Investment Strategy
Value investing: Can an individual investor match the skills of a professional institutional investor
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
Strange as it may sound, but the answer is an emphatic YES. In fact, not only can an individual investor match the competence of a professional institutional investor, he can give the professional a run for his money.
The individual investor, being a consumer himself can have a direct feel of the market much before the market research team of an institution will inform the institution. To give an example, if you are a regular visitor to Archies Gallery, in no time you can judge if the popularity of Archies products is on the rise or not. Browsing through the store and looking at the profile of the buyers should give you sufficient clues about the growth of the company.
One of the key principles in value investing is understanding the business you are buying. Unless you can understand the nature of business of the company, better stay away from it. An investor should take a commonsense approach while buying the shares. He should ask himself if he would buy the whole business at the prevailing market rate of the share multiplied by the total number of issued shares of the company. If the answer is yes, he can go ahead and invest in the shares.
The concept of a circle of competence was presented by Phillip Fisher in his book, “Common Stocks and Uncommon Profits”. Warren Buffett was much inspired by this idea and he always stayed within his own circle of competence. He never ventured into buying a business he did not understand, preferring simple businesses over complex businesses, however exciting the latter might have looked to him. He remarked, “[W]e try to stick with businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change we’re not smart enough to predict future cash flows.”
Thus, while Buffett always admired Bill Gates, and even has Gates as a Director in his investment vehicle, Berkshire Hathaway, he never invested a dime in Microsoft, as Microsoft has a business model which Buffett does not understand. He would prefer to invest in companies like Coca Cola , American Express, Gillette and Washington Post whose business model are simple and can be easily understood by him. He makes substantial money out of his investment in insurance business, which though fairly complicated, is within his circle of competence.
One difficulty for individual investor is that of getting the information. Thanks to Internet, information is now not very difficult to locate. A visit to company’s web-site should give a great deal of information about the company. Financial newspapers like Hindu Businessline carry great amount of information about various companies, and such information could be a good starting point for your research. If you want to succeed in long term investing, you must have an ability to read the balance sheet and other financial statements. Understanding the annual accounts is easier than it seems to most of us, and buying an inexpensive book on how to understand financial statements would be one of the best investments you ever made.
A visit to the supermarket, or a look at your wife’s shopping preferences could give you great clues about changing tastes and preferences, much before any analyst would capture the data. If you spend just a fraction of time that you spend on buying a TV , on buying a long term investment, you would be rich many times over.
A value investor does not get carried by the terms ‘biotech’ or ‘InfoTech’ appearing in the name of a company. Unless you can understand biotechnology, or that area of information technology a particular company is working in, your investment would not be better than a bet. It does not mean that all the companies with these adjectives are not worth investing, it only means they may be out of your circle of competence.
Of course, not many people are born with a great circle of competence, and as a value investor you should work hard to increase your circle of competence. It could be an industry you have worked in, a product that you have been patronising for years, a company which you know inside out, or an industry that you can understand easily. Every investment idea you evaluate gives you a great chance to widen your circle of confidence, whether eventually you go ahead with the investment or not is immaterial, the knowledge would stay with you which can be put to use when there is an opportunity in that particular industry.
If during the visit to my doctor, the doctor discusses with enthusiasm that Cipla or Dr Reddy is doing well, it is worth further investigation, but if the doctor advises me to buy Jet Airways, I would rather take ‘tips’ from the nearest Panwallah, than from the doctor!
Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com
Strange as it may sound, but the answer is an emphatic YES. In fact, not only can an individual investor match the competence of a professional institutional investor, he can give the professional a run for his money.
The individual investor, being a consumer himself can have a direct feel of the market much before the market research team of an institution will inform the institution. To give an example, if you are a regular visitor to Archies Gallery, in no time you can judge if the popularity of Archies products is on the rise or not. Browsing through the store and looking at the profile of the buyers should give you sufficient clues about the growth of the company.
One of the key principles in value investing is understanding the business you are buying. Unless you can understand the nature of business of the company, better stay away from it. An investor should take a commonsense approach while buying the shares. He should ask himself if he would buy the whole business at the prevailing market rate of the share multiplied by the total number of issued shares of the company. If the answer is yes, he can go ahead and invest in the shares.
The concept of a circle of competence was presented by Phillip Fisher in his book, “Common Stocks and Uncommon Profits”. Warren Buffett was much inspired by this idea and he always stayed within his own circle of competence. He never ventured into buying a business he did not understand, preferring simple businesses over complex businesses, however exciting the latter might have looked to him. He remarked, “[W]e try to stick with businesses we believe we understand. That means they must be relatively simple and stable in character. If a business is complex or subject to constant change we’re not smart enough to predict future cash flows.”
Thus, while Buffett always admired Bill Gates, and even has Gates as a Director in his investment vehicle, Berkshire Hathaway, he never invested a dime in Microsoft, as Microsoft has a business model which Buffett does not understand. He would prefer to invest in companies like Coca Cola , American Express, Gillette and Washington Post whose business model are simple and can be easily understood by him. He makes substantial money out of his investment in insurance business, which though fairly complicated, is within his circle of competence.
One difficulty for individual investor is that of getting the information. Thanks to Internet, information is now not very difficult to locate. A visit to company’s web-site should give a great deal of information about the company. Financial newspapers like Hindu Businessline carry great amount of information about various companies, and such information could be a good starting point for your research. If you want to succeed in long term investing, you must have an ability to read the balance sheet and other financial statements. Understanding the annual accounts is easier than it seems to most of us, and buying an inexpensive book on how to understand financial statements would be one of the best investments you ever made.
A visit to the supermarket, or a look at your wife’s shopping preferences could give you great clues about changing tastes and preferences, much before any analyst would capture the data. If you spend just a fraction of time that you spend on buying a TV , on buying a long term investment, you would be rich many times over.
A value investor does not get carried by the terms ‘biotech’ or ‘InfoTech’ appearing in the name of a company. Unless you can understand biotechnology, or that area of information technology a particular company is working in, your investment would not be better than a bet. It does not mean that all the companies with these adjectives are not worth investing, it only means they may be out of your circle of competence.
Of course, not many people are born with a great circle of competence, and as a value investor you should work hard to increase your circle of competence. It could be an industry you have worked in, a product that you have been patronising for years, a company which you know inside out, or an industry that you can understand easily. Every investment idea you evaluate gives you a great chance to widen your circle of confidence, whether eventually you go ahead with the investment or not is immaterial, the knowledge would stay with you which can be put to use when there is an opportunity in that particular industry.
If during the visit to my doctor, the doctor discusses with enthusiasm that Cipla or Dr Reddy is doing well, it is worth further investigation, but if the doctor advises me to buy Jet Airways, I would rather take ‘tips’ from the nearest Panwallah, than from the doctor!
Dr. Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA, CISA, CISM, PhDChartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com
posted by Dr. Tejinder Singh Rawal at 6:55 am
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