Chant the right investment mantras before riding the market
Warren Buffet looked at businesses and tried to find value, George Soros sought to play macro imbalances while Peter Lynch sought to pick value from a large universe of stocks.
These investment philosophies worked, enabling them to generate market outperforming returns consistently over a period of time. Their philosophies helped them ride through markets, which went against them periodically, and come out winners at the end.
Warren Buffet emerged a winner out of the tech boom and bust in early 2000 by sticking to his philosophy and not investing in tech stocks. George Soros rode through a bad bet against the yen while Peter Lynch emerged a winner from the Wall Street crash in the late 1980's.
The common thread that separated these men from the other money managers, was their investment philosophies.
The reason why I am writing on this topic is that ordinary investors can also benefit from having their own investment philosophies.
The aim of formulating an investment philosophy is to bring discipline into equity investments, not get carried away by market sentiments and ride market volatility without losing money and hope. The next question is how can ordinary mortals form an investment philosophy?
While it is not an easy task, it is not rocket science either. All it requires is a bit of self-introspection.
The first question I asked myself was what would make me stay with an equity investment through ups and downs in the market? The answer was the way the business was run. If I liked the way the business was run, I would stick with the investment through rough and smooth periods.
The next factor followed from the answer above. What did I like about the way businesses are run? I jotted down a list of factors, which went into running good businesses. Factors such as commitment, desire, ability, competitiveness and scalability all came out from this exercise.
Once I knew what I was looking for in a company, I ran through the list of all 'A' group shares in the BSE and made a qualitative comparison. I listed down the factors of good businesses and marked each 'A' group company against the factors to tally up a total.
I gave one mark for positive, zero for neutral and minus one for a negative result. However, the primary qualification for this exercise is that one must know the company being marked.
Once completed, I tallied the totals to arrive at a shortlist. I marked the short-listed companies for further research and once satisfied with financials, valuations, future plans, etc, I placed them on a buy list.
This simple exercise of formulation of an investment philosophy enabled me to sift through almost all the shares listed on the exchange to shortlist 30 shares for investment.
I am not going into the companies short-listed for investment, but the same exercise carried out by another individual or a group of individuals will produce completely different results as investment philosophies will differ.
However, the common thread is the discipline and the confidence which went into the investments rather than actual results. Actual results do matter in the end and this is what separates good investments from bad investments.
The process of forming an investment philosophy cannot be done by everybody due to time and capability constraints. Investors who do not form their own investment philosophies go to professional fund managers to generate returns with their investment philosophies.
In such cases, it pays to understand the investment philosophy of the fund manager or the fund management company to whom the investor is entrusting money. It also pays to check whether the fund manager or the fund management company is adhering to their respective investment philosophies.
This is what separates investors investing with Warren Buffet and investors investing in other fund managers. The next time you are contemplating equity investments, think about investment philosophies to enhance the value of your investments.