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Sunday, March 1, 2009

Investment Philosophy of an Experienced Investor

Instead of my usual dose of stock market and mutual fund investment wisdom on a Sunday, I thought it will provide a different perspective to hear about the investment philosophy of other experienced investors. So I requested Nishit to answer 30 questions. Very generously, he agreed to spare some time and gave detailed answers for the benefit of this blog's readers.

Nishit Vadhavkar is a young investor who works as a Quality Manager in a MNC IT company. In his spare time, he analyzes the Financial Sector. "You work hard for your money; make your money work hard for you" is Nishit's motto in investing.

Here is the full Q&A session:

Q1.  When did you first start investing in the stock market?

Ans: I started off when I was in Engineering College. CNBC was just launched around 1998 and I saw the prices of companies going up and going down. This got me interested in knowing why they went up and why they went down.

Q2.  Who got you interested in investing in the stock market?

Ans: I come from a family of investors. I am the 4th generation investor. My mother used to actively track the markets and from her I got the first whiff of the markets. The advent of share prices on television hastened my interest in the markets

Q3.  How did you choose your first investment?

Ans: It is said that you learn only from your mistakes. The money you lose in the markets is your tuition fee. Those were the days of the dot.com boom. My first stock was DSQ Software. I still hold it in my account since it is not traded.

Q4. Which stocks did you buy?

Ans: DSQ Software, Reliance Petroleum (the earlier ‘avatar’) and Wipro were amongst my first buys. I was not earning those days. But I had an inheritance of a few shares of Gujarat Ambuja Cements from my grand mother. I used that capital to slowly build up my portfolio

Q5.  How long did you hold them?

Ans: Wipro I sold after it trebled. Reliance Petro when the Ambanis announced a merger with RIL at an unfavorable ratio.

Q6.  Why did you sell them?

Ans: It made no sense to hold Reliance Petro after the unfavorable ratio. I had bought it at Rs 60 but the merger ratio made it at Rs 22. I got out after booking my losses. I learnt from my mistakes and sold Wipro at 3 times my cost price

Q7.  Did you make a net profit or a loss on your first investments?

Ans: Wipro got me back what I lost in Reliance Petro and DSQ Software. Wipro had consecutive upper circuits and went to Rs 8000 from my cost price of Rs 1100. I did not exit at Rs 8000, but finally did so at Rs 3000. That taught me to exit when the price becomes unrealistic.

Q8.  What did you learn from your first investments?

Ans: Thoroughly analyze the company. Promoter background is of paramount interest. You are buying a company, not a stock. You are a part owner in that business and you must understand everything about the business. A share will do well if it is a well managed company in the right sector at the right time.

Q9.  How long did you spend in the market before realizing that making money in the market wasn’t as easy as it looked?

Ans: Actually I realized it is much easier than it looks. ‘Keep it simple’ is my philosophy. A 30 minutes study is enough to take a decision whether it is worth investing or not.

Q10. What steps did you take to keep better informed?

Ans: I subscribed to Outlook Money (Intelligent Investor in those days), read the Economic Times daily. I am a voracious reader. The advent of Internet also helped my browse the sites. I joined an online investment club. I found other like-minded investors like me and we corresponded regularly. Then we started meeting once a month and finally gave presentations to each other. Today it’s been more than 10 years that I have been investing in the markets. I have actively seen 2 bear markets and 1 long bull market.

Q11. Did you learn fundamental or technical analysis first? Why?

Ans: Fundamental analysis. For the simple reason I did not know TA existed. For a long time, I did not believe in TA but since the last 2-3 years I am brushing up on that as well.

Q12. Did some one teach you, or did you read some books?

Ans: My mother was my first teacher. She had an uncanny knack of picking up winners just by browsing through the Economic Times. She kept a watch on scrips that were moving up steadily and she used to pick up winners. She still does.

Q13. What books did you read? 

Ans: Peter Lynch is one guy I completely agree with. ‘One up on Wall Street’ and ‘Beating the Street’ are classics. I also read Ken Fisher though it did not fascinate me as much. Of course, the ‘Bhagavad Gita’ of all Investors, ‘Intelligent Investor’ by Ben Graham, and Jesse Livemore’s ‘Reminiscences of a Stock Operator’. Also, I read ‘Technical Analysis’ by Magee and Edwards. Jim Rogers is another great investor. His books are worth reading.

Q14. Were these books useful for a novice investor?

