Should you buy now and investigate later? (Mar 18, 2015) |
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In this issue:
» Why Bill Gates thinks Buffett is more valuable now than ever before...
» India - lowest cost of living in the world?
» New lending regulations could hit India's ambitions to grow at fast pace
» ...and more!
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The world of money and stock markets is just as mysterious and puzzling as the complexities of life and the universe. It is natural, here too, for investors to seek the 'gospel of truth', 'the magic formula' that would bring them great fortunes. The smartest thing to do -we are genetically programmed to do this - is to look for the 'master' who has a solid track record of wealth creation and then to mimic his approach.
This makes complete sense. The likes of Warren Buffett, Peter Lynch and Benjamin Graham have inspired generations of investors across the globe. And some sincere learners indeed became rich following the investment philosophies of these stalwarts. But not all... Why?
There are a few reasons... One, many blind followers have a tendency to mimic the 'master' instead of mimicking his approach. The moment investors in India hear that a famous investor has bought a particular stock, they make a beeline to buy the stock without a second thought.
Two, many investors take the words of famous investors a little too literally. We have something important to share in this context. A week ago we came across an interview of famous Indian investor Rakesh Jhunjhunwala, also referred to as RJ or 'Big Bull'. In this interview, he talked about his 'buy now, investigate later' mindset: "Sometimes a stock's story is too overwhelming to ignore; you just go and pick it up. Later one can sit and investigate the merits."
Words can be puzzling. And to someone who takes words too literally, it can be dangerous too. Does Mr Jhunjhunwala mean you should buy a stock first and then research it? We don't think so.
When he says 'investigate later', it does not mean that he buys stocks without prior research. He has many years of research and investing experience behind him. So he would already have a fair acquaintance with the stocks that he buys.
Hence, 'investigate later' only means that a much deeper, granular study could be done later if the stock story sounds compelling and fares impressively on some important parameters.
So yes, if a stock makes the cut based on some preliminary checks, if the stock story seems very compelling and if the valuations seems attractive, then it would certainly make sense to make a partial investment. Then you could carry out further research to see if your view gets validated. If your conviction in the stock story grows, you could allocate more funds to the stock.
All in all, we believe that the best way to profit from the knowledge and wisdom of famous investors is to learn from their investing philosophy and approach. Do not try to imitate them by buying up all the stocks they hold. And don't take their words too literally either. Be a student, not a follower.
Do you think it makes sense to buy a stock first if it makes the preliminary cut and carry out a deeper research later? Let us know your comments or share your views in the Equitymaster Club.
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We are living in a time when there is unprecedented amount of information and resources on investments. In other words, you have practically EVERYTHING at your disposal to become really rich. So what is the missing link that will take you there, to the fortunes that you deeply desire? In our view, having access to loads of information alone is not enough. You need the wisdom to screen information diligently and pick what is valuable. By wisdom, we don't mean having a high IQ. Wisdom is a kind of practical intelligence that comes with years of experience.
Recently, when Bill Gates praised Warren Buffett's annual letter to Berkshire Hathaway shareholders, he validated exactly this point. As per Gates, this latest letter is the most important annual letter Buffett has ever written. One of the interesting points that Gates mentions is: "What really struck me this time about the letter was the value of experience. Buffett is better today than ever because he's seen so many businesses and he understands business profitability so incredibly well."
Need we say anything? However boring it may sound, the simple key to excelling in the stock markets is study, practice and patience.
Inflation has been haunting us Indians for quite a while now. In fact, most of the Reserve Bank of India's policies have had no option but to be geared towards firefighting the menace of inflation. Amid this background, today's chart of the day should come as some solace. As per a study showcased in the Business Insider measuring current consumer price levels across the globe, India is pegged to have the lowest cost of living in the entire world!
India comes it at just 26 on the cost of living index, the lowest by far. Even countries such as Nepal, Pakistan and Tunisia come in higher on the index. At the other end of the spectrum lies Switzerland with the highest cost of living in the world.
India: The lowest cost of living in the world
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Bank lending growth is already near its slowest pace in five years. And if this wasn't enough, it seems like the months to come may see banks go even slower on this important front.
And as much as they would hate to do this, changing regulations will mean that banks will be forced to set aside more money for their stressed loans. Come the 1st of April, banks will have to increase capital levels to cover 15% of restructured loans. This is up from just 5% currently mandated. Compounding this problem is the fact that distressed loans soared to a record Rs 4.2 trillion as of December 2014 as per a report in Livemint, which is a large 6.2% of total advances.
Not surprisingly, many banks, especially public sector banks, are feeling extremely constrained with respect to capital. And thus are moving very cautiously on lending, even refusing to pass on recent interest rate cuts in many cases. Considering the country's and the government's ambitions to grow the economy at a brisk over the next few years, such a constrained growth in lending may very well prove to be a big spoke in the wheel as far as these ambitions are concerned.
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The Indian stock markets were trading weak today on the back of intermittent selling activity across index heavyweights. At the time of writing, the BSE-Sensex was trading down by around 91 points. Losses were largely seen in power and IT stocks.
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Today's investing mantra |
"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!" - Warren Buffett
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| This edition of The 5 Minute WrapUp is authored by Ankit Shah. |
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ARUP BHATTACHARJEE
Mar 18, 2015Dear Editor,
Incidentally, I have come across the same interview of RJ,which you have refereed to.
My comments are as follows;
1)What he said has to be understood in proper context. I think he meant, that when one has fair amount of idea of about a company, its business,future prospect & it's stock valuation/price, if market gives opportunity, one should grab that immediately without much investigation why it has corrected. I heard him saying that, he off-course does further investigation when he invests his 2nd tranche.
2)I totally agree with you that "When he says 'investigate later', it does not mean that he buys stocks without prior research. He has many years of research and investing experience behind him. So he would already have a fair acquaintance with the stocks that he buys.Hence, 'investigate later' only means that a much deeper, granular study could be done later if the stock story sounds compelling and fares impressively on some important parameters."
3)It will be a blunder by a retail investor by following RJ's above-mentioned suggestion without proper understanding of the context & the broader picture.
rgds,
Arup