The golden rule of investing
In this issue:
» India Inc borrows more to pay off debt
» Should India open mining?
» Demographic dividend - the wasted growth driver
» Fiscal cliff outlook brightens
» ... and more!
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That's right. The way to make this easy is to apply the golden rule of investing devised by none other than the legendary investor Warren Buffett. The rule is to stay within 'your circle of competence'. Circle of competence is nothing but investing in companies or sectors where the investor knows more than an average investor. In simpler words it means invest only in what you know and understand rather than investing in anything and everything. It especially means that one should stay away from sectors or businesses that you do not understand at all. Investing in what you know would mean that investors should know the company's products and services. Understand the company's customers and its competitors.
If you apply this golden rule to the entire list of listed companies, you are bound to come up with only 3 or 4 companies or at the most 10 companies. These are the ones you should concentrate on because these are the ones you would be able to earn higher returns in. If you can tell clearly as to what is driving a company's growth then in all probabilities you will be able to predict its growth as well. And understand what would be the right price to pay for this growth. However, if you step out of your circle of competence then your answer to the same question would be 'I don't know'. Or worse, 'Because so and so told me it will grow at this rate". This is nothing but a recipe for disaster because you would never know if the price that you are paying for the stock is right or wrong.
So there you have it. The golden rule of investing is to stay within your circle of competence. It is important to remember though that this circle is not something that comes in one day or one month. It takes time to build and strengthen. And for that you need patience. But in the long run this circle can help you earn fantastic returns on your investment. It is the recipe of getting rich in the long term.
Do you agree that staying within your circle of competence is the recipe for getting rich in the long term? Share your views or you can also comment on our Facebook page / Google+ page
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Source: The Mint |
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However, few Indian firms have perhaps failed to appreciate the value of the above statement. We are referring to firms that were aggressive issuers of a security called as FCCB. Consequently, the bad consequences are now coming home to roost. As per a leading daily, most of the companies whose FCCBs were due for redemption this year have borrowed afresh to meet their obligations. This means that they would now be paying a higher interest rate than what they paid for their FCCBs. This could worsen their interest coverage at a time when the core operation is not throwing up enough cash on account of the economic slowdown. Clearly, this is yet another example of why it pays to be conservative at all times.
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In short, the bulk of India's economic debate has mostly circled around short to medium term issues. What is seriously lacking is a long term vision for the country. How India will absorb its rising workforce is a very crucial question. But there has been little directed effort towards harnessing India's demographic dividend. India has a growing working population. And this demographic advantage is likely to continue till 2050. It is worthwhile to note that most other major economies would be witnessing a reverse trend during this period.
In order to channelise the young population, India really needs to expand its manufacturing base. Necessary labour law reforms have to be made. There is also a greater need to focus on vocational education to create a skilled workforce. Such long term initiatives are the need of the hour. But the government seems to be concerned only about the immediate challenges before the 2014 general elections. A youth without a job is more likely to take to regressive anti-social activities. As such, there is a huge danger if the rising youth population does not find meaningful employment.
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House Speaker John Boehner has offered to accept a tax rate increase for the wealthiest Americans. This in some sense signals a step down from the staunch Republican stance. This means that what the Democrats and the current government need to do is figure out the income levels and the tax rates. With just two weeks remaining before the fiscal cliff kicks in, it is questionable whether both parties will be able to come out with a comprehensive policy by then. But the fact that the Republicans are willing to relent appears to be an encouraging sign. And now, the ball is in the Democrats' court in terms of the steps to be taken next and certain compromises that they will need to make too. Whether this will be the solution to a much longer term problem of the health of the US economy remains to be seen though.
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As per a recruitment survey published by Firstpost, hiring activities are likely to gather momentum from the first quarter of 2013. And no prizes for guessing the sectors that will lead the pack. As expected, sectors like IT and FMCG will lead the pack. Financial services and auto sectors follow next. But it is encouraging to know that even sectors like realty and telecom, which are badly affected by downturn and regulatory issues, are not shying away. The survey covers around 3,000 employers in India. Hence one can say with a reasonable degree of confidence that the employment scenario in India is finally looking better. We hope this gives the much needed boost to the economy. Fingers crossed.
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04:55 | Today's Investing Mantra |
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2 Responses to "The golden rule of investing"
sundaravaradan S
Dec 17, 2012Hi People,
It is TRUE and well said that we need to Invest in 'Our Circle of Competence' (Over the years).
It is like saying' "If a Human drinks the Heavenly Nectar, he will never Die'! How True!
The only thing is No one...No one.. is competent to know ALL the Macro, Micro events of the Future of any Company.
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We have so many Analysts, MF-Managers,HNIs, as Investors.
Are the always right? Do they pick-up 3-8 stocks only, at ANY given time?
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No offence meant!
THIS IS SIMPLY IMPRACTICAL ADVICE, in this interconnected World!
Rakesh Kumar Jajoo
Dec 17, 2012What you stated is really very correct.The golden rule of investing is to stay within our circle of competence.
Fantastic advise.