Why Fund Managers Make Mistakes: Lessons from Marcellus Saurabh Mukherjea

Introduction

Marcellus – In various professions such as dentistry or plumbing, the value added by professionals compared to laymen is evident. However, in the world of investing, this is not always the case. Saurabh Mukherjea, a renowned fund manager in India, has been invited by numerous news channels and has written popular books on investing. Despite his expertise, his fund Marcellus has underperformed the benchmark and generated negative returns. This blog aims to analyze the mistakes made by Marcellus and highlight the importance of learning from these mistakes to improve our own investment strategies.

Simplified Investment Thesis

One of the reasons for Marcellus’s poor performance is their oversimplified investment thesis. Mukherjea follows a philosophy known as “coffee can investing,” which emphasizes companies with high return on capital employed (ROCE) and low debt. While these are quantifiable metrics, the focus on clean management and good governance is more challenging to evaluate. This oversimplification can limit the portfolio’s potential for growth and overlook potential opportunities.

Growth Investing vs. Value Investing

Mukherjea’s approach as a growth investor means he is willing to pay premium prices for companies with strong growth potential. This differs from value investing, where investors focus on buying undervalued stocks. While growth investing can lead to significant gains in a bull market, it can also result in losses if valuations become unsustainable. It is important to strike a balance between growth and value investing to maximize returns.

Mistimed Exits and Missed Opportunities

Marcellus’s portfolio has suffered from mistimed exits and missed opportunities. For example, selling HDFC AMC at a 40% loss was a questionable decision, considering the subsequent 60% increase in stock price. Additionally, Mukherjea’s skepticism towards public sector banks, such as Punjab National Bank, caused him to miss out on the significant rally that occurred in these stocks. Recognizing fundamental changes in industries and timing investments accordingly is crucial for success in the market.

Incorrect Macro Analysis

Mukherjea’s macroeconomic analysis has also been questionable. His belief that rising bond yields and interest rates indicate expanding economic growth is not always accurate. The market’s verdict often contradicts such assumptions, and it is essential to understand and respect the market’s dynamics. Having a comprehensive understanding of macroeconomic trends and their impact on specific industries can guide investment decisions.

Avoiding Generic Advice

Marcellus’s portfolio contains a lot of generic advice, such as “never sell clean, well-managed companies because of valuation.” While clean companies with high ROCE and low debt are desirable, the market is cyclical, and even well-run companies can experience periods of underperformance. It is crucial to evaluate companies based on their specific circumstances and not rely solely on generic advice.

Poor Alpha Portfolio Construction

The construction of Marcellus’s portfolio appears to lack the potential for significant outperformance. While the selected companies are good compounders, they are unlikely to double or triple in size. Paying high fees for a fund manager to invest in companies like HDFC Bank and Asian Paints, which are easily accessible and have stable performance, may not be justified. Investors should focus on finding opportunities that offer additional alpha compared to the benchmark.

Conclusion

Learning from the mistakes of fund managers like Marcellus is crucial for individual investors. By managing our own money, avoiding generic advice, and understanding the market’s verdict, we can improve our investment strategies. It is essential to reward merit and evaluate fund managers based on their performance. Additionally, striking a balance between growth and value investing and recognizing fundamental changes in industries can lead to better investment outcomes. Ultimately, taking an active and informed approach to investing can help us generate better returns.

Disclaimer: The information is only for information purpose only. It is always recommended to consult with certified financial experts before making any investment decisions. Follow busymoneyfreak.com