Investing requires commitment

How does the Hammock resist the temptation of timing the market? How does it cope with the wild swings in the market? How does it survive disappointing results of some of its constituents? And thus poured in questions from our franchisees during our last meeting with them held in Mumbai.

The franchisees were a distressed lot, what with the market being at its volatile best in recent times. To add to their misery some of Hammock stocks (Zee, Indian Shaving and even Hindustan Lever) have also posted disappointing performance in the market in recent times. Most franchisees have been left doubting the viability of the buy-and-hold philosophy of the Hammock.

 

Pouring oil on troubled waters

We tried our best to pacify them. "A good investment strategy is quite akin to a good relationship. There will be some unpleasant moments, but it will always reward you at the end," we told them. Many seemed to relate to the analogy and nodded their heads in agreement. But still that frown remained on many a forehead.

The past few months have been quite volatile. And the Hammock, for which volatility is a taboo word, has also fallen victim to it. The drop in the Sensex has created a dent in confidence of the investor.

 

That most investors have had a trying time is a fact. Which is why we were not surprised with the barrage of questions thrown at us by our franchisees nor did their attitude -- most were heard murmuring "only if …" unduly bothered us.

"If only I'd sold back when I was up 50%! Now I'm back to breakeven!"

"You are better off, I'm down some 25% of my portfolio, if only …"

"Hey, that's still fine, I'm down and out, lost 60% of my investments! If only …"

Sad. True that the market has been rather unkind of late, but most of our franchisees seemed to over-react to a short-term disappointment. For volatility is nothing but a short-term disappointment.

 

Sticking with your spouse through thick and thin

Taking our "good relationship" analogy further, we told the distressed franchisees that there are times when you have skirmishes with our spouse (lovers' tiff is more like it). You argue and fight and even come to blows. Nothing wrong with that -- both of you are busy souls and get stressed out at times.

You may come to blows over something as small as a meal (a soya bean casserole) that is not to your liking or over something that is not so trivial (your spouse having a luncheon date with his pretty marketing head), but no reason is big enough to call it quits, right? Most franchisees seemed to agree with us again. We took heart and continued.

Similarly with the investing strategy that you follow. You do not give up on a good strategy just because it has failed to perform. While owning an investing strategy you should be aware that there maybe times when it will treat you shabbily. Your favourite stock may get battered in the market due to some unforeseen events. Or maybe some big company (like Hindustan Lever or a Zee or an Indian Shaving) will come out with mediocre performance and your dear stock will tank. Or maybe an analyst will come on your favourite "bull" market channel (read CNBC), saying that the market and your favourite stock are both "overvalued". You shouldn't bother if that causes your stock to hit the lower circuits. Ups and downs are two sides of the same coin -- relationship.

And a good relationship is like a good investment

Just as you would need to work on your marriage every day (with the right partner, you are of course rewarded with a lifetime of happiness), an investor also needs to pamper its investment constantly.

Good investing isn't based on a few good stock picks while the occasional rough patch isn't necessarily an indication of bad investing. Good investing is about cultivating solid financial habits and sticking to them. If you do that, financial gains are bound to follow. The message seemed to get across and our franchisees …

 

Learning from Warren Buffett

At this point we were reminded of the legendary investor Warren Buffett. In the annals of investing, Warren Buffett stands alone and tall. Starting from the scratch, simply by picking stocks, he has amassed a colossal fortune of $12 billion. If one had invested $10,000 in Mr Buffett's stocks when he began in 1956 and stuck with those companies, one would be sitting on nearly $100 million today.

What is remarkable is that Mr Buffet has amassed this fortune not with esoteric techniques that are not understood by the lay investor. But through a blend of calculation, common sense, patience and fundamental analysis that can be easily replicated by the ordinary investor. He bought good businesses at low prices and stuck to them. He bought companies like American Express, Washington Post, Ogilvy & Mather, Gillette, Coke for the long term and his portfolio has grown handsomely year over year. Remember how in 1985 Coca Cola committed the mother of all blunders by changing its formula and bringing out New Coke? The company's market capitalisation fell sharply after that fiasco, but Mr Buffett's faith in the company remained unchanged and the rest is of course history.

 

A few words of advice

Once you own a stock in a great business, hold onto it! Don't worry if the stock market (and with it the stock) drop one month and go up the next month. We are investors who will rough it out, ignoring the vagaries of market cycles. We believe in spending our time watching our companies deliver on promises. We would however not hesitate to pull the trigger if the business fundamentals of any of our companies goes kaput. You will surely see us using the sword then …