Monday, November 12, 2012

The 4th and 5th session of wealth management –Investing through equities.

Let me start by wishing all my readers a Very Happy Diwali.

This blog was due for more than two weeks – but as the college had exams and then a 10 day break, this session on Investing through Equity was dealyed.

As we all know, different people have different views on investing through equities. And my guess is that everyone is sometimes right and sometimes wrong – there is no one right way to make money by investing in equities.   

Here, I share the methodology used by Warren Buffet –who I think has the most successful track record in this area.

With a view to share Warren Buffet’s approach to life and investing,  I showed the class a one hour documentary on the great man himself -  you too can see on YouTube. This documentary was  produced by BBC and is called “The biggest money maker, Warren Buffet”   (it is split into 6 parts in YouTube – each about 10 minutes long and here is the url of the first part   

The documentary tries to explain the reasons behind Buffet’s success –his early style of investing (called buying cigar butts) - his journey through the years and his views on life and on investing. As is evident in the video, he invests just the way he lives  –he is an independent thinker – has self awareness of “what works for him”  - and sticks to what works for him – he is long term in his approach – is willing to accept mistakes – sometimes break his own rules - is willing to take large risks once he is convinced about his approach  - is very honest in whatever he does - and, even though he is one of the richest men on earth, money is not important to him personally –he just “enjoys making money”.

After the documentary, we discussed his style of stock picking – the following are the key points that I would like to share:

  • Warren identifies "well managed consumer monopolies" and waits for market price of its shares to come down to a level where investing in it makes sense. He avoids companies that are in commodity businesses.
  • Once invested, he holds the investment for long term until the business loses its attractiveness or until a more attractive alternative investment becomes available.
  • Warren believes that any equity investor should view the company in the same way as any business person buying up the whole company –focussing on its cash generating potential in the future – overtime the company that has a superior cash generating potential would give a good value appreciation of the stock.
  • In this session, I describe 14 questions that one must ask before investing in any company. I also take the example of CRISIL to explain these questions – at the end of these 14 questions, we discuss two ways of forecasting the stock price  - and this would then give us the 10 year returns on this investment, if you invested in CRISIL at today's market price.
  • These 14 questions are given in the ppt – most of them are self explanatory. The last two questions are mathematical and anyone who can read a financial statement can (hopefully) understand the flow of logic – our forecast of the share price of CRISIL ten years into the future is given in the end and we take the more conservative of the two forecasts and we take the decision to invest or not to invest.     

As more detailed treatise on this subject is coming out in my forthcoming book – where there is more than 40 pages on just this area (hopefully it is easy to read and understand :-) ).

You can down load my ppt used here -