This is pretty turbulent time for first time investors. Coming off from the massive correction of last year, most of them have made big returns in whatever they bought last summer. Making money in a Bear Market is easy, especially for someone who had the temperament to buy fear. However, if this is the first bull market of your life, you’d agree that to buy right is more important than anything else.
When you’re trying to make a name for yourself in the world of investing, and have a vision to make loads of money, all you need is one Bull Market at the beginning of your career where you can significantly improve your level of capital.
I can tell you from my experience, the feeling of getting that one big idea, that one stock which you’ve discovered and the market doesn’t yet price fully; the stock which you’ve put your money into and are getting excited about as the business improves, the feeling of being right two years from now when the stock doubles or triples is not something one can express or explain. It can only be experienced.
When you’re working hard to make it big, you do a lot of work in the dark. You read everything you can about the markets, investing, big investors, stocks, companies and try and frame your own processes and valuation models as to what do you believe is a good bet to make. It’s funny because doesn’t matter what you do or what you miss, a lot of luck is in play. You can be sure shot about everything and still the stock turns out to be a dud. Or you can simply get lucky and make a killing in the wierdest bet you’ve made.
So here’s what I believe one should do. You’ve to develop a method to control your investments and stick to them patiently. In the world of investing, process is all you can control, the outcome is beyond anybody’s grasp. So when you get disciplined about the way you’ll pick stocks, your failure rate will go down and you’ll make fewer mistakes. Charlie Munger famously says that all he tries to do is to avoid doing stupid things than to be smart.
You know if you positively compound your money even at low rates, in twenty years you’ll end up being very rich. The key is to avoid multiplying the whole thing by too many negatives or zeroes. That way, you money will only add up, not goes down every other year. This is a simple method which works wonders over long periods of time.
Developing an investment philosophy takes years in the making. The more you learn, the more you realise that you understand a lot less than you think you do. Also, it’s not one size fits all, universal laws of gravity which you can apply in isolation of everything else and it still would work. Investing is more of an art than science. Hence, a lot of ideas you’ve which will work depends on the sheer gut feeling you develop over time, but can’t put to words or explain without sounding confused.
When you’ve an idea you think is a big thing, a bulb goes up in your head. You know that it’s going to go up not twice but ten fifteen times and now you can’t find out why. You look up for research reports and there’s not much available. People in the market don’t think it’s a good bet but you somehow are convinced that it’s going to go up considerably. It’s all in your gut that you build positions. Something like this happened to me with BSE and ICICI Securities. I had positions when they weren’t the favorites, and the Market suddenly discovers them and they’re all over the place.
However, the market is a very bad judge of long term bets. Nobody could have foreseen if HUL will go up 10x in ten years if they had listened to the guys on tv but slow yet steady, it did go up 10x in the past ten odd years.
There’s an old video of Ramdeo Agarwal in which he explained how he bought Eicher and Nestle, at almost 25 times earning and still made ten times his money. There are some stocks which can grow their earnings faster than whatever the market believes they can, and generally at the beginning of this era, they’re trading pretty cheap to modest multiples. Nestle was available at 25-30 times earnings in 2009-10. No value guy touched it. However, if you can visualise correctly that the business will grow faster than expected, both the Price/Earnings and the Earnings will grow faster than the market and thus, the share price will go up 5x-10x in five six years.
So I believe some of these non lending financial companies can grow their profits much faster than the most liberal estimates of the market and since they’re due for P/E expansion, they can go up significantly.
Just do a small research for yourself. Google all stocks in financial sector, banks, nbfcs, brokers, AMCs etc. See what their profit margins are and the valuations they’re trading at. Now ask yourself one question. In five years, is it possible for these companies ( non lending financials) to grow their businesses two-three times, assuming more Indians come to the markets and invest at a higher rate then they currently do. In that case, at their profits margins, what is the most conservative estimates of their net profits be like. If that number is anywhere close to 2 or more, you’re looking at a three bagger atleast as once the growth kicks in, the company trading at 15 times earnings also gets treated better and trades at a higher multiple. That’s how you know what can happen if you sit tight on these companies.
If you don’t believe what I say, look at the share charts of some of the prominent asset management companies of the USA, like Blackrock, Blckstone, T Rowe Price etc and their earnings profile. They’ll look eerie similar to some of our companies. That’s a trick to check if your judgements are directionally right or not.
Whether or not you double in three four years only time will tell. Till then, all you can control is the process through which you invest. Also, the constant goosebumps is an added feature!
Life is all about Compounding! 