The more I learn about investing, the better I am at identifying my own mistakes, why I made them and how I can avoid a repeat moving forward. I am sharing them with you in the hope that you can sidestep them.
A mistake I am ashamed of.
In April 2020, the trustees of Franklin Templeton Mutual Fund decided to wind up six debt schemes. The explanation given was that the market had become illiquid due to the severe impact of COVID-19.
I remember my heart sinking for numerous reasons.
One, I was invested in one of the designated funds - Franklin India Short Term Income Plan.
Second, my trepidation at the state of the economy as the pandemic led to a global crisis of unprecedented reach and proportion.. Stock markets across the globe witnessed precipitous falls. Was this just the start of a financial apocalypse?
Third, I had taken a very laidback view of my investments. I ignored the credit bets made by Franklin Templeton and kept assuring myself that the fund manager knew exactly what he was doing. Being a seasoned player, I figured that there was no way he would be caught on the back foot.
I pulled out my money from Franklin India Liquid - Super Institutional Plan, ICICI Prudential All Seasons Bond Fund and HDFC Corporate Bond Fund. My reasoning being that if this happened to one fund house, how could I be sure of the others? I could not bear a loss on my debt funds; this was the “safe portion” of my portfolio. And all these funds held a substantial amount.
In retrospect, I am ashamed of the way I overreacted.
- What was my mistake: I should not have exited from ICICI Prudential All Seasons Bond Fund and HDFC Corporate Bond Fund. Both delivered well.
- Do I regret it? Yes, I do.
- What is the lesson that I learnt? a) Don’t make a move in panic. Take a step back and listen to reason. b) When allocating money to debt, stick to safe bets. If you want to take a tactical bet with your debt portfolio, make sure it is money that won’t get you into a tizzy.
Let your winners run.
When the market tanked abysmally in mid-March 2020, I put a huge amount in PGIM Jennison Global Opportunities. I did so with the intention of holding on for many, many years. The news was bleak as the world was witnessing a healthcare and economic crisis unlike anything we had ever witnessed. Stock market bulls were running for cover.
The rebound took my breath away. Within six months I was looking at an eye-popping absolute return of 72%.
My options were:
- Sell the entire investment.
- Leave the investment as it is.
- Pull out only the gain.
- Sell in stages. If the market goes up, continue to sell at a higher rate. If it dips, I anyway booked some profit.
- Check the asset allocation and sell based on how much of my equity portfolio should be in global stocks.
I went for the first option. So, what made me sell?
I would not sell an equity investment if the market tanked. I would refrain from converting a paper loss into a reality. But I reasoned that it would be foolhardy to not convert a phenomenal profit into an actual one. Deep down, I honestly believed this was just good old-fashion dumb luck and could not envisage such a winning streak again. I was wary about the impact of the U.S. election on the market. I felt most comfortable with my decision to exit, though it was not necessarily the best.
- What was my mistake? I sold too soon.
- Do I regret it? No, because I made a tidy profit.
- What is the lesson that I learnt? a) Often in a raging bull market, you will leave some money on the table. It is ok. Such is life. b) I was completely unperturbed in my reaction to the equity crash but panicked at my debt portfolio. This was a very telling sign about my behaviour and how I view each asset class.
The big fat exit strategy.
Very early 2018, I took a tactical bet in SBI Pharma Fund (that was later renamed to SBI Healthcare Opportunities Fund). I had no idea when the sector would pick up, but I was in no hurry. I put in a lumpsum and ignored.
It has done really well. But now I am not sure if it is time to exit. An acquaintance told me to exit, another told me to reduce my allocation to pharma and practice asset allocation. I have done neither, and I don’t think that is very smart.
- What was my mistake? I have no exit strategy for my pharma fund.
- Do I regret it? Not really. But it has led to unnecessary confusion.
- What is the lesson that I learnt? a) Investing with a goal (in terms of a time frame) is very easy when one does so in a regular equity mutual fund. b) When it comes to a sector or a thematic bet, the time frame does not really work. You have to get in at a low and plan your exit when the rally takes place. c) Always have a sell thesis next to the buy thesis. Or at least a price target. Be decisive when that is met.
I wish I was more hands-on.
One of the very first stocks I bought was 3M. The stock never delivered when it came to dividends, and that was fine by me. It was capital appreciation that was my goal, not cash flow. It never disappointed. My unrealised profit is over 2000% in absolute returns.
3M is an old company and thrives on innovation. The famous Post-It was created in 1980, and was offered in multiple colours in 1985. Before many other companies, it got its first website in 1995. In 1996, the company's data storage and imaging divisions were spun off as Imation Corporation.
Though the company spends phenomenal amounts on R&D, it has not been concretely backed up by demonstrable improvement in pricing power. A discussion in 2019 with an investor disheartened me even more. I was told that the stock just does not justify its PE, despite having a good brand and decent pricing power. And besides PE, sustainable earning growth and ROCE was something that had to be considered.
It was sheer laziness that I never added to my portfolio. And now I don’t know if it is worth adding to the position, or time to sell. I don’t need the money, so will keep holding.
- What was my mistake? I started with a small allocation in my portfolio and failed to increase this winner. I should have continuously accumulated 3M.
- Do I regret it? Yes, I regret it a LOT.
- What is the lesson that I learnt? When you have a good stock, don’t be afraid to tank up, even if the price keeps edging higher.
The PSU struggle.
The day I bought 3M was also the day I picked SBI and ONGC. I sold SBI and still hold on to ONGC. In retrospect, it would have been wise to hold on to SBI and sell ONGC.
- Do I regret selling SBI? No. I wanted to clear my portfolio of PSUs and I made a profit.
- Do I regret holding on to ONGC? Yes. I should have sold when it was on a roll.
- What is the lesson that I learnt? If I am not willing to put in the hard work to maintain an equity portfolio, it is best that I stick to mutual funds. And that is what I do now with fresh investments.
I have left my stock portfolio untouched, but all fresh investments are only in equity mutual funds.
This is important: None of the stocks or funds mentioned are either buy or sell or hold recommendations. This is purely my personal experience, shared for informational and educational purposes.
Larissa Fernand is Senior Editor at Morningstar India. You can follow her on Twitter.