Monday, July 07, 2014

Every single day, allow it to pass


Probably one of the best statements I have heard in investing world. When the prices of stocks increase, we rush in to buy and when they fall, we rush in to sell. Both are inverse of what we should be doing; why are we behaving this way? Is there a way out?

Yes. Once invested in the right companies, allow each day to pass, knowing only fully well that businesses need time to grow. The stock market is not the business, they happen elsewhere. The stock market purely is a platform to buy them and not a place where profits are made. Businesses make profit by executing their business well, reviewing their strategies time to time and making changes when required. So do not follow the what the stock market is telling (in terms of the price changes) instead focus on what the businesses are telling you, whose stocks you own.  are the strategies in tune, are the promoters transparent and honest enough, is the Net Profits and earnings growing every year, if so are changes to get there happening? These should consume our energy and not the stock prices alone. Prices are an outcome of those questions we ask.

We almost always overestimate our capability. When the stock price of our recent pick goes up, we congratulate our self on our ability to have foreseen. If the stock price goes down, we promise ourselves to exit if price comes back to our purchase price. There is no value we associate to the business, first when we bought the stock and then when we decide to sell.

Buy decision have to be predetermined by 'margin of safety' (on a roll of stocks that we have already filtered), which is generally appealing during a downtrend. So as a buyer we should prefer markets going down rather than going up. Our attitude towards market vagaries will decide our investing fortunes.

In the last couple of months, stocks have run up very fast. This is to the surprise of many as they stayed out of the market. Unfortunately, there are not too many stocks which offer sufficient margin of safety. Don't blindly buy because the share price has been going up. Only when the tide goes out do you discover who's been swimming naked.

A great investor once told me not to measure a stock by its price but with its market cap, this is quite a revelation. What he meant is to look at the stock as a business and by examining the market cap you are actually evaluating the size of the industry that of competitor, the growth prospects of the industry, headroom etc.

As Warrren Buffet wrote to shareholders “You don't have to be a genius to invest well. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ. To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these.”

To develop the right attitude which alone is required to achieve investing success, write to