Why I chose to become full time investor and plan to build an investment company…
“I found more comfort in owning several businesses than to run a single business that exposes me to significant concentration risk”
Not that I am saying one should quit their business, but…
One must read this article wholly to get my message. I come from a family with four decades of textile manufacturing business. Although, it would have been an easier path to follow, I found more comfort in equity market investing. To your surprise, none of my uncles, aunts or close relatives were brokers or full-time investors. For me, this had to happen from scratch.
Heads up, I chose this path and can proudly say, ‘I’m loving it’.
“The biggest hurdle I faced was the cultural psychology”
Relatives or strangers, things I hear from them when I start a conversation about stock market.
- This is gambling, stay away.
- How can you trust others with your money?
- All companies are fraud, never invest.
- People in stock market don’t do anything but count on luck.
- Only few investors have it in their stars to prosper in stock market.
And many more questions and commentaries I get to hear…
I could spend a day addressing these questions but let me cut it short. For me, stock market investing is the finest thing I came across. Where else can one find so much freedom?It helps me follow my passion to read all day long and comes with unbelievable benefits that others generally ignore. Over and above, I get to build a temple of knowledge that helps me feel secured in highly competitive and disruptive world. I am happily diversified looking for businesses daily. Small or big, every investor can buy part stake in public listed businesses they like. One doesn’t get this luxury in private companies.
“Surrender! Never try to be in whole control of your finance”
By this, I mean, invest into other companies. It is beautiful to run a business, but it is wise to invest into other businesses that one believes can offer him diversification, create wealth and is available at a fair price. Equities is the only asset class that allows one to invest smallest amount in businesses of his/her choice and participate in growth story of other companies.
One of the most important factor to look for is Return on Capital Employed. Let me explain this in plain language.
John runs a textile business. Industry economics suggest his business is highly competitive with many participants and less pricing power. His return on capital employed is 10% which is below cost of capital. His family ran this business for two decades and has tremendous emotional value and lesser financial value comparatively. Should John continue?
Tom runs a software company. Industry economics are excellent with high barriers to entry, high pricing power and sustainable moat around the business. His return on capital employed is 20% and expects it to remain same for foreseeable future. Should John buy some shares of Tom’s company?
Given Tom’s business is available at fair price, if management is right and if the business model is understood. Which business should John pick to invest from profits he generates in textile business?
An intelligent investor must consider investing in Tom’s business after prudent analysis.
“Business and investing go hand in hand”
A good businessman is also a good investor. He could either invest money in his own businesses or into other businesses that offer him higher returns. Most make a mistake here. Emotional value beats financial value and therefore, lesser is the prudence and rationality.
An investor must be aware of better opportunities that could generate him better returns and participate into businesses with growth potential. This leads me to my next point.
“Investing is more intelligent when business-like”
Stocks are not just ticker prices but businesses that trade in the market for a price. It is our duty to analyze the competitive, quantitative and qualitative aspects of a business before investing. A portfolio of great businesses shall be everyone’s favorite approach.
“Lack of financial penetration in India”
I want my child to be an engineer or a doctor. The old school thinking has forced many kids to deviate from natural talent they possess, and follow a path they wouldn’t if their parents had not forced it on them.
Our schools don’t teach personal financing, wealth management, but they expect kids to remember the year Akbar became an emperor. While the latter maybe important, the former is even more important.
“Media runs on critics”
Brokers make themselves rich by commissions. News channel frame the news in ways to capture viewers attention. One good quality of a successful investors would be to ignore the news that is irrelevant or causing them to make decisions due to psychological biases that critic creates. One must have full faith in their research and be backed by strong reasoning.
“Reading is the most crucial aspect of successful stock market investing”
It is true that stock market investors read all day long, and this is where our stock picking ideas come from. We are boring and have nothing better in life to do but to read. I would still choose to read as I get to keep track of many businesses. How they were built? Why they were built? Competition? Management? Valuations? Mergers? The list is long and learning never stops in equity markets.
At times we do nothing and doing nothing is a talent hard to develop. We would rather be patient in buying into a business than to rush and overpay for it. The act of patience is hard to practice, but if mastered, can give one an upper edge.
“If you do what everyone else does, you’re going to get the same results that everyone else gets”
It does take courage to be a contrarian and if carefully done, pays the best rewards. This is where people get distinguished based on their skills and talent. Be different and be proud of it.
“Keep it simple and don’t try predicting the rains”
Investing strategy should be kept simple. Low turnover, low cost. Like Charlie Munger says, ‘Most people can’t be successful like us is because our investment philosophy is very simple’. Those that trade often have to be right daily or weekly and those who find a few high conviction ideas need to be right on very few. Surprisingly, this is what it takes to succeed in the markets.
If I was to write down 10 most important sentences for stock market investing,
- Diversification but do not de-worsify.
- Investing is an art, not science.
- Avoid hot stocks. They can burn you.
- Business or investing, avoid highly competitive industries.
- Those with knowledge don’t predict, those who predict don’t have the knowledge.
- Don’t get caught up in detail, look at the bigger picture.
- Price and value, two things to consider before putting money on the table.
- Margin of safety.
- The biggest asset is your brain, train it well.
- Psychology is more important than high IQ in investing.