»Profit Hunter by Equitymaster

On This Day - 5 MARCH 2019
Ignoring This One Thing Could Be Your Biggest Investing Mistake

Richa Agarwal, Research analyst

A few days ago, I came across the letter from Pabrai investment funds led by Mohnish Pabrai.

Reading that letter, I realised that super investors are not immune to some of the most common investing fallacies.

In case you haven't heard yet, Pabrai Investment Funds reported a significant underperformance across its three portfolios: -22.8%, -35.3% and -41.9%. These funds significantly underperformed the benchmark indices.

To quote Mr Pabrai: "Much of the decline can be attributed to irrational declines in the prices of our two largest holdings, Fiat Chrysler and Rain Industries".

The two stocks crashed 34% and 70% respectively in 2018.

But the issue wasn't bad stock selection.

Fiat Chrysler has gone up more than 5 times in around 6-7 years from his buy price. Rain Industries is up over 3 times since he took the position in 2015.

What became his undoing was over-allocation to these stocks in 2018. In one of the portfolios, both stocks contributed up to 78% of the holdings.

He is still convinced about the prospects of both businesses. He might eventually be proved right.

Mr Pabrai can survive this correction and volatility.

Could you?

Most investor's can't.

And that's where a prudent asset allocation (diversification) - the most underrated aspect of investing - comes into the picture. Unfortunately, most investors realise its importance after the damage is done.

In my recommendations, even for my high conviction buys, I do not recommend subscribers consider investing more than 2%-3% in a single small-cap stock and 10% overall in smallcaps.

So why am I sharing this with you today?

During my interactions with you at the Equitymaster Conference, I realised asset allocation guidelines have been ignored.

And while I made the point clear to those who were present, I want all my readers to give asset allocation the importance it deserves.

In case you are wondering if such diversification/allocation guildlines are good enough to produce market beating returns, let me tell you that Hidden Treasure's internal rate of return of 28.1% (versus 11.3% for Sensex) since inception in Feb 2008 considers equal allocation in each smallcap we have recommended till date.

Not only you could beat the markets with prudent diversification, but also ride out the volatility without losing sleep

And you could thus make the most of the rebound opportunities.

Regards,

Richa Agarwal
Richa Agarwal (Research Analyst)
Editor, Hidden Treasure

PS: Volatility can be your friend. You just have to find the right way to take advantage of it... and that's what we have for you. Click here for 4 stocks that were chosen to profit from the current volatility.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407