12 Mantras (Principles) of Investment – By Laxmikant Bhole
1. Look for fundamentally sound companies: Be very cautious when you are investing in high debt stocks. Such companies will have to shell out high amount of profits by way of interest, which limits their growth. At the same time, be careful if you are investing in less liquid stocks. Thumb-rule – avoid high debt companies as far as possible.
2. Keep margin of safety: Look for undervalued stocks. This gives not only high probability of larger gains but also minimizes the downside. Avoid investing in stocks that are reasonably valued or overvalued unless you are sure about its prospects.
3. Understand your own risk appetite: Everybody’s risk appetite is different. Understand what is yours and invest accordingly. Do not invest in high risk/volatile stocks just because your friend/colleague or somebody else is doing so. You are solely responsible for your gain/loss and nobody else.
4. Start early: Start as early as possible in life. Tomorrow never comes, think today when you want to start investing which will help your tomorrow.
5. Do your own analysis: Fundamental analysis is a proven method for many years. You may get the best investment advice from someone else. However, study about the stock yourself before you invest. Never invest based on a ‘tip’!
6. Look for prospects: Past analysis of a company is important. However, it is more important to understand its prospects.
7. Diversify: Diversify your portfolio. Don’t put all eggs in one basket. At the same time, keep your portfolio manageable.
8. Do not be greedy: Book profits once your target is reached if your risk appetite doesn’t allow you to be invested for longer durations.
9. Ignore once sold: Do not check the market price of stocks once you sell them. Don’t regret if its share price rises further.
10. Apply ‘Power of Forgetting’: If you have a risk appetite to hold for longer durations, do not panic in volatile market situations. Think long-term for the right stocks. Don’t take impulsive decisions. Many a times, a stock doesn’t move for months/years, but keep faith and conviction in your own analysis. Avoid short-term trading. A plant grows into a large tree if nurtured properly. As highlighted in my previous article, Rs.10000 invested in 100 shares of Wipro in 1980, is worth over Rs.537 crore today. This is the Power of Forgetting and conviction in long-term investment. Of course, you must review such investments regularly though.
11. Review & Adapt: Review your portfolio regularly. You must be updated on how the company is doing. Read annual reports regularly and carefully. Keep an eye on the businesses as well as the industry. Do not let emotions come in between when the stock should be sold. Track the market conditions, global and as well as domestic and then take a decision.
12. Invest your own money: Never borrow money to invest. Plan your finances properly. Invest regularly as the power of compounding is amazing. You will realize it over a period of time. Nobody can guarantee you returns in the stock market. What is important is to study the company carefully and trust your own analysis. It is absolutely important to do your own detailed study before you take any investment decision.
After all, it’s your hard-earned money. These are the mantras of investment I follow based on which some of my investments have fetched.
Here are top 20 tips by the all-time investors –
Howard Marks :: Smart Investing doesn’t consist of buying Good Assets, but of buying Assets ‘Well’.. This is a very, very important Distinction that very, very few people Understand. “
- Warren Buffett ::: “Investors should remember that Excitement and Expenses are their Enemies. And if they insist on trying to ‘Time’ their Participation in Equities, they should try to be ‘Fearful’ when others are Greedy and ‘Greedy’ only when others are Fearful.”
- John Templeton ::: “For all long-term Investors, there is only One Objective – Maximum total Real Return after Taxes.”
- Benjamin Graham ::: (Guru Of Buffett) “It is absurd to think that the general public can ever Make Money out of ‘Market Forecasts’…”
- George Soros ::: “If Investing is Entertaining, if you’re having Fun, you’re probably not Making any Money. Good Investing is ‘Boring’..”
- Jack Bogle ::: “If you have trouble imaging a 20% Loss in the Stock Market, You Shouldn’t be in Stocks.”
- Bob Farrell ::: “The Public buys the most at the Top and the least at the Bottom.” And, “When all the experts and forecasts agree – ‘Something Else’ is going to happen.”
Jeremy Grantham ::: “By far the biggest problem for professionals in Investing is dealing with Career and Business Risk ::: protecting your own job as an agent. The second curse of Professional Investing is Over-Management caused by the need to be seen to be busy, to be earning your keep. The individual is far better-positioned to wait patiently for the ‘Right Pitch’ while paying no regard to what ‘Others’ are Doing, which is almost impossible for Professionals.”
- Barton Biggs ::: “Quantitatively based Solutions and Asset Allocation equations invariably fail as they are designed to capture what would have worked in the ‘Previous Cycle’ whereas the next one remains a ‘Riddle’ Wrapped in an Enigma.”
- Philip Fisher ::: “The Stock Market is filled with individuals Who know the ‘Price’ of Everything, but the ‘Value’ of Nothing.”
