Timeless Investing Principles


1. Discipline

Being a value investor one needs to have proper discipline which doesn't drive the investor from going against the other principles of investing. Discipline again includes temperament, but temperament kicks in only when you hold a stock, whereas discipline is maintaining the proper decorum with stocks even when you don't own them. In simple words it means restricting oneself from buying a stock for quick bucks when you already know the business behind the stock cannot stand the test of time in the long run.
Discipline on the other side also means knowing when to cut your losses and book profits when you hold a particular stock. When you make an investment and it gets below the purchase price, it's better to jump off the sinking ship when you know that the business can't flourish in the long run. Whereas when once you know that you're in the right business which has been bought at the right price, the period of holding that business is forever irrespective of the share price. 


2. Expect Volatility & Profit from it!!

Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. Graham illustrated this with the analogy of "Mr. Market," the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he is depressed about the business's prospects and quotes a low price.

Because the stock market has these same emotions, the lesson here is that you shouldn't let Mr. Market's views dictate your own emotions, or worse, lead you in your investment decisions. Instead, you should form your own estimates of the business's value based on a sound and rational examination of the facts. Furthermore, you should only buy when the price offered makes sense and sell when the price becomes too high. Put another way, the market will fluctuate - sometimes wildly - but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued. The technique of rupee-cost averaging can be followed to tackle Volatility (good option for passive investors).

Rupee-Cost Averaging 
Rupee-Cost Averaging is achieved by buying equal amounts of investments at regular intervals. It takes advantage of dips in the price and means that an investor doesn't have to be concerned about buying his or her entire position at the top of the market. Rupee-cost averaging is ideal for passive investors and alleviates them of the responsibility of choosing when and at what price to buy their positions.


3. In Promoters we Trust

Sometimes some questions begin and end with "Who's the In-charge here?".  The most important factor in screening a company is the quality of the promoter. You cannot just invest in a company which has BadAss promoters, no matter how much attractively it is priced. Such promoters will always find out a way to fill their pockets at the costs of minority investors. In earlier days it was really difficult to check the promoter integrity, but now with the use of Internet, one can easily find out the track record of the company as well as the promoters. You simply have to type the Company's/Promoter's name along with the words "Fraud", "Scam" , "Cheater", "Misrepresentation" etc. and Google for the same. Also last but not the least, one can always look for any prosecution details on the MCA Website for any company and get the required details. Remember that a promoter with integrity and dignity will always strive for the success of the Company and not only for his own success.


4. Cash is King

Charlie Munger had once said "It takes character to sit there with all that cash and do nothing. I didn't get to where I am by going after mediocre opportunities". All I can say by looking at this statement is "How True". But then what happens to us when we've got a lot of cash with us?? Can we see it laying in our saving bank account and earn almost nothing for us ? The answer is "NO". What we do is we try to swing at every pitch for earning that extra profit and end up losing attractive investment opportunities miserably. Well this is not our mistake, being a human it actually takes a lot to keep your money idle and wait for the right time. But what helps is waiting for the right time to pour in your money. What we actually do is - invest in other stocks for that extra profits!!
This thing never helps. For becoming a successful investor you need to imagine that all you got is 20 investment decisions in your lifetime and not more than that and you need to use them carefully as they are scarce. This will help in controlling oneself from swinging at every pitch.


5. Margin of Safety - The central concept of Value Investing

Margin Of Safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities, but also to minimize the downside risk of an investment. In simple terms, Graham's goal was to buy assets worth $1 for 50 cents. He did this very well.

To Graham, these business assets may have been valuable because of their stable earning power or simply because of their liquid cash value. It wasn't uncommon, for example, for Graham to invest in stocks where the liquid assets on the balance sheet (net of all debt) were worth more than the total market cap of the company (also known as "net nets" to Graham followers). This means that Graham was effectively buying businesses for nothing. While he had a number of other strategies, this was the typical investment strategy for Graham.

This concept is very important for investors to note, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and ups its price to fair value. It also provides protection on the downside if things don't work out as planned and the business falters. The safety net of buying an underlying business for much less than it is worth was the central theme of Graham's success. When chosen carefully, Graham found that a further decline in these undervalued stocks occurred infrequently.

While many of Graham's students succeeded using their own strategies, they all shared the main idea of the "margin of safety". One of the living legend example who created Fortunes out of following this principle is Warren Buffett.

I hope this article will help each and everyone of us to master these investing principles.

Stay tuned, Happy Investing :)

Some more from the world's greatest Investor

Today let us look into some other qualities of great investors. Buffett had learnt from his teacher Benjamin Graham that "You don't have to do extraordinary things to achieve extraordinary results". Remember his simple strategies have led to his extraordinary success. Investing is not a game where a guy with 160 IQ can beat a guy with 130 IQ. Rather successful investing is something that can be achieved with a little more than basic knowledge, fundamentals and common sense. Let us look into some of these that have been followed by Mr. Buffett over his lifetime.

        1. Patience

Think 10 years rather than 10 minutes. If you aren't prepared to hold a stock for a decade, don't buy it in the first place. Be a decade's trader rather than a day trader. Value investing has been a proven get-rich-slow technique. Stock market is a relocation center where money flows from the impatient to the patient. Well if you don't believe then name one such day trader who has turned $10 Mn into $ 1 Bn. Patience is required for value investing. Charlie Munger says "Investing is where you find some great companies and then sit on your ass". Well all this seems to be really easy and simple, but the fact is it is not so easy to be patient, specially amidst all the people around you act irrationally. So the mental exercise which is practiced by Buffett is that buy a stock and then assume that the market has been closed from the next day for a 5 year holiday. 

