A leaf from the book of the masters

Don't you wonder about the people at the top in their respective professions? What do they do differently? Do they have a secret that the masses know nothing about?

We ran into these questions while working out the top mutual funds for 2010, and marvelled at the minds that steer crores of rupees to mindboggling returns. The answers could be the ordinary investor's path to financial nirvana. All it might take is adopting their investment strategies and applying them to your portfolio. Or may be just a few nips and tucks to match your methods with theirs.

But will the fund managers reveal their signature strategies? We approached four of the best brains in the business and discovered that they were only too keen to share their ideas. The fund managers we spoke to included Kenneth Andrade (IDFC Premier), Mohit Mirchandani (Taurus Infrastructure), Pankaj Gupta (Magnum Contra) and Anand Shah (Canara Robeco Tax Saver). Each has earned very high returns for his funds, the best credentials any fund manager can boast of. Here are their mantras for success.

The four strategies: Andrade describes himself as a 'growth-oriented personality', which is why he favours small companies. "They are more nimble in their operations, and because of a low base, they can grow faster," he says. On the other hand, Gupta swears by contrarian bets and scouts for sectors that are out of favour. His stock selection is based on "market capitalisation, discounted valuations and finding opportunities in mid- and large-caps". He is also on the hunt for new sectors because they have a high margin of safety.

Contrast this with Shah, who adheres to the GARP formula, that is, growth at reasonable prices. "We are very conscious of the price we pay for buying a growth-oriented business," he says. Shah also considers company management while choosing stocks, favouring those that have people with proven track records at the helm. Mirchandani, who has turned around many funds from the Taurus stable, claims to follow no fixed strategy. His investment approach changes with time, but the goal remains the same—"To make money in the markets." Perhaps flexibility is his only style, a concept you wouldn't find acceptable. However, he does follow one rule— holding the stocks for the long term. This is why his funds see relatively lesser churn than others.

The conclusion is obvious. You don't need a genie to earn big returns. The rule book says it all. But even though you know the fundamental rules of investing, why do managers earn huge returns and you don't?

Regular course correction: The fund managers candidly admit to making several mistakes in the past. Gupta has been caught on the wrong foot by investing too heavily in telecom, an industry suffering from low profit margins. Mirchandani is still to recover from the recent slowdown. "I ignored the signals of the market peak in January 2008. The sentiment was euphoric and one tends to get carried away," he says.

But these fund managers don't mope over their blunders. They analyse why they went wrong and make amends. For instance, Mirchandani knows he has a tendency to get attached to his best stocks. This is why he immediately replaces a stock if he finds a better one, even though it causes some heartburn. Likewise, Shah has a weakness common to ordinary investors—the tendency to book profits early and run losses. How does he manage to earn such high profits (Canara Robeco's Tax Saver notched up 90.5 per cent returns last year)?

This is because Shah, like the other fund managers, acknowledges his mistakes and has disciplined himself enough not to repeat them. When was the last time you did so?

Words from the wise: Having overcome their failures, these fund managers have become repositories of financial wisdom. Andrade says that his biggest learning has been to avoid predictions on market cycles, while Gupta feels that herd mentality is the most dangerous. Shah has taught himself to concentrate on the long term, which is why he never buys a good business at a high price and waits for better opportunities. On the other hand, Mirchandani always reminds himself that without risk, there is no gain.

The insight into their working is useful, but if you were looking for a readymade solution to your investment woes, you might have been disappointed. Perhaps, this is exactly what the fund managers want to convey, that investing is a process that involves rule books, discipline and self-analysis. Success doesn't quite come by rubbing a lamp.