophy. This consistency is what differentiates good portfolio managers from individual investors.
Right selection, allocation
Good portfolio managers view a portfolio like a garden where each underlying stock has a purpose in enhancing the overall look and mix of the portfolio on both return and risk fronts. All such stocks ideas that do not complement the portfolio in this context are not added to the portfolio, even if their they are good.
Stock allocation is carried out scientifically, based on the degree of conviction, whereby higher weights are assigned to securities in which conviction increases over time. On the other hand, an average investor’s portfolio construct is an outcome of a variety of ideas and the mix not thoughtful. Many portfolios hold huge number of stocks with no emphasis on the concept of allocations and weights.
Manage emotions rationally
Every day, the stock market is affected by macro data and news flow, which leads to volatility in prices. While the average investor may get impacted by these and bring in regular changes in the portfolio, good portfolio managers treat all of this as noise and stay focused on critical aspects pertaining to the underlying businesses that are part of their investible universe.
Good portfolio managers follow micro data points pertaining to business revenue growth, earnings growth, cash flow growth and valuations, and make rational decisions accordingly.
Constant learning, evaluation, accepting of mistakes
The aim of a good portfolio manager is to generate competitive returns, which requires constant learning and evaluation of a portfolio. There is always a bias in the human mind favouring the businesses held in a portfolio. However, as it goes through a reality check, there is a need to challenge bias and follow data. This is one of the most challenging aspects of portfolio management.
According to good portfolio managers, a stock must always comply with the investment philosophy framework. The moment it is realised that a stock is slipping outside of the framework, it must be exited.
Good portfolio managers accept mistakes early on. This is why they may choose to exit some stocks in a loss and, on the other hand, hold a profitable one despite a steep rise in its price. Most investors end up doing the opposite.
Ability to hold businesses for a very long term
The aspect that makes the biggest difference is the ability to keep conviction and hold on to a business despite multiple increases in its stock price over years. Good portfolio managers view the underlying business strategically from the lens of its promotor and not a trader. Good portfolio managers are visionary investors who understand the big picture of how the business is creating a new market, or increasing its market share or earnings with a rise in demand.
Average investors, instead, take decisions based on price movements from a tactical viewpoint.
Striking a balance between risk and return, and steering the portfolio for alpha generation is both a science as well as art.
--Kamal Manocha is Founder and CEO of PMS AIF World. The views expressed in this article are his own.
First Published: IST