Getting started: How to think about potential investments?

Everything that needs to be said has already been said. But since no one was listening, everything must be said again.

- Andre Gide 

The best ideas are already out there. So there's no need to reinvent the wheel. Save yourself the trouble of thinking you're truly special to come up with innovative solutions every time. Some of the world's most successful value investors are cloners, and there is no shame in it.

With reference to thinking about potential investments and tracking them on an ongoing basis, the following are useful:

1. The four-quadrant approach is an effective way to think about your potential investments. It avoids the clutter and neatly organizes companies into four buckets as per business and valuation. Going ahead it makes sense to have rules about how much you will be willing to bet into these buckets.

2. Vishal (founder to Safal Niveshak) has done a great favour by teaching amateur investors how to keep track of their investments using Google Finance and Excel. It's a very handy tool and serves as a ready reckoner of potential investments. 

Most often good businesses are not available at cheap valuations. If you're not completed convinced about growth, you may not invest in such companies. It's important to keep them on your radar though so that when the iron is hot (good business; good valuation), you can strike them! This is where the excel sheet is most useful.

Cheers, and happy investing!

Why I was not a value investor

As an introduction to value investing, the course on Safal Niveshak recommends keeping an investment diary to note down learnings from value investing. These may be instructions of some sort, like a checklist before making investment decisions or just notes on companies. The idea is simple. As Neeraj Marathe elegantly put it, you cannot hide from your own written words. By maintaining a diary, you keep checks and balances on yourself and ensure that your theoretical understanding of concepts in enforced in practice. It's also an excellent way to rejig your memory about past decisions and alter future course of action if need be.

One of the first things to increase self awareness as a value investor includes the understanding of why you have not used value investing principles to make decisions yet. I wrote the following down as I mulled over this issue:

I have not been a value investor because...

I am fairly new to investing in general (less than a year). I was not introduced to value investing directly. Initially I started with William O' Neil's CANSLIM methodology of stock picking. I dabbled in some stocks. I remember my first bet - Symphony Ltd. It was nearing the end of it's meteoric rise and was trading at 40x PE around April 2015. Without a sound background in accounting, I took CANSLIM to heart and dived headlong in. In hindsight, I was a victim to availability bias. Without sufficient reading and exposure, I naturally assumed CANSLIM to be the definitive method for successful investing. The methodology did not talk about valuations at all and I mistook 'good companies' as 'good investments'.

Despite my losses, I was not demotivated. Even though CANSLIM is largely a momentum based approach, at its heart it looks for stocks with proven track records of long term profitability and performance. The other aspect of it is based on technicals which are largely driven by institutional forces. While William O' Neil gives numerous examples in his book and his methodology is considered successful in US market, I wondered if it was truly replicable in the Indian context. A quantitative study of this methodology in the Indian context remains unfinished and I will be very glad to discuss the experiences of Indian investors who may have tried such an approach. Coming from a coding background, I've always been excited about using algorithms to help make investing decisions. From an academic point of view, this is work in progress.

I apologise for digressing from value investing. But I feel my losses have been instrumental in understanding the importance of valuations and consequently 'margin of safety'. I think investing is inherently risky. Whether you consider risk in the academic sense of volatility or permanent loss of capital, risk comes from uncertainty about the future of any business. Value investing trumps other investing methodologies because it minimises speculative value and focuses on intrinsic value arising from an existing business in its existing competitive environment. Focusing on intrinsic value and applying a margin of safety minimises the chance of 'permanent' loss of capital. However, 'short term' loss of capital in terms of paper losses (affected by volatility in prices) cannot be eliminated. This proves for longer time horizons in value investing. I now understand the importance of taking rational decisions for long term wealth creation and am very excited about training myself to be a value investor.