So many people share their investment tips on the internet that it can be difficult to digest and assimilate all. This makes it necessary to focus only on what the industry veterans have to say about the same. Rich in an experience that mostly comes from their risk-taking abilities and their prolonged stay in the market, these experts have risen to high positions simply by imbibing some basic points that we tend to ignore other than the expertise that only a few possess.
For example, Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services in a recent conversation with Value Research analysts shared how his 30-year-long investment journey had been fraught with mistakes. Experience is the mistress of folly and how one experience abstains you from making similar mistakes in the future. Following are the key takeaways from his stock investing journey that spanned over three decades that included the most infamous stock market crashes followed by strong upward trends that made good the losses suffered during those times.
Do not borrow money to invest
Volatility is intrinsic to the stock market, which is why you will never earn assured returns. Assuming that you have invested similar amounts in both debt and equities, even a slight jolt to the market during a series of corrections or owing to external factors like the current Russia-Ukraine skirmish will erode at least half of your net worth in equity instruments and leave you with notional losses. Avoiding the idea of taking a loan to invest in the market means that you can take on both the bears and bulls in the market with equal ease.
Have a role model early in life
Not everything that you learn from books will help you decide the course of your investing journey. Instead, find a veteran in this field and latch on to his or her experiences. Agrawal shared how the content in Warren Buffett’s annual letters lent him a new outlook regarding stock market investments. The renowned market expert even attended Berkshire Hathaway’s yearly general meetings from 1995 to understand what equity investment entails. These meetings left a profound impact on this investor who had once betted on 200 stocks in a bid to over diversify his risk. The folly was corrected and the portfolio was slashed down to 15 stocks that outperformed their peers. These meetings do not ensure mere learning; they ensure a solid start to your investment journey.
The compounding effect
Remember what the famous physicist Albert Einstein had said about compound interest? In his view compound interest is the eighth wonder of the world that must be understood and optimized to learn how your wealth grows over a period. The underlying principle of every successful stock investing is to realize the power of compounding and how it works over a long period. The trick is to stay invested for prolonged tenures, thus, allowing you to earn multifold returns on your investments, thereby, creating a corpus.
Great, Good and Gruesome
This is actually a page taken from Warren Buffett’s strategy shared in his 2007 annual letter that classifies companies into these categories depending on how much returns they earn on the capital employed. Investing in great companies means that you earn returns that are not only much higher than the cost of capital employed but also that which rises every year. This relieves these companies from investing further capital in their daily operations. Good companies require significant investments to grow to ensure that they ensure good returns on the capital employed. Investment in gruesome companies is a big “No-No” considering how these companies continue to earn low returns despite promoters infusing significant amounts of investments in them.
Management quality matters
Investment guru Philip Fisher in his much-acclaimed book “Path to Wealth through Common Stocks” mentioned how investors must focus primarily on the management, followed by the industry before everything else. The idea is simple how management quality scores over every other element that we value while parking our money in stocks. Investors must gauge the quality of management using three criteria including indisputable integrity, demonstrable competence and the intent to grow.
Value migration
Product or market strategy must change with time. This is explained well in Adrian Slywotzsky’s book which explains how obsolete business models give way to new ones. The value of a product lies in the way how you view its market cap and profits. However, with changes in customers’ preferences, companies must change the way they do business. For example, the gradual migration from state-owned banks to private banking enterprises or the decision taken by many telecom companies to gradually shift to wireless connections from the hefty cabled network that we used earlier.
Understanding how a company grows
There is no fixed formula to define the growth of a company. A company’s stocks may factor among the top 50 owing to myriad reasons including its cost, volume and pricing mix, operational changes, value migration, regulatory changes that explain its growing earnings. So, focus on why a company grows instead of just looking at its annual earnings.
Decide your investment strategy
There is no fixed recipe to success, which means that no one fixed investment strategy can work for all. Design your own investment strategy based on the quality of business or management, growth in earnings, the longevity of the business idea at reasonable pricing. Either investors must come up with their own time-tested investment strategies or rely on fund managers with a well-articulated investment strategy or process.
Value the worth
Out of the stocks that you had bought, how many of them do you consider worthy of your long-term investment portfolio? While many investors are aware of the prices at which they had bought their stocks, not many of them are aware of their intrinsic value. Most retail investors in the market know the price of everything but the value of nothing. Warren Buffett while distinguishing between price and value had commented, “Price is what you pay, value is what you get.”
The investors using simple financial strategies and other tools must arrive at the right value of the stocks they are holding. This will accordingly help them to plan their exit strategies too. If the value of a share is way higher than its price, it makes sense to buy the shares of that particular company and stay invested in them for nearly a decade. The growing value explains the compounding effect on the shares’ prices, thus, enlarging your corpus to the desired extent.