Monday, May 01, 2006

My Investment philosphy

I don't have any academic background in finance and I don't miss it.
I've followed a unique way to train myself in this subject. The basic
tenets of my approach are.

1. Hear it straight from the Horse's Mouth: I don't like text books. I
would rather read Kenyes and Adam Smith, than reading a text book on
economics. Similarly in investing I've learnt more from the investors
like Graham, Ficher and Buffett. Here too I preferred reading all the
60 odd letters to shareholders rather than a cook book on Buffett.

2. Practice it: No matter how much you read theory you never learn
without applying the theory into practice. If you lack conviction to
put your money where your mouth is, then you haven't really learnt. At
various times 70 to 140% of my net worth has been in stocks and it has
given me a lot of impetus to learn, to avoid mistake. I can not afford
to speculate. I reserve my gambling instincts to card games.

3. When someone points to the moon, don't catch the finger: You got to
imbibe the essence of teachings and develop your own strategy. Time
and again people ask me that you buy commodity stocks and still say
that you follow Buffett's philosophy. I'm operating in a different
environment, with different fund size and with different level of
skill. I have much better chances of getting high returns following
myself than following Buffett. Just the same way as Buffett developed
his own strategy after learning from Graham, I have to develop my own
optimized for my operating environment.

I said that "Circle of competence is a fuzzy thing" because everyone
misjudges his competence level. You would remember the famous
experiment where people in the group were asked to judge their driving
skills on a scale of 1 to 10 relative to the group.
The average of their scores was 7.5 !

I'm no different. In 1994, when I was 18, I used to think that I know
a lot about stocks. Five years later I had lost a fortune, trading in
stocks and I still believed that I knew about investing. All that
changed after I read Buffett. Things have become much simpler and
pleasant fro that point on.

The differences between my approach 4 years ago and today have to do
with maturing of my strategies, more realistic assessment of risks
involved and increased confidence. Now I know that I can afford to sit
back for a while and still generate above average returns. I don't
have to outperform Sensex in each of its every mad rush.

Over the years I have become more circumspect in giving advise. The
quality of investment is just of facet of investment transaction. The
investor is the second facets. Suppose I give a long term `buy' advise
and you think that it will give you 100% in 2 month. It falls by 30%
that month and you sell it, then my advise is meaningless. I've come
to know that even sound advise can harm people. That's why you would
never see messages from me, with glossy titles like "million dollar
advise" even if I believe it is.

In spite of being in IT I find IT businesses very difficult to
predict. I like commodities because the equations are very simple
there. The next thing I like are branded businesses where revenues are

To summerize, investing is not about making great and accurate bets.
Its about being 100% sure in avoiding big mistakes. The amount of
effort it takes to be 100% sure automatically ensures that you end up
buying stakes into great businesses and returns usually follow.

Posted: Feb 5, 2006

1 comment:


My take is the best thing is something in between trading and buy and holding.