Value Investing!! What's the secret?

The term “Value Investing” has been used and abused to such an extent that it confuses a lot of people. I have realized that “Investing” itself bring so many emotions and thoughts varying from gambling to luck to fear of losses and greed to earn quick money.

The amount of money involved is directly proportional to the seriousness of your emotion. The core principle of “Value Investing” requires emotion-less behaviour from an investor. But with so much of chaos surrounding us and TV/newspaper screaming at an extreme pitch about the “sensex” that emotions are bound to arise. If you ponder a little bit, you will realize the similarity of emotions generated by sex and sensex, the UPs and DOWNs, the fear and greed are similar, along with bringing similar sensational news in the media.

I have understood that most people who invest in stocks and looking for quick bucks rather than sustained growth over a long long period. This single biggest greed makes the stock investment risky and volatile despite the millions of theories and re-search in understanding the stock phenomenon. It needs to be repeated in our mind that “nothing in this world is free” and applies to stock investments as well.

It is important to distinguish between “investing” and “trading”, since although both involve buying/selling company stocks, but the key difference is your intention of getting involved. I would rather think of it as a difference between “buying a house for living” Vs “brokering a housing deal”. In both the aspects you would investigate a house property, buy/sell it but the intention is different. When you brokerage a housing deal, your intention lies in pocketing the brokerage amount rather than finding an ideal place to live for your customer. This is exactly similar to “stock trading”, where you are not interested in whether the company is worth investing based on it’s potential as a “lambi race ka ghoda” (long term value). As a trader you would not even care whether the company would exist even after a month. As a housing broker, would you care if the house you sell gets destroyed after one month of your deal? Surely not, with the brokerage you earned, you would be using that money to do more such sweet deals. Same with stock traders.

So what about stock investment? You would agree “buying a house for living” is a different ballgame than just being a broker. When you think of buying a house, you would spend so much time visiting the builders, visiting the sites, reading reviews, acquiring knowledge about buying (what is super built up area, how much is stamp duty etc etc). When you want to buy such a house, you would really care about the quality of the house, how much appreciation it will provide in long long time (not few months/1-2 years) and you would certainly wont invest if you get to know that the building will not exist after 10 years.

How many housing brokers you know compared to people who bought their own houses? The ratio will definitely be skewed towards people who own their houses. So it is for sure that handling a brokerage business is not everyone’s cup of tea, but this same principle people forgets when investing in stocks.

It is extremely hard to understand that the very same people who will spend so much of energy and time in buying a house for living into it, do not spend even half of that time in thinking of investments in stocks. They would rarely hesitate to put their hard-earned money into that “hot-tip” they received from friend or a magazine.

The simple reason for such behaviour is that most people do not think of stock investments as “investment for life” which they think about house investment.

The similarity between buying a house and stock investment is hard to ignore since have you seen people investing in 10 or 20 houses in a single shot, but they would not hesitate to invest in more than 20 stocks at one time.

The biggest point to keep in mind when investing in stocks is to think of “buying a business'” (similar to buying a house) and to think of stocks as an “asset building” activity (similar to buying a house) rather than a mechanism to make quick bucks. It is a myth to think that any retail investor can earn astronomical returns in a short period of time. So instead of wasting time/energy in pursuing those hot tips, read-read and understand the stock market and the philosophy you want to pursue to get decent returns. Warren Buffet has said this ”Read everything you can. Read, and then on small scale do some of it yourself.

If you want to be a value investor, stop watching CNBC/Bloomberg on a daily basis.

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