Ans: Yes, though they are for US markets, the lessons are universal. Markets change but investing philosophies remain the same.

Q15. Now with experience, what books would you recommend for novice investors?

Ans: Peter Lynch is one author you should not miss on.

Q16. How do you choose a stock? Top down (sector analysis) or bottom up (stock analysis) or technicals? 

Ans: I look around me. I look at products that are selling well. In 2003-2004, I saw every one buying Bharti Airtel mobile connections. The stock was languishing around Rs 40. I went out and bought Bharti. I saw UTI Bank ATMs popping up all over Mumbai. This was my next purchase. I first look at what is selling in the market. Then I look who are the promoters, and then I look at the financials.

Q17. What fundamental indicators do you use (P/E, P/BV, RoE, Cash Flow, etc.) for stock selection?

Ans. I like to keep it simple. P/E ratio, book value is enough for me.

Q18. Do you think timing the market or timing individual stock entries are feasible?

Ans: This is where TA comes in handy. Technical Analysis tells you when to buy or sell a stock. Fundamental Analysis tells which stocks to buy. If you combine the two you have a winner on your hands.

Q19. What strategies do you follow in a bull market?

Ans: I keep taking my profits and locking them into debt instruments. This reduces my returns, but ultimately you never know when the market will correct. The idea is to build wealth slowly.

Q20. What strategies do you follow in a bear market?

Ans: In bear markets it pays to be cautious. When it is clear that the trend is downwards, it's better to sit on the sidelines. Stick to large caps because they give you safety. Do not enter the markets unless you are sure that the valuations are absolutely compelling and also whether your company will survive the bear market. Stick to quality stocks.

Q21. What is your strategy in a market that is moving sideways?

Ans: I am a long-term investor. I buy when I see value. The market can go anywhere it wants.

Q22. What is your typical holding period for a stock?

Ans: 2 years to 5 years. Over the years I have matured and become more patient. In markets you have to be like a crocodile. Wait patiently for your prey.

Q23. Why and when will you sell a stock?

Ans: I sell when I see that I have made good profits, or if the potential for rise is limited. I find another stock that would give better returns. I also sell when I need the money or when I find I have a made a blunder. I believe in cutting my losses. I never marry my stocks. Stock markets are not a place to be emotional.

Q24. How do you allocate your assets – stocks, fixed income, mutual funds, gold, real estate, cash? A fixed percentage for each?

Ans: I am a conservative person. I never put more than 50% of my assets in stocks. Fixed income and gold form the other 50%. I avoid real estate because there is no transparency and too much paperwork. There is no easy exit.

Q25. How do you react to bonus, rights, stock split, buy-back, dividend announcements?

Ans: Usually gimmicks by the promoters and sell on news.

Q26. How do you react to merger, acquisition, demerger announcements?

Ans: Another gimmick by promoters. Be very careful when you hear such announcements

Q27. Are you for or against ‘Rupee cost averaging’ (a fixed amount of money regularly invested in the market)?

Ans: Strongly in favor of investing regularly in the markets

Q28. Do you think ordinary investors are better off investing in an Index fund or an Index ETF?

Ans: If you do not understand the markets, then definitely yes. Check out the returns during the bull phase.

Q29. What are some of your biggest investment mistakes, and how do you ensure you won’t repeat them?

Ans: DSQ Software and Reliance Petro. I constantly keep updating myself on the markets and I have a long memory. A burnt child always dreads fire.

Q30. What are some of your biggest investment successes, and how will you ensure that you can repeat them?

Ans: Bharti and UTI Bank. I bought Air Deccan when everyone was flying Deccan and sold it at Rs 300 when I felt it was overvalued.

Keep your eyes open. Successful investing is all about common sense. It is no rocket science. Do your homework and book profits regularly. You must network with people who are good investors. You get different insights. Always keep your ego in check. The market is the King. You cannot beat the market. It's like in Game theory, the game always wins. The market will always win. If you try to beat it, you will lose.

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Well, there you have it. Guess Nishit's investment philosophy isn't much different from my own. Experience of different bull and bear cycles teaches you how to be diligent, cautious, and patient (I just happened to use a different animal while talking about being patient in this post in Aug '08- where I had also mentioned of a buying opportunity in Oct '08).

If you have experienced a complete bull-bear cycle and would like to talk about your investment philosophy, please send me an email or leave a comment on this post.

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