|»5 Minute Wrap Up by Equitymaster|
On This Day - 18 MARCH 2015
Should you buy now and investigate later?
In this issue:
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.
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.
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.
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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