Investing for Beginners & Finding our own Investing Style

By Raunak Onkar, raunak@ppfas.com

When a lot of people first start to read & learn about investing they invariably end up reading about Warren Buffett in their first few weeks of reading. From there onwards begins this fairy tale dream ride into the idea that someday they can also invest like Warren Buffett. The next automatic step that people tend to take is to read what any other fund manager worth their salt has to say about Warren Buffett. To remind you, at this point there is not a single rupee invested by this person, ever in his life (apart from may be the automated Fixed Deposit certificates & PPF investments).

After having read & being enamoured with Warren B’s performance & his dazzlingly simple explanations of how he analyses businesses, people start with the notion that investing is an easy affair. By this time, the activity of really sitting through an entire market cycle not being able to find great investment opportunities or even spending huge amounts of time & effort in researching industries & their managers has never happened to them.

The problem with a beginner learning to invest is that we tend to immediately get sucked into the investing blog world. In this world, a lot of people are strikingly original in researching their own ideas while a lot are “me too” people who are constantly following what other smart fund managers are doing. Not enough effort is spent to understand why investing is important & what are their unique needs to invest. People rarely do any cash flow analysis of their own life & are massively unaware of their own patterns of spending & making money. People automatically assume (especially salaried people) that they will somehow have enough money by the end of the year to put into wet dry bounce house some tax saving mutual fund & not to forget the mammoth 8% “tax-free” compounder of public savings – The Public Provident Fund.

Any person who wishes to take charge of their investments & wants to compound their savings at a rate of at least 5% more than the fixed deposit rate has no other legal option but to invest in Stocks.

Investing in stocks, especially from this background is going to be a tremendous uphill task. By this time each new fund manager we read about, we start to feel like we must mimic his/her style of investing. It makes sense when these fund managers lay out their ideas & explain their thought process. Using these fund manager’s ideas as a blind entry point can prove to be disastrous. It is not different from following trading tips from public investment forums or your local broker.

Blindly following fund manager’s ideas & investing styles seems easy & straightforward to do. On the contrary it is the most difficult thing to do. Most of the time, these professional investors discuss ideas with a time lag. A lot might have changed from the time they have invested in that idea & by the time we get to read about it. Instead the best way to learn from someone else’s idea is to use it as a first filter. This way we can get an investment idea from some professional investor & then start doing our own research in order to learn about the business & industry better. Sadly, this rarely happens, unless the investor is genuinely dedicated to learn.

Blind reliance on professional investor’s style has two other drawbacks.

First, we never get to learn what our own style of investing is. We never get to learn how much risk we can tolerate with our own money on the table. We always assume that someone else’s measure of risk is also applicable to us. But we have our own unique cash flow needs which the professional investors may not have. So it makes sense to learn about how we need & use cash in order to plan our investments accordingly.

Second, blindly following someone else degrades our own ability to learn. Cloning other investor’s styles has been popularly discussed by Mr. Mohnish Pabrai. He does it himself. But what we generally fail to consider is the amount of research that goes into reverse engineering the idea & finding out details on our own to validate it. With our diminished will to learn about the business, especially after the investment case is wide open in front of us, we can never hope to be good at critically analysing businesses.

Finally learning to invest on our own has tremendous advantages. Apart from getting to know our own investing style, we also get to know a lot about our own psychology. We start observing ourselves & realise what situations make us feel afraid or what events make us feel greedy. With a logical & rational understanding of investing we can practice the virtues of restraint & patience to hone our investing skills. Researching ideas on our own forces us to read about a lot of businesses & generally what’s happening across the world. How industries work? How do we get to use the stuff we use everyday? Who makes them? What does it take to successfully sell the product or make us buy it? All these details help us paint a vivid picture of this live & dynamic world which exists beyond the prime time reality TV shows & daily TV serials.

In his easy to understand & brilliant book F-Wall Street by Joel Ponzio, he advocates this very basic list of Ten intelligent investing commandments:

  1. Never Invest in anything you do not understand
  2. Price follows value over the long term
  3. Price volatility does not imply any additional or reduced risk; the risk is in the price you pay & your evaluation of the opportunity
  4. The stock market is a place to buy & sell businesses, regardless of the myriad of other (or faster) ways to make or lose money in stocks
  5. There is no tomorrow, only “five years from now”
  6. Earnings are for the Income tax department & accountants; business owners & silent partners rely on Cash
  7. A great business is one that will survive the bad times, wait for the bad times to invest in great businesses
  8. Unless it affects the business of your company or it is filed with the exchanges, it’s just noise. Analyst opinions and general market trends do not affect the business of your company & are not filed with the exchanges
  9. He who turns over the most rocks, wins
  10. If you don’t have a margin of safety, you don’t have a good opportunity

Remember, investing is simple, but not easy. If it were easy, we would all be billionaires & I’d most certainly be on my private yacht instead of writing this blog post.

About Raunak Onkar

Raunak Onkar heads the Research department at PPFAS Mutual Fund. He started his career at PPFAS as part of his internship during MBA. He holds an MMS (Finance) degree from the University of Mumbai.

9 thoughts on “Investing for Beginners & Finding our own Investing Style

  1. Pratik Desai

    Hi Raunak,

    Good one and nearly fact. But its really difficult to isolate ourselves from whats going on in the market.
    Even though its always a good idea to learn investing on our own rather than blindly following someone.

    Reply
  2. Krishna Kishore A

    Loved your style of writing Rounak. 10 commandments are so good, especially the 7th point.
    Please keep posting.

    Regards,
    Krishna Kishore A

    Reply
  3. kalidasa

    Great post Raunak – You seem to know me. This is my story. Although, I am reading and learning and trying really hard to be the “genuine lot” like you write.

    I would like to read more about what are the key things you look for when reading an annual report. Notwithstanding financial shenanigans (a great book btw, although, it covers GAAP only), there is enough information and accoridng to me a first good step in filtering stocks. What I cannot understand and wish to read from informed people like you is – what are the red flags, what sections of the 200 page document to pay attention to? Do you read it end to end?

    information for investors like me (although quite not the beginner) shall be very helpful.

    once again, great post 🙂

    Reply
    1. Raunak Onkar Post author

      Thanks Kalidasa.

      While reading an Annual Report the things that you’ll want to focus on is directly related to how much you already know about the business. If you are reading about the company for the first time, all data is relevant. If you are well versed about the business & know how the business & its promoters/managers behave, you’ll automatically gravitate to particular sections of the report first.

      Notes to financial statements give a very detailed view of the financial statements. If you care about cash flows more, the Cash flow statement of the company reveals a lot about the quality of earnings of the business. Related party transactions is another favourite section of mine.

      When I was first learning to read financial statements it was very helpful to understand the importance of each financial statement & how they are linked to each other. A simple google search about accounting red flags or understanding financial statements shall generate a lot of results for you to go through.

      Reply
  4. swapna

    Hi raunak,

    As an individual I don’t like to take risks of any kind. My investments patterns have not been any different. So i have been miles away from stocks as its OK for me not be a billionaire !!!

    Few years ago I had checked out many ‘life insurance investment related products’ and compared their returns with the ones offered by the mammoth you mentioned in your article ‘ppf ‘. Surprisingly ppf gave better returns than them.

    Since then I turned my back on any insurance investment schemes as they do nothing different.

    Recently in union budget I have heard some pension schemes which are being promoted by the government. Would you have any take on them ? If yes please share..

    Regards

    Swapna
    p.s I also likes that closing para of ur article 🙂

    Reply

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