When I was studying in College in Mumbai, I heard a saying from my friends about BEST buses.
“You should never run behind a bus because if you miss one, there’s always the next one coming in few minutes.”
And it was quite true because I don’t remember waiting at any bus stop for more than 15-20 minutes ever in Mumbai for whatever period I stayed there.
It’s funny that later I found the same analogy being used in the context of stock market. Occasionally, I visit few online stock discussion forums, not for fishing new ideas but just to see what’s keeping people busy these days.
In one such forum an investor argued, “If my stock seems overpriced, I sell it even if it’s a good business to own. I’ll buy it again when it comes down.”
“What if it doesn’t come down?” someone countered.
“Well, then I’ll buy something else,” the first guy reasoned. “There’s always the next stock to buy in the share market. Isn’t it?”
Now, that reminded me of Mumbai’s BEST buses. I thought of naming it the “Mumbai BEST Effect”. Don’t worry, it’s not really an official psychological bias. But just for the fun of it, I coined the term.
Unfortunately, good stocks are NOT like these buses. Unlike buses and trains, that have a fixed schedule of arrival and departure, opportunities in the share market don’t come at such regular intervals.
However, what does come frequently and quite regularly is the stock recommendation from self-proclaimed stock gurus and other talking heads on financial media. They want the new investor to believe that share market is brimming with multi-bagger stock ideas.
Why wouldn’t they? The incessant buying and selling activity is what generates revenue for them. Their intention is always to make their clients dance in and out of the market. And they are master choreographers.
It takes more than reading the newspaper and staying abreast with latest developments in markets. The reality is that quality businesses aren’t very easy to come by at attractive prices.
In my personal portfolio, the stock that has given me the best return so far is the one I have held for the longest (4+ years now). And a majority of those returns have come in last 15 months. Since the current price is almost 3X my average purchase price, I have to constantly fight the urge to sell it. What helps in this fight is the realization that ideas like this don’t zip by like buses. That thought strengthens my resolve to stay invested for long term.
It’s a delusion that one can accumulate wealth by getting down from compounding-bus every now and then. Because compounding is always back-loaded. The returns in value investing are usually non-linear.
In other words, for 80-90 percent of your holding period, the price doesn’t change much but it’s that window of 10-15 percent that captures all the price movement. When that window will occur is very difficult to predict. Since you don’t want to be outside the compounding bus when that price movement happens, changing buses frequently is a loser’s game.
But how can one control this urge to change buses frequently?
If you have sound reasoning, it goes a long way in resisting such urges. Rationality is the best scalpel to slice away the emotions from investing. So one mental framework to think rationally is to follow Benjamin Graham’s advice. In his investment classic, The Intelligent Investor, Graham wrote…
Investment is most intelligent when it is most businesslike.
Treat your investment as a real business rather than just another row in your online portfolio tracker. Buffett simplified the idea further when he said…
I am a better investor because I am a businessman, and I am a better businessman because I am an investor.
In this context, since we’re already on the subject of comparing buses with stocks, an important distinction to understand is the one between ownership mentality versus renting mentality. When you buy a bus ticket you’re basically renting the bus. As long as the bus is moving forward (like a rising stock price) you would be least bothered about its condition.
However, when you buy a stock as an investor, you agree to own the business, partially, though. And an owner doesn’t abandon his asset at the drop of a hat. Neither does a businessman change his business every month, especially when the current business is spitting out cash.
Baseline information suggests that 92% of businesses fail before they reach age three. So if you have found a business that’s earning well and generating good returns on your investment, don’t abandon it prematurely. Don’t fall for the “Mumbai BEST effect”. Because if you do, you may miss this bus…a bus called long-term compounding.
On the other hand, if you realize that you have boarded the wrong bus – bad business – get down as soon as possible before you are taken in the reverse direction from your wealth creation goals. As per Peter Lynch’s thought process, you just need 6-7 buses moving in the right direction to take you towards your goals, plus you need to ensure that the remaining 3-4 wrong buses don’t take you too far back.