The skill of an adviser and that of an investor is being able to ignore the short term underperformance of a company or a fund. Let us take 2 examples – Coromandel International in stocks, and Hdfc Equity fund in fund performance.

When monsoons are bad or there is a talk of government abolishing fertilizer subsidy (they do it regularly, do they not?) Coro takes a dip. It is a time when it is tempting to pull ALL MONEY OUT of Coro and believing that after all a commodity business is not really profitable. However, if one were to yield to that temptation, I would have missed out the best 2 years of Coro fert – in absolute and relative terms. So if you have say 30000 shares, sell 5000 and if it falls further sell another 5000. Stay on in the balance – SIMPLY BECAUSE THE COMPANY IS GOOD and is continuing to do well. Thus even if I had yielded to temptation I would still have 20000 shares.

Same holds true for Icici Pru Discovery, Hdfc Equity, etc. These are good fund managers who know what to do in the market. If for 2% p.a. I can get S Naren and Prashant Jain to give me market beating returns, is there a need for me to second guess them on a quarterly basis? In case I feel very strongly that I Pru Discovery is taking a wrong stand (and I am convinced that Naren is wrong) I should sell only say 5000 units and not the whole 30000 units. I do not need to.

Trying to be in the market or completely out of the market is dangerous, given our personal prediction records. I am not just bad, I am terrible. I do it for fun, and do not believe it myself. If I had written down all my predictions (even worse, with reasons) I could have easily written my 4th book – and it would have been listed in humor, not capital markets. Since I know my ability to predict does not exist, I keep seeing what these fund managers are doing. When Anand Radhakrishnan filled his Franklin India bluechip with Psu stocks – I looked at it as a contrarian bet. Personally I do not have much psu, so I was happy that AR is buying PSU stocks. He soon corrected course. Recently Icici Pru Discovery shifted from mid cap to large cap – I guess ‘he saw value in LC rather than in MC’. Similarly Prashant Jain moves a little ahead of the market – and in those periods he looks like a laggard. Suits me. I would never wanted to stock myself with sbi, infosys, and icici bank. To me that again looked like a contrarian and I was willing to live with that.

Even worse are people with pathetic to poor equity knowledge/ skills trying to play a game of “putting all the money into the market” and “pulling out all the money from the market”. Such a game is not worth playing. Imagine 2003. You invested when the sensex was say 2500. Soon the market went to 6000. You EXITED FULLY. Well, you would never have got a chance to buy the markets at 6000 sensex level again. Never. INVESTING IS about ignoring the short term noise while the long term factors are creating wealth for you.

Investing, is NOT GAMBLING. It is exactly the opposite. If you allocate your assets to shares, debt, real estate, commodity, etc. for the long-term your returns will be positive as long as the country in which you have invested is growing at a decent pace. After all, the markets are a slave to EPS and PE ratios!  So, the smart investor aka asset allocator should always be holding shares and thus be exposed to equity and debt as much as possible knowing that the weighted average multi year return is a nice REAL positive number!  After all cash as an asset class (which means you are either sold out completely, or waiting to invest) is the worst possible long-term asset allocation! Cash as an investment is a guaranteed negative real return.

The smart thing, of course, as the Bible says “know thyself” – risk profile, behavioral tendencies, family background, job stability, spousal earnings, etc.  well enough. You then build your asset allocation that make sure that you can stay invested in equity and debt for as long as possible. Cash has no role in a long term portfolio – except of course as an emergency requirement.

Should I be ‘all In’ or ‘all out’ is a GAMBLING question, not an INVESTING question.