- Ken Fisher ::: “You can’t develop a Portfolio Strategy around endless possibilities. You wouldn’t even get out of bed if you considered everything that could possibly happen….. You can use ‘History’ as one tool for shaping reasonable Probabilities. Then, you look at the world of economic, sentiment and political drivers to determine what’s most likely to happen—While always knowing you can be and will be wrong a lot.”
- Charles Ellis ::: “The average Long-term experience in investing is never surprising, but the Short-term experience is always Surprising. We now know to focus not on ‘Rate of Return’, but on the informed Management of Risk”..
- Bill Miller ::: “The Market does reflect the available Information, as the professors tell us. But just as the funhouse Mirrors don’t always accurately reflect your weight, the Markets don’t always accurately ‘Reflect’ that Information. Usually they are too Pessimistic when it’s Bad, and too Optimistic when it’s Good.”
- Thomas Rowe Price Jr ::: “Every Business is Manmade. It is a result of individuals. It reflects the Personalities and the Business Philosophy of the founders and those who have directed its affairs throughout its existence. If you want to have an Understanding of any Business, it is important to know the ‘Background of the People’ who started it and directed its Past and the Hopes and Ambitions of those who are planning its Future.”
- Carl Icahn ::: “We have bloated Bureaucracies in Corporate America. The root of the problem is the absence of Real Corporate Democracy.”
- Peter Lynch ::: Investing Without ‘Research’ is like playing Stud Poker and never looking at the Cards.”
- John Neff ::: “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy Stocks that look bad to less careful investors and hang on until their Real Value is Recognized.”
- Henry Kravis ::: “If you don’t have Integrity, you have Nothing. You can’t buy it. You can have all the Money in the world, but if you are not a Moral and Ethical Person, you really have nothing.”
- Ray Dalio ::: “An Economy is simply the Sum of the Transactions that make it up. A transaction is a simple thing. Because there are a lot of them, the economy looks more complex than it really is. If instead of looking at it from the top down, we look at it from the transaction up, it is much easier to Understand.”
Jesse Livermore ::: ‘Play the Market’ only when all factors are in your favour. No person can play the market all the time and win. There are times when you should be completely Out Of the Market, for Emotional as well as Economic Reasons .
Lessons Warren Buffett Teaches Us – There was a one hour interview on CNBC with Warren Buffet, the second Richest man who has Donated $ 31 billion to charity.*
*Here are some very interesting aspects of his life:*
1. He bought his first share at age 11 and he now regrets that he started too late!
2. He bought a small farm at age 14 with savings from delivering newspapers.
3. He still lives in the same small 3-bedroom house in mid-town Omaha, which he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence.
4. He drives his own car everywhere and does not have a driver or security people around him.
5. He never travels by private jet, although he owns the world’s largest private jet company.
6. His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis. He has given his CEO’s only two rules.
Rule number 1: do not lose any of your share holder’s money.
Rule number 2: Do not forget rule number 1.
7. He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch Television.
8. Bill Gates, the world’s richest man met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became = devotee of Warren Buffet.
9. Warren Buffet does not carry a cell phone, nor has a computer on his desk.
His advice to young people: Stay away from credit cards and invest in yourself and *Remember:*
A: Money doesn’t create man but it is the man who created money.
B: Live your life as simple as you are.
C: Don’t do what others say, just listen to them, but do what you feel good.
D: Don’t go on brand name; just wear those things in which u feel comfortable.
E: Don’t waste your money on unnecessary things; just spend on people who are really in need.
F: After all it’s your life then why give chance to others to rule.
The above may not make you Warren Buffet. However it will surely make you successful and bring you more wisdom.
*A Must Read: Kindly Spare some time*
Money does not create man but it is the who created Money.
Take Advantage of Both Fear and Greed in the Stock Market
The “herd mentality” is a behavior finance term suggesting that it feels safer to follow the crowd, but that’s not always the best way to make money. Buffett emphasized this point when he said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
The tech bubble of 2000 is a good example of the herd mentality in action. Valuations in stocks reached absurd levels as investors kept buying, not wanting to miss the boat. Many people got in just as the bubble burst, and within two years the NASDAQ lost 75% of its peak value. Buffett likes to buy when the economy takes a beating and sell when things get overhyped, a strategy which works well in the long run.
Plan Today for Goals and Events That Are Likely to Occur Far into the Future
Buffett often preaches the benefits of maintaining a long-term perspective, such as when he said, “Someone’s sitting in the shade today because someone planted a tree a long time ago.” He stays focused on the big picture and doesn’t get overly concerned about what happens in the present.
Buffett also likes to hold on to his investments forever. One of the things that can do the most damage to an investor’s long-term success is paying too much attention to his investments. A 10% market correction, while quite normal and healthy, can send skittish investors running for the exits. This can lead to missing out on the subsequent rebound and leaving gains on the table. Buffett understands that investors need to focus on where they want to be in the future versus where they are today.
