While running 10km this Sunday, I realized that there are a lot of parallels between investing for long-time horizons and running long distances. If you have ever run more than 5 km at a stretch, you would have realized that running long distances is more of a mind game than a physical game. After running for some distance at one go, your body will want to give up but it is your mind which will eventually decide whether you want to continue running or take a break. You will suddenly realize that legs and hands movement is in an auto cruise mode once you have convinced your mind. Similar is the case with investing. If you invest in a good quality company, there will be some time periods in between where you will feel that valuations have run out of the band that you had imagined for that company and your mind will tell you to exit and re-enter the company later. It is at this stage that you need to convince your mind to go for the long run and ignore short term volatilities. Suddenly you will find that your returns and behaviour both will be in an auto cruise mode.
When you are running marathons, it is important to take pit stops and hydrate yourself well. If you don’t take enough liquids both before the race as well as during the race, there are high chances that you will face cramps in your limbs, especially your calf. Similar is the case with investing. Sometimes it is important to take pit stops and re-evaluate your thesis about the companies you have invested in. I am not a fan of constantly re-evaluating the investments but once in a quarter is a good frequency to have. If you don’t re-evaluate your investments at a regular interval, there are high chances that either you will hold on to the companies for longer than you should have or miss out on some good opportunities that are available in the market.
If you are running a half marathon or a full marathon, you will agree that it is not only about the day on which you are going to run but the preparation that goes into it six weeks before the race. You need to practice at least twice a week for at least 6 weeks on the go before the race to be able to successfully complete the race. It is not only about the practice but also about the nutrition intake that you take 48 hours before for the race. Your diet would typically include a lot more carbohydrates in the lead up and you need to drink a lot of water the night before the race so that you don’t dehydrate yourself at the time of running. Similar is the case with investing. You need to prepare really well for any investment that you are about to make. The preparation begins much before you actually hit the ‘buy’ or ‘sell’ button. You need to build a lot of conviction in the management quality of the company that you are evaluating along with other business characteristics like market size, market share, pricing power, regulations, competitive advantage, etc. Evaluating all these factors will take a long time and, most of the time, it is not about the work that you do immediately before the action that you take but it is about the experience that you get over a period of time in evaluating companies, tracking companies for long periods of time and assessing whether the managements walks the talk, analyse business cycles, be it either the finished product business cycle or the raw material business cycle since both will impact the company’s margins.
While running long distances, it is very important to not compete with anyone else running along with you but compete with your own mind and body. The moment you start looking at other runners and feel that the other runner is running really fast and you have a long way to catch up, you will start running faster than what your body permits and will eventually break your rhythm. Similar is the case with investing. You need to avoid ‘herd mentality’ and concentrate on your pace rather than getting distracted and look at what other investors around you are able to generate in terms of returns. The moment you start chasing returns and compete with other people, you go out of your circle of competence and start making mistakes. Warren Buffett familiarized this term “circle of competence” back in 1996 through his shareholder’s letter. You don’t need to have an opinion on every company that is listed. You need to choose your area of expertise, universe of companies that you can understand and make a judgment on. If you ever want to get out of that circle, then it is important that your bet size is really small and you continuously monitor it over a period of time.
Raj Mehta is co-fund manager at PPFAS Mutual Fund
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Updated: 04 Oct 2023, 09:58 PM IST
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