Investing principles from Warren Buffett, Phil Fisher and Sir John Templeton

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  • February 17, 2019
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Rahul Jain

Investing directly in equity markets, also known as direct equity investing, takes quite a bit of time and energy, and not to mention loads of research and patience. That is not to say that it cannot be mastered. On the contrary, equity investing can be aced – here is how.

Successful equity investing is about embracing certain resilient rules or principles, the golden rules of investing, if you may. I intend to elaborate on the most enduring rules of successful equity investing and thereby creating wealth.

• Understand what you are buying:

This is the most basic prerequisite for investing in equities. You must have a good understanding of the product/service offered by the company – where the product finds usage, the manufacturing process, the value-addition, and its input costs.

If you find the product/service too complex or too good to be true, it is better to give it a miss even if it appears exciting.

If you feel remorse later, remember Warren Buffett who refused to buy technology stocks in the Dot Com boom in 1999 and lost on some gains initially only to find redemption in the crash that followed.

• Think long, really long

If you are going to need your money in a hurry (within 3-5 years), equity markets may not be the right place for you.

While you are investing for the long-term, you instinctively adopt certain traits like giving the daily noise a miss and looking at companies with a more serious, long-term perspective. You automatically align your point of view with the company’s point of view.

So if the company has set up a plant and expects returns to start reflecting in the stock price three years later, that’s also how long you will wait for the stock price to start moving up.

• It’s not about keeping up with the neighbours

Investing is a painstaking activity about identifying the right companies. It involves understanding the business of the company, the opportunities and threats it’s likely to witness over time.

These analysis does not get simpler because your friend or colleague bought a specific company or because a company is in the benchmark index or because it was recently in the news.

In other words, there is no shortcut to study and analysis. You just cannot expect to identify a good company through the choice of your friends or the benchmark index.

To quote Sir John Templeton – If you want to have a better performance than the crowd, you must do things differently from the crowd.

• When markets are misbehaving, that’s the time

A lot of individuals are flustered with market volatility. Their response to market irrationality is with some irrationality of their own, so they end up selling in a panic or avoid markets altogether for a while.

You may rue this response in the future. When stock markets are in panic mode, that’s the time you must add to your portfolio.

Disclaimer – Be prepared to suffer additional short-term pain, but do not wince, instead increase your positions so long as you have conviction.

Key Takeaways:

Successful equity investing is about following certain golden rules like:

a) Understand what you are getting into by reading up on the company’s products and services, the end users, manufacturing process, basic input costs.
b) Think long-term while investing in equities – align your investment horizon with the stated break-even or profitability time frame of the company.
c) You do not stand a chance of beating the crowd by investing in the same stocks as them – you need to study harder and identify companies with markedly superior advantages.

d) Instead of getting cowed down in the face of volatility, increase positions when markets are pessimistic.

Investing guru Phil Fisher once said, it seems logical that even before thinking of buying any common stock, the first step is to see how money has been most successfully made in the past.

Stick to these simple rules and I am certain you will go a long way in terms of wealth creation.

(The author is Head, Personal Wealth Advisory, Edelweiss)

Disclaimer: The stocks mentioned are for reference only and not buy or sell ideas. The views and investment tips expressed by investment expert on moneycontrol.com his own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

 

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