Money & Books (7 Jan 2024)

Should you wait for the election results before deciding to invest? & What's the 1 question that gets the best work done?

Happy 2024! I wish you health (without which you won’t really be able to enjoy anything else), wealth (I hope you make money while you sleep so that you can own your time), and happiness (surround yourself with positive people; my wife has been a source of daily joy for me).

THE STORY OF MR. GIFTED AND MR. MORTAL

Assume we have two investors – both of whom invest Rs. 1 crore annually in shares of Asian Paints from their annual savings. The first investor is Mr. Gifted. He is skilled at timing share prices. Each year, he buys Rs 1 crore worth of Asian Paints shares at the lowest price point of that year. The second investor is Mr. Mortal. He believes he cannot time share price movements, and hence he buys Rs 1 crore worth of Asian Paints shares on the 1st January of each year, regardless of the prevailing share price.

Mr. Gifted and Mr. Mortal start investing in Asian Paints from 2008 onwards.

In their first year of investing, Mr. Mortal invests Rs 1 crore in Asian Paints at Rs 113.6 per share on 1st January 2008. However, Mr. Gifted uses his skills, waits for Asian Paints’ share price to fall to its lowest level for the year – Rs 85.3 per share on 15th December 2008 – and hence invests his Rs 1 crore at a 25% lower share price vs Mr. Gifted, on their 2008 investment.

Something similar transpires in the second year of investing – Mr. Mortal invests Rs 1 crore in Asian Paints at Rs 88.8 per share on 1st January 2009. However, Mr. Gifted uses his skills, waits for Asian Paints’ share price to fall to its lowest level for the year – Rs 71.0 per share on 12th March 2009 – and hence invests his Rs 1 crore at a 20% lower share price vs Mr. Gifted, on their 2009 investment.

The two investors follow this process annually for the next 10 years. At the end of 10 years, on 31st December 2017, the two investors compare their portfolio values and XIRR (annualised rate of return).

Mr. Gifted’s portfolio is worth Rs 55.5 crores, an XIRR of 30.0%!

Mr. Mortal’s portfolio is worth Rs 47.3 crores, an XIRR of 27.2%!

If we consider investing in the Sensex (instead of Asian Paints) over any 10 year time period after 1991, the outcome would not have been dissimilar. Mr. Mortal’s 10 year portfolio value would have been 80-90% (average of 82%) of Mr. Gifted’s portfolio value.

If we increase the time frame of investment of each portfolio from 10 years to 20 years for any year after 1991, the outcome would still be the same! Mr. Mortal’s 20 year portfolio value would have been on average 82% of Mr. Gifted’s portfolio value if invested in Sensex, and an average of 84% if invested in Asian Paints.

The simple reason why Mr. Mortal isn’t too far behind Mr. Gifted in all these portfolio iterations discussed above is that Earnings drive 80-90% (if not higher) of the stock returns generated over the long run. As a result, provided the underlying asset (company or an index) delivers a modest or healthy earnings growth, it does not matter whether the entry point of one investor was 20% higher or lower than another investor.

The philosophy to follow is to invest in companies whose earnings will compound consistently at 20-25% over long periods of time. If you hold such companies, you can just sit-on-your-ass and wait. The prices will match the underlying fundamentals is you broaden your time horizons.

Marcellus decides which companies I own through my investments. I trust them to make these decisions for me. They spend all their efforts trying to understand and build high conviction on a company’s fundamental strengths so that I can 5x my money in 10 years.

*These stories and ideas are from Marcellus Investment Managers: Quantifying the Futility of Timing the Market

---

"IS THIS YOUR BEST WORK?"

This story comes from the world of politics.

A staffer had drafted a memo and left it on Kissinger’s desk for him to read. A while later Kissinger approached him and asked if it was his best work. The staffer said no and rewrote the entire memo. The next day the staffer ran into Kissinger again and asked what he thought. Kissinger asked him again if this was the best he could do. The staffer took the memo and rewrote it yet again. The next morning the same scenario played out, only this time the poor staffer stated that yes indeed it was his best work. Kissinger replied, “Okay, now I’ll read it.”

Shane Parrish followed Kissinger's example: “I simply replied to the email with “Is this your best work?” The fellow responded no, asked for a few days to clarify his thinking, and came back with a version he thought was dramatically improved. Without opening the document, I shot back the same thing. He replied, “Yes, this is the best I can do.” I read that version, and it was excellent. Now that I knew what he was capable of and he knew that I knew, I told him I expected that out of him every time. The standard was clear. I was never disappointed.”

You can also turn the question on yourself and ask "Is this your best work?" You know what you are capable of so the answer will come back right away.

*These stories and ideas are from the book Clear Thinking by Shane Parrish

Harsh Batra
LinkedIn & Instagram

I build businesses (EthosData, Happy Ratio), help investors 5x in 10 years with 1 proven strategy (Marcellus), and email what I learn every Sunday (sign up here).