Focus on Investing in Quality First. Worry About Paying a Fair Price Second.
Buffett likes getting a good deal on an investment as much as anybody, but he also makes sure he’s getting a good investment before looking at the price.
Buffett’s philosophy on value investing is to favor companies that maintain strong dominant positions in the broad economic landscape to generate above-average investor returns. He looks to avoid companies with high leverage, or debt financing, in favor of those that generate their own capital for reinvestment and growth. He also likes to do research himself instead of relying on analyst teams.
In short, he prefers well-run companies with strong balance sheets and good management teams. He’s willing to pay a higher price for them because he believes a return on investment generates over time.
Set Aside Money for Savings Before Doing Anything Else
Buffet suggests that people are rich based on what they save, not what they spend. He shuns the notion of borrowing money to buy a fancy car or house and instead favors fiscal responsibility and financial preparation. He believes that individuals should prepare a budget that covers basic household needs and to begin saving once those bills are paid. It’s a very simple plan, but one to which many still fail to adhere.
Buffett has also advised that investors should “not save what is left after spending but spend what is left after saving.” He famously lives in the same Omaha, Nebraska home that he bought in 1958 for $31,500. Berkshire Hathaway’s headquarters takes up just one floor of an office building, and his office doesn’t even have a computer.
*The Art of Holding investments to create wealth for you*
Stocks rarely perform in the time frames we predict, and it’s why the market only works for investors that have a long-term portfolio focus. Performance is never linear, up and to the right, year after year. You sometimes have to hold onto a position for a few years before it goes up 100% in 3 months.
*“I’m accustomed to hanging around with a stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I’ve owned something.” – Peter Lynch*
Here is a real-life example: I started buying a company I own today in early 2012 when it was at $0.35-0.40 per share. As my conviction grew I bought more and by mid- 2014 the stock hit $2.00 per share. Today (January 2017), the stock is still at $2.00 per share. Yes, I’m up considerably from my average cost basis but this company has been dead money for 2.5 years. Years!
How do I know if I’m right in holding versus just being entrenched in endowment bias?
Let’s get back to some basic first principles. Sustainable multi-baggers have three characteristics: Long-term revenue and earnings growth with little to no dilution. When you are holding onto a position ask yourself – Is this business growing and making more money per share than it did a year ago, two years ago? In my real-life example above the company’s business is almost double the size it was 2.5 years ago. Yes, the stock hasn’t gone anywhere but the business is doing really well. I have no problem holding this stock. If the business wasn’t performing, I would sell. Successful investors can differentiate business performance from stock performance and can take advantage of those investors who can’t.
*“I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for.” – Phil Fisher*
In the book, The Art of Execution, portfolio manager Lee Freeman-Shor invests $25-$150 million ($1+ billion total) in 45 of the world’s top investors. His instructions to them were simple as there was just one rule. They could only invest in their ten best ideas. Over several years he tracked their positions, trades, performance and was amazed at what he saw. He identified both good and bad habits and divided the investors into groups – Rabbits, Assassins, Hunters, Raiders, and the most successful group, the Connoisseurs.
*“The most successful investors I worked with, those who made the most money, all had one thing in common: the presence of a couple of big winners in their portfolios.* *Any approach that does not embrace the possibility of winning big is doomed.” – Lee Freeman-Shor*
In this excerpt, Lee Freeman-Shor talks about one of the attributes of Connoisseurs.
“One of the key requirements of staying invested in a big winner is to have (or cultivate) a high boredom threshold.
Meeting some of my Connoisseurs could be very, very boring because nothing ever changed. They would talk about the same stocks they had been invested in for the past five years or longer. On the days I had a meeting scheduled with a Connoisseur, I sometimes struggled to get out of bed.
The fact is, most of us will find it difficult to emulate the Connoisseurs because we feel the need to do something when *we get to the office (or home trading desk) every day. We look at stock price charts, listen to the latest market news on Bloomberg TV, and fool ourselves into believing we could add more value from making a few small trades here and there. It is very hard to do nothing but focus on the same handful of companies every year; only researching new ideas on the side.*
*Many of us, seeing we have made a profit of 40% in one of our stocks, start actively looking for another company to invest the money into – instead of leaving it invested.* This is precisely why lots of investors never become very successful.”
Every multi-bagger will have long periods (even years) of stagnation as fundamentals backfill, old shareholders get bored, and new shareholders enter. Just like a fine wine, sustainable multi-baggers of
ten take their time to ascend and develop. If you’re invested in great businesses that continue to grow and earn more money, don’t let lulls in stock price and boredom scare you out of them.
*Successful long-term investors have the ability to disconnect the business from the stock price. It’s why it’s important to focus on being a great business analyst, not a stock analyst. Active patience is the hardest skill-set to develop.*
*- Ian Cassel*