Buffett has owned a large block of Berkshire Hathaway for over 5 decades and has not sold a single share. Another reason why Buffett has been able to turn $10 Mn Washington Post investment into a 1 Bn stake was because he held on to those shares for dear life. Right after his purchase in 1973, the shares slumped 50% but he refused to sell a single share, he had a bigger picture in his mind. For him the stock was volatile but the business wasn't, the business was really stable. His patience has been richly rewarded. Many things- good and bad are going to happen while you are a shareholder, The stock market will overheat and the prices will rise, the bears will close in and the prices will plunge, the important thing is to be in the right business and cultivate the right attitude. Remember time is a friend of a wonderful business and an enemy of a mediocre.

What do we learn : Do not check your investments everyday or week, remember that all stocks go up and down. A better use of your time would be to keep an eye on business performance rather than on price performance.

Tip: If the question is "How long will you wait?", Buffett's answer is "If we're in the right Business, We'll wait indefinitely"

        2. Look at stocks as ownership interest

Once you get into the right business, you can let everyone else worry about the stock market. The stock is nothing but a representation of your share in the ownership of the company. When you think about your portfolio what should come to your mind is not Moneycontrol, tickers or tables in the dalal street journal. What should come to the mind is the business or a collection of Businesses-real enterprises engaged in the right businesses. It's not about playing the market, it's about buying the business. If a business does well the stock eventually follows. The most important thing that you can do before buying a business is write down on a piece of paper the reasons why you will pay these many Rupees for a particular business, If you can't write down the reasons, don't buy it. During the days of dot com bubble, the high-tech stocks were going up exponentially. Investors were buying the stocks on price action rather than on the quality of the business that stock represented. Buffett did not buy a single internet stock as he was not able to see a predictable future of these companies. 

1999 was the worst year for the "price" of Berkshire Hathaway, the stock had plummeted to $ 40,000 a share from a previous high of $ 84,000 a share. Buffett was criticized and laughed upon by the market pundits for missing the bus. Buffett still refused to buy the business that he does not understand. Buy businesses that have stayed for 50 years and will stay probably for 50 years more. Businesses that don't change much are the one's that Buffett likes. Wrigley's chewing gum will not change 10 years down the line from what it is doing now. These are the businesses that Buffett likes to invest in. These are the business that become more predictable. 

What do we learn: Don't think about the stock in the short term. Think about Business in the long term. Investing is never emotional, it is more business-like.

Buffett & his Strategies

Starting from today on a frequent basis I'll be posting a few articles on value investing. This is a blog that I had started long time ago but was left stranded due to some other preoccupations. Let us today look into Warren Buffett & his style of investment, the principles that he follows. Value investing is something that has been rewarding investors in the long run, and is a proven technique to make money in the long run. 

1. Choose simplicity over complexity

When investing Buffett has always followed a simple approach and that is invest in businesses only which you understand, and do not try to complicate things and invest in businesses that you do not understand. His famous quote "I have pledged-to you, the rating agencies, and myself- to always run Berkshire with more than ample cash. When forced to choose, I will not trade even a night's sleep for the chance of extra profits" says it all. So what do we learn from this is that we need not swing at every pitch, but then wait for the right time to invest in. For eg.) Why did Buffett buy tons of Coca-Cola in 1987, and lots of American Express in the year 1963 ? Why these companies and these years only ? That's because these were the years when these companies were trading at cheap prices and were struck with one time huge but solvable problems. We also need to buy only what we understand and are ready to hold for the next 5-10 years.

      2. Practice independent thinking

Wall Street is the only place where people ride to in a Rolls Royce to get advise from those who take the Subway is what Mr. Buffett has to say. When it comes to investing, self conviction is what is really important, if you lose conviction, you lose everything. Then even a 10-15% temporary drop in the share price will make you jump out of the stock. However people continue to listen to the Brokers, the so called Research companies etc. which tells you less about the company but more about the person making such research. It's only when you think independently you are bound to hold a particular stock for really long term, it's your conviction that'll make you hold it for longer time. When you ask your Broker or the so called analysts about a particular stock "These stocks, Should I buy or sell?" their honest answer would be "Who cares, Just do it!!". They won't ever say it straightforward. Because it's your volume and quantum of transactions that is going to make money for them.

     3. Maintain proper Temperament 

Temperament is the self control of a person on oneself. It is something that neither gives you great pleasure from seeing the rising stock prices that you hold nor does it gives you sleepless nights on seeing the stocks go down by 50% which are held by you. Maintaining the right temperament is very much important for an investor. Assuming you bought Eicher Motors in the year 2000-2001 when it was trading at Rs. 25, the stock went all the way to Rs. 50, you thought that you've doubled your investment and let's sell the stock. Here's where temperament plays it's role. Not deriving pleasure from the rising prices and not fearing when the prices plummet. Only a stockholder who wants to sell his stocks in the near future shall be happy with the rising prices. Needless to say that today the price of Eicher motors is more than 20,000 per share.

These are my two cents on some of the strategies of Buffett, will continue this post in my next article with some more knowledge on investing. Stay Tuned and Happy Investing:)