Something caught my attention while reviewing the monthly factsheets of PPFAS Flexi Cap Fund. The fund had substantially reduced exposure to a stock that was once a top holding – Persistent Systems. The company and the stock are doing well. So, why would the fund exit partially? That led me to delve deeper. This post is the end result of those observations. This is neither fund nor a stock recommendation for or against. We will not look at price charts, discuss stock valuations or anything as such. Instead, we will look at it from the vantage point of a value investor and try to learn a lesson or two. This is a chart depicting journey of the stock in the fund:

Notice in first few months, the % holding fell. It was not because the fund sold the stock. But the price fell about 25%. Such steep corrections will test the mental makeup of any investor. And any investor who had faced such situation will vouch that this is not pleasant experience. The peak holding was in Dec’20 and from then on, the fund started to offload little stake. Also notice, value in Jul’21 was much higher even though % holding had come down. Final point to note, in Sep’21 while holding is half of what it was in Dec’20, the value is higher than what it was in Dec’20.

In investing, it is possible that one gets rewarded even while investment decisions (or execution) were not correct. Similarly, one can also get punished even though the decision (or the execution) was correct. This does not happen in any other field – say engineering, sports, medicine, or architecture. In everyday life, faulty input leads to faulty output. But only in investing, this equation does not work sometimes. Hence, we say process is more important than outcome. Especially in investing. So, what has this got to do with Persistent Systems? I say everything. The ability to stick to conviction when stock fell 25% in initial months. Similarly, the ability to exit when valuations reach (or exceed) thresholds. And everything in between. That is where it gets even more interesting. Let us see that “in between” bit in detail.

Since we don’t know at what price a fund buys or sells securities, we cannot compute the average price. But we can do a thought experiment. Consider a hypothetical scenario where we assume they have two set of brokers. A very ‘bad broker’ and a very ‘good broker’. The bad broker always buys at the highest price in the month. And while selling, they sell at the lowest price in that month. The good broker is the opposite – buys at the lowest price in the month and sells at the highest price in the month. Using these hypothetical values, we could get two values – worst-case and best-case prices. This is how the journey of the stock would look like:

The actual prices and values will be somewhere between dotted and solid lines. Gain/Loss is difference between investment and month end closing value (marked to market).

The stock price went parabolic in 2021. So let us remove the 9 months of 2021 and look at it again (zoom in the dotted rectangle):

We immediately notice two things:

• The investment did not gain (or lose) much for more than half the time, from Nov’14 till about Jun’20. The investment value just remained flat (the green line).
• Inspite of non-performance (this is subjective), the fund gradually bought more of the stock. This becomes very apparent from 2019 till second half of 2020.

These two tell a lot about the mental makeup of the fund managers. Seeing a 5% allocation go nowhere for 5+ years and still believing in it is no mean feat. Not many experienced fund managers out there can do it. For various reasons. Although every AMC beats the trumpet of “long term investing”, few actually practice it themselves. I have written posts; you can read it here and here. PPFAS has always emphasized that they believe and follow value investing. And their actions proved they follow what they preach, time and again. And even in institutional space, there are very few fund managers who can do that.

There are many approaches or styles to investing. Value investing is one of them. And not an easy thing to do. And Charlie Munger says it ever so succulently – “it is not supposed to be easy. Anybody who finds it easy is stupid”. In the journey of value investing, one will come across periods of under-performance. It raises innumerable self-doubts and during those down phases, we begin to question the veracity of research. A value investor too will experience the good, bad and ugly. It is the mental makeup and the processes that separate best from the lot. I have taken few liberties while writing this post. I have considered a very specific theme that did well, that too very recently. There will definitely be cases where ideas that did not do well. Where the investment had been exited at a loss. It will always be a mixed bag. But remember, process trumps. Follow the rules and results will follow.