This article is about a principle in investing. To learn more about the basics of investing, you can join this course on Elearnmarkets: NSE Academy Certified Capital Market Professional (E-NCCMP).
I would like to start today’s blog by introducing about my uncle who is a businessman and an investor too. He is now around 50 years of age and has been investing since the beginning of his investment career in 1990’s. He is not much educated but he always tells me, remember Einstein’s word- “Compound Interest is the eighth wonder of the world”. Not only he tells others about it, but he follows it too. The thing which i like the most about him is his discipline. From the very start of his career, he started investing a fixed sum every month. He does not carry any research before investing but what he does is he buys stocks of those companies whose product he uses in his daily life. Say he wears Titan watch so he bought stock of Titan industries, has Hero bike so bought Hero motocorp, similarly he has Colgate Palmolive, HUL, Dabur, Cera, Asian paints, Pidilite, ITC, United spirits ltd, Cipla and the list is endless. These are the stocks which he didn’t acquire at a point in time but over the years. His long term is not 5-10 years but he says that he is buying the stock and his children will sell it. Even Warren Buffett says, “Our favourite holding period is forever”. So we can say that making money in investing is not a rocket science and the most important thing is discipline and patience, where even the highly qualified people fail many a times. Even Warren Buffett, the most respected person in field of investing, himself made a research by collecting bottle caps in the mall before investing in Coca cola company. I am not saying, this is the only reason why he bought coca cola but it was one of the most important reason.
Simplicity is the key to long term success in investing. Key points which we should look into while investing are: –
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- we should focus on business which are simple and easy to understand that requires fewer assumptions
- look for moat in businesses and margin of safety while buying the stocks.
Warren Buffett says, ”We haven’t succeeded because we have some great, complicated system or magic formulas we apply or anything of the sort. What we have is just simplicity itself”. In his 1993 letter, he wrote – “We try to stick to 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. Incidentally that shortcoming doesn’t bother us.”
It is not that we should not analyse the company and sector, should not read annual report etc but we should not make our analysis so complex with multiple variables that you can’t be sure that it was completely your skill and not dumb luck. Just like in engineering, it’s the “KISS principle (Keep it simple stupid)” – avoiding complexity and overspecification, sometime its better. People generally give more importance to complex ideas instead of intelligent simplicity. Even the people with simple knowledge can outperform the intelligent people by just applying simple ideas rather than focusing too much much on complex models like Discounted Cash-flow(DCF) etc. Charlie Munger says,” People calculate too much and think too little…………….we have a passion for keeping things simple. If something is too hard, we move on to something else. What could be more simple than that?”
