One small step can make you Warren Buffett
(Aug 17, 2015)
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In this issue:
» India Inc. struggling in Modi's reign
» Increasing shareholder activism to strengthen corporate governance?
» Round up on the markets
» ...and more!
Let me start with a question today... Do you think you can become like Warren Buffett?
Pause for a moment. Consider this question seriously.
Pay attention to your immediate thoughts and responses. What comes to your mind? Do you think it is possible? Does the question sound silly? Unrealistic? Too big a goal?
Think about any big goals that you have been yearning to achieve.
For instance, having a rock solid stock portfolio that would let you retire early...earning enough passive dividend income that would pay off all your annual expenses...
Why do these big goals remain elusive? What could you do right now to start moving in the direction of your goals?
Before I share the success formula I discovered, let's understand what success is and why some people are able to achieve their dreams.
Success is transforming your existing circumstance (A) to the desired circumstance (B). This journey from A to B entails a series of improvements...improvements in the way you perceive, think, decide, and respond. This is what differentiates highly successful people from the rest.
Sounds easy in theory, but going from A to B may be quite an uphill task. The journey may be long and arduous, demanding thousands of improvements...
What can you do to make the required improvements consistently, without giving up or tiring out?
The Japanese have a fantastic solution for this. It is called 'kaizen'.
The kaizen method
Improvements can be in the form of radical leaps or incremental steps. The Japanese term 'kaizen' is associated with continuous, incremental improvement.
Japanese businesses successfully employed this method after World War II to boost productivity and worker morale. Now, this method is applied across various fields, including personal growth.
So, what is kaizen all about? What is the philosophy behind this approach?
I was surprised to learn that kaizen is a highly scientific approach rooted in neuroscience. Let me explain a bit...
There is a part of your brain called the 'amygdala'. It is the fear center in your brain. It triggers the automatic 'fight or flight' response when faced with a potential threat. In terms of brain evolution, the amygdala is a very old structure. It was an indispensable device for our primitive ancestors to guard against threats to survival from predators.
But in our modern times, this brain mechanism can sometimes sabotage our thinking and decision making by sending false alarms. For instance, it often reacts to big changes, complexity and unfamiliarity the same way it would have responded to the sight of a dangerous snake. The truth is that the amygdala cannot tell between a real threat and a perceived threat.
Do you remember the last time you consciously decided to make a big change in your life but gave up soon? Who sabotaged your plans? Most likely it was the amygdala.
Once you know how the amygdala functions, you can devise a way to trick the automatic 'fight or flight' alarm. Kaizen can help you do that.
The kaizen method emphasizes making small, continuous improvements...so small that the amygdala does not perceive them as a threat.
Coming back to the start... If you want to acquire the investing wisdom and business acumen of Warren Buffett, what should you do now? Let's consider two approaches...
I could tell you to start reading all the books on value investing, business, accounting, and valuations, and so on...to devour as many annual reports as you can...to spend ten hours reading and researching every single day of your life...
And it may sound like solid advice. You might even feel inspired to try. But what if you are not an avid reader...or you're uncomfortable with numbers...or you have a busy routine? You are likely to give up pretty soon. The amygdala feels threatened by big, uncomfortable changes.
How about starting with really small changes instead? If you are a newbie investor, how about spending five minutes a day reading about investing or browsing through an annual report? Five minutes may sound almost ridiculous. Is that going to make any difference? Yes, certainly!
The idea is to create a routine that will gradually grow into a habit. And importantly, without triggering the amygdala.
As you go, keep increasing the time you dedicate to investing. Over time, the momentum will set in on its own. The key here is consistency.
That's kaizen in short.
So, if you have been trying to bring about big changes in your investing fortunes, try the kaizen method for a change. Take one little step towards wisdom and wealth every day.
"The journey of a thousand miles begins with a single step." - Lao Tzu
What is that one little step that you are going to take today to become a wise, successful investor? Let us know your comments or share your views in the Equitymaster Club.
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More than a year has passed since the Modi government was elected to power with a clear majority. If expectations are anything to go by, it seemed that markets expected Mr. Modi to wave a magic band and bring the much awaited turnaround. Be it individuals or corporate, the enthusiasm knew no bounds. Themes like disinvestment, debt reduction, reform were sold to the retail investors. However, a year down the line, little seems to have changed at the ground level. And what better measure could one use than corporate earnings to gauge that. As the chart suggests, the earnings and sales growth continue to disappoint quarter after quarter. While sales growth has been languishing, the performance at the bottomline level continues to belie hopes.
As an article in Firstpost suggests, high hopes are waning. The stock markets have lost momentum. Those who share this disappointment include industrialists and corporate executives. The big ticket reforms are no where in sight. India still reels under the issues that have been dragging it for long - be it land, labour or tax matters. The public sector banks, despite all the big announcements, remain as precarious as ever in terms of asset quality.
These are exactly the concerns that we have been warning the investors about - that nothing is going to change overnight. Despite a pro reform Government at the centre, one needs to be realistic about the pace of these changes. And one of the ways that long term investors can follow to avoid let down is bottom up approach of investing. As long as you invest in rock solid businesses at right valuations, you are unlikely to be disappointed in the long run.
India Inc. still waiting for a turn around
Even as big bang reforms promised by Modi Government remain elusive, there is a sea change taking place when it comes to the attitude of the minority investors. It was the common man who brought a change the political landscape more than a year back. This time, it seems to be the common investor determined to take to task the errant promoters and managements. As an article in Livemint suggests, increasing instances of investor's activism are making firms cautious. What also deserves a mention here is regulator's effort to empower minority shareholders.
Be it the remuneration of the management, appointments of executives or related party transactions of significance, common investors are making sure that their view matters. This is indeed a much needed change for the evolution of corporate Governance. After all, even minority shareholders have a stake, however small, in the business. So they should have an opinion and influence on the way the business is run. Even though we have a market regulator to discipline promoters and managements, there is no dearth of cases when the latter has chosen to take minority investors for a ride. As every common investor chooses to stand up for himself and fight for his cause, we believe that a major loophole in corporate governance is getting plugged.
The Indian stock markets continued to trade in the negative territory after opening the day on a weak note. At the time of writing, the BSE-Sensex is trading down by 275 points (1%) and the NSE-Nifty is trading down by 70 points (0.8%). The S&P BSE Midcap index and the S&P BSE Smallcap index are trading marginally up. Sectoral indices are trading mixed with stocks from the pharma and energy sectors leading the losses. However banking stocks are trading firm.
"It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that" - Charlie Munger.
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|This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Richa Agarwal (Research Analyst).
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