Investing is not as difficult as many would like us to believe, all it needs is some time, effort and loads of discipline.
Manish Jain
Investing, especially in equities, has always been perceived as risky and that is why perhaps retail investor participation in India is amongst the lowest in the world. Most small investors prefer mutual funds rather than exercising their own acumen and building direct portfolios. Here we look at the art of significant wealth creation in equities while minimising the risk.
To be honest, it is quite simple and six simple steps is all that there is to it. Yet, it is one of the most difficult things to do as it needs tremendous discipline. Quite a contradiction! The discipline is needed to stick to the beliefs and not get lured by short-term gains and market movements. The discipline is needed to break the cycle of greed and fear.
So let’s look at the six simple steps:
1) Never buy the stock: Sounds strange? But it’s one of the fundamental rules of investing – rather than buying the stock try partnering with the business. Confused? It’s quite simple actually. When we buy stocks we don’t get obsessed but when you partner with a business, the diligence is of another level.
The questions to be asked is – is the management good? What is the industry growth outlook? Does the business have a leadership position in the industry? Is the position defendable? How is the corporate governance? What does the balance sheet look like? The idea should be to go as deep as possible in your homework.
2) Invest in quality: Always! No compromises on this one ever. By quality, we mean companies that are run by a fairly competent management, which has a proven track record to delivering through time frame. Refer once again to the point above. A company which stands true to the highest standards of corporate governance.
A company which has not just leadership but also a certain competitive advantage to protect its position. In short, a “Good and Clean” company. Finding a business like this is easier said than done, believe me when I say this that not too many companies pass the muster. At Ambit Coffee Can, we live with this philosophy and the consistency of our returns say the whole story.
3) Invest for the long term: Wealth creation in equities happens over the long term. Always. The aim should be compound the money over long periods of time to reap the full benefit of the equity markets. Again, when you partner with a business, its imperative that we invest for the long term. Short term gains are quite tempting, but as we say – Maintain focus and maintain discipline!
4) Keep the churn low: Two things need to be done – keep the portfolio concentrated and keep the churn low. A concentrated portfolio is needed because picking the right business is more important than spreading out the risk. Risk mitigation will happen by picking businesses, which will delivery steady profit growth and not by spreading out our money thin. A low churn is needed to get the maximum benefit of the power of compounding.
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Always remember it is how much time you spend in a stock rather than trying to time it right. A good stock should only be sold when business fundamentals have shifted fundamentally and not just because of short term market movement.
5) Invest with a purpose: A lot of us tend to make this mistake – Investing with a return in mind rather than a purpose. Always remember, a sound investment will always make money in the long run. However, return is a by-product and not the primary aim.
The first question that all of us need to ask is – why are we investing this money? What is it that we seek to do? Matching the investment vehicle with the purpose is extremely critical. Imagine, investing your liquid need fund in a long term illiquid instrument! Great return, but the fund will not be there when you need it the most. So, never walk away from this – Investing with a purpose!
6) B2C vs B2B: When we invest, it should be as predictable as possible. Cyclicality is a big negative for our returns. B2C businesses have the power of their band equity, which can be leveraged to generate steady profit growth in businesses over long periods of time. Data from 1994 to 2019 suggests that as long as profits grow consistently, our portfolios will outperform the markets, irrespective of what happens to the multiples.
So if you follow these six simple steps, you can watch your money multiple multifold, over the long term of course. Investing is not as difficult as many would like us to believe, all it needs is some time, effort and loads of discipline. Maintain a philosophy and follow it diligently. Follow these simple rules, be disciplined and see the magic.
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