Why I Prefer Branded Clothes But Not Branded Stocks?

Dec 7, 2020

Rahul Shah, Editor, Profit Hunter

My wife doesn't like the way I shop for clothes.

She thinks I get fleeced under the garb of buying high-end brands as some of them offer no value for money.

She could be right. To be honest, I have no understanding of fabric quality. Zilch. Nada.

To compare one fabric with one another in terms of texture, feel, durability etc. and then to pit them against their respective MRPs is too much of a mental exercise for me.

Which is why I have figured out a pretty useful short cut.

Buy the best brand that fits my budget and voila, problem solved.

I know that these brands have been around for years, have made a mark for themselves and can be trusted blindly to deliver the goods.

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Therefore, I often tell my wife that my purchases may not always be true value for money and it may look like I am paying a small premium most of the times.

But she has to consider the other angle as well.

What if I spend a few thousand rupees on some local brand and the purchase turns out to be bad given my limited skillset.

Here, we may have to write off the entire amount versus a small premium I have to fork out for well-known brands.

If you think this logic makes a lot of sense then you'll agree that investing also works the same way.

In investing, there are trained as well as untrained buyers of stocks.

The untrained buyer who has limited experience of how to conduct research, is better off buying the best quality companies.

He may end up paying a premium and at times a hefty one at that, but the risk of a permanent loss of capital is not as high as in the other direction.

This other direction being buying second grade or third grade companies even though their stock prices could be quite tempting.

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However, if a high quality stock offers limited downside, their potential upside could also be limited.

The reason is simple. If you think that a certain stock is of extremely good quality and has been around for years, the market also has a similar opinion of the same.

Therefore, it is seldom available for cheap. There's always a premium attached to it which limits the upside.

It is because of this reason I don't usually recommend high quality stocks in my Automatic Income project unless the premium to be paid for them is quite low.

I like to take it down a notch in terms of quality provided the prices are very attractive.

I'd like to believe that my more than 15 years of experience in the stock market qualifies me to be a trained investor and pick out those stocks where the risk-reward ratio is firmly in favour of the investor.

My interest therefore is not in stocks that scream quality and thus offer limited upside.

Instead, it is in those stocks where the discrepancy in price and the stock's true value is so high that it offers a huge upside potential.

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Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

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