Thursday, October 9, 2014

Darwin's Theory of Evolution For Stock Investing

"Buying  a Solid Business below intrinsic Value"

If ever there is an oxymoron then its the above statement.

At least for newbie investors.When Warren Buffett says it,it means a world of difference but for a regular investor without access to tigabytes of data,a chance to talk to the management,knowledge about vendors and especially how the products will fare in the future are a major grey area.

I keep reading articles and talking to so called analysts who make it sound so simple to buy equity of a firm and holding for 5 or so years and turn it into a multibagger.

Once upon a time 'value investing' was the last resort of those who had lost on short term reccomendations and wanted an exit option by hanging their investors on the anvil of 'long term'.

In an earlier post I had mentioned that luck is an important part of whether the firm in which you hold stock does really well over  a 5-10 year period or fades away simply because technology,environment as well as consumer tastes are changing at an average of 6 months from an earlier window of 1.5-2 years in the 1990s.

"It is not the strongest of the species that survives,nor the most intelligent
But the One most responsive to change"

Charles Darwin

Although Darwin meant it to explain evolution,this holds true for corporates as well.Another well known management guru said something similar:-


Are the companies you are buying responsive to change?Indian Tobacco Co(ITC) started with cigarettes as its name denotes but over the last 35 years its product range includes paper,food articles,clothes.

I am sure  a library near you or even 'google' can show you how a firm has responded over the years in adding or reducing its product chain,demand-supply dynamics.

I do not think I am competent to judge intrinsic value of a Facebook or Google or Himachal Futuristic with the minimal data I possess without some serious maths.

So forget about finding out discount to intrinsic value or Book Value(BV) or forward PE which at most can give a statistical valuation.If you use a product and have used the same one for 5 years,look behind the label and buy stock of that firm.You may or may not make millions from that but you certainly won't lose your shirt...!!