When we are working in the field of equity markets tends to face this set of questions from probable investors on regular basis.
“Where do you think markets are headed?”
“Which stock is the Best buy from one year perspective?”
“How I can double my money in short run?”
“Do you think we should stop investing into equity markets as they are not yielding returns from last 3 years?”
Well today through this forum I will take this opportunity to provide our members some insight into basis of investing. Investors who have been following markets for quite sometime would be aware of investment techniques of World’s greatest investor – Mr. Warren Buffett and so it is quite obvious that one can find many similarities in my thought process and investment style though it is quite natural that no one can claim genius of this great man.
First, we need to understand equity markets are not about speculation and short term money making machines but investing in stocks are basically we own partnership in that particular business. As we know that only very few business would yield profits from very first day while rest would take a reasonable time to give good returns. In times of crisis most of business would face slump period but it does not mean that our investment would never yield returns. So whenever now you think of investing do it as if you are willing to be a partner in the business.
Second, when I say partnership that means it’s quite obvious that we want partners who are trustworthy and smart. So here comes the most important point that is assigning highest rating to management when we are deciding our investment in listed companies. Business icons like Mr. Ratan Tata, Narayan Murthy & Deepak Parekh are few of best examples of world smart managers with highest credibility who have created great wealth for their shareholders.
Third, invest in companies whose business model we can understand and its simple i.e. core competency. Say for e.g. its obvious that one who is a banker understand its model very easily and should prefer to invest in banking sector or one who is in field of technology should prefer taking exposure in an IT company.
Fourth, we should look at sustainability of the business model in long run. Warren Buffett made investment in stocks of newspapers, beverages or financial services as he had faith in long term sustainability of its business model, so it’s a question we need to ask ourselves while investing whether company in which we want to invest will be operating years down the line. I know one of my uncle who had invested in stocks like Asian paints, Castrol and Nestle two decades back and has been reaping handsome returns in form of dividends apart from capital invested initially but he understood simple nature of their business as he himself used mentioned companies product and never lost patience as well as faith in management.
Fifth, one should look at intrinsic value of any business for investing which is nothing but discounting future cash flows by a discount rate which should be equal to returns expected. If you find that an intrinsic value is more than current price of the stock than it makes a good case of investment.
Sixth, though one might have done all research it all boils down to one thing that is patience. Mr. Warren Buffett has been holding stock of Coca Cola Company for than two decades. Invest in business where you don’t want to sell anytime soon and than sit tight for a considerable period. Just imagine if we had to make investment in real estate do we check prices everyday? Answer is obviously quick no. Than what is the need to check prices everyday in case of stocks only because we have easy access to prices?
I hope above investment techniques would prove as a useful insight which would spread more awareness among investors and repeat good benefits out of it.
Author: Manish Parekh
Marwadi Shares & Finance Ltd - Investment Team