Power of Focus
First with the ‘Power of Focus’
“Price is what you pay, Value is what you get”- by Warren Buffett
The prime focus for an investor is to get the maximum value out of the investment that he makes. He should chase the change in value of the investment, that is, the delta. The market is continuously pricing the stocks according to its knowledge and hence it is very important for an investor to get ahead of the market.
To get ahead of the market, an investor should focus on some specific good companies and do an in-depth research on them. Past data is a reliable source to select these few good quality companies. Value and not the price of the stock should be taken into consideration while selecting your focus companies.
Our veteran investor’s mantra in life is to “Buy companies that are rock solid from the inside”. He says that if a company is broken and is not making money, no matter who is buying that company, he will not buy it. This is a big lesson in life. We all tend to become victims of herd mentality. We hear of someone who has a great track record and has made a lot of money in the stock market in the past and we then try to follow their footsteps. It is okay, even advisable to follow what they are doing because that can narrow down the process of identification of good stocks but SELECTION of investment choices should only come from one’s own research and faith.
The power of focus entails predictability. A company which has done very well in the last 3 years but was bad for 8 years should be avoided UNLESS there is a strong belief that the company is turning around after having made noticeable changes in their operations, management, etcetera. Without solid evidence that there is scope of turnaround, such an unpredictable company must be avoided.
Focussing on quality companies requires you to analyse key financial ratios such as Return on Equity or Return on Capital Employed, identify unique selling propositions, thoroughly read the Director’s Report and Management Discussion and Analysis (MD&A), look for sizeable opportunity in the industry and also perform SWOT & Porter’s 5 Forces analysis to understand of external factors affecting the company and its performance.