1 Avoid leverage
Never borrow to invest in the stock market. Assuming a 1:1 debt-equity, a 50 per cent fall in the market will erode 100 per cent of your net worth and put you out of the game. Avoiding leverage allows you to take the booms and busts of the market in your stride.
2 Have a role model
Till 1994, much of my understanding of equity investing was EPS × P/E = Stock price. Looking back, I call this ignorance of ignorance. Then in 1994, I came across Warren Buffett’s annual letters. From 1995 onwards, I also started attending Berkshire Hathaway’s annual general meetings. This transformed my understanding of equity investing. For instance, I slashed my portfolio from 200 stocks to about 15. It pays off significantly to have a role model early in your stock-market journey. You can always improve upon the learning from them, but at least you get a solid start.
3 Price is what you pay, value is what you get
It is said that in the stock market, people know the price of everything but the value of nothing. Warren Buffett has made the distinction very clear by saying, “Price is what you pay, value is what you get.” Using whatever methodology, investors must independently arrive at the value of companies and juxtapose the same with the price. If the value is higher than the price, then there’s a case to buy. If the value is lower than the price, then the stock should be avoided or sold if already held. The above are just a few of my key investing lessons. In closing, it can be said that equity markets are getting bigger and more sophisticated by the day. There’s enough room for new learning and new masters. You too can be one!
4 Great, Good, Gruesome
This lesson is from Warren Buffett’s 2007 annual letter. All companies can be classified into Great, Good and Gruesome. Great companies are those whose return on capital is not only significantly higher than the cost of capital but also rises with every passing year. They require virtually no capital to grow. Good companies are those that earn a return on capital higher than the cost of capital but require significant investments to grow. Gruesome companies earn a return on capital lower than the cost of capital and are compelled to invest more at these lower rates in order to grow. The key lesson is to avoid Gruesome companies at all cost, no matter how cheaply valued they appear to be.
5 90% rule of investing
Investment guru Philip Fisher in his book Path to Wealth through Common Stocks says, “In equity investing, management is 90%, industry 9% and 1% everything else.” I assess the quality of management by three criteria: unquestionable integrity, demonstrable competence and growth mindset. In fact, my few investment mistakes have been mainly because of a wrong judgement of management quality.
6 Power of compounding
The secret to successful stock investing is understanding the power of compounding. Compounding works best over the long term. For instance, a 25 per cent return over 10 years results in an appreciation of 9.3 times. However, the same over 30 years results in an appreciation of 808 times. The number of years held is only three times higher, but the appreciation is 87 times higher.
7 India’s NTD opportunity
This is a powerful framework to strengthen the conviction in the India growth story. It took India 60 years since independence to clock its first trillion-dollar of GDP. Post that, every next trillion-dollar (NTD) of GDP is coming in at a successively shorter period due to the power of compounding on a higher base. When per capita income rises, consumer spending on necessities does not increase in the same proportion, leading to a huge growth in discretionary spends, such as on white goods, vehicles, travel, etc.
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QGLP: Every year for the last 24 years, Motilal Oswal Annual Wealth Creation Study launch by Mr Raamdeo Agrawal. These studies and frameworks culminated in the form of a proprietary investment process which he calls QGLP – Quality (of business and management), Growth (in earnings), Longevity (of Quality and Growth), at reasonable Price. Investors should ideally come up with a time-tested investment process of their own. If not, they are better off investing with fund managers who have a well-articulated investment philosophy or process.
