Widely read:
Anand Kumar
Here's common advice given to equity investors. "Just invest in good stocks, monitor them closely and hold for years." It sounds like an easy thing to do. Let's reverse that for a moment. "Just avoid investing in bad stocks. Whatever remains is good." Doesn't sound very exciting. There's no sense of achievement in just avoiding bad investments. Surely, the heart of making lots of money on the stock markets is to identify great companies; the greater, the better.
If you think about it, both approaches are the same, but one is easier. Can you guess which one? Some months ago, I had an interesting chat with Samir Arora, who is the CEO of Helios, a new mutual fund company that is being set up in India. Arora has a long and illustrious history as an equity fund manager, and his approach to stock picking and the general philosophy of equity investing has always been interesting.
I found it interesting - useful - to listen to Arora about how he classifies the universe of investable stocks and his broad approach. As he describes it, the first thing to do is classify the companies into good and bad. So far, so good. Everyone does that. No, wait a minute. Everyone does NOT do that. Hardly anyone does that. Instead, most investors are fully focused on looking at companies and seeing which are the best stocks to invest in. Instinctively, they feel that that is the right thing to do. There are many good options, but surely we must find the best.
However, that's quite hard to do. As Arora says, as long as you can be well above the average, you will be alright. If an investment manager with a long and illustrious track record can admit to that, surely any investor can. As he says, within your investable universe, you can start by choosing which companies are good, or you can start by choosing which companies are bad. The key point is this: it's very difficult to choose between good and good, but it's easy to choose between good and bad. You need to look at dozens of things to decide whether a company is worth investing in, but even one or two strong negative points are enough to decide that you must not invest in a company, no matter how positive the rest of the factors are.
Helpfully, he also points out that most selections in life should be made like this, including choosing whom to marry. He has a point there. Those of you who are at that stage of life may also want to consider this approach in your personal lives! The problem is that asking someone to identify and buy 'good stocks' is similar to asking them to buy low and sell high. Here's the thing: in the world of stock trading, the golden rule every investor lives by is to only invest in what they perceive as 'good stocks'. You'd be hard-pressed to find an investor who knowingly goes out of their way to put their money into what they consider a 'bad stock'. Quite simply, it doesn't happen.
However, here's where the plot thickens: 'good' is a highly subjective term in investing. The definition is fluid, varying from one investor to the other. Yet, they all play by the same rule; they put their money where their belief lies. And that belief is always centred around the notion that the stock they're investing in is a 'good' one. However, the same is not true of a bad stock. It's far easier to be sure that a stock is bad. With this alone, one can eliminate half or more of the starting investable universe. This is a great starting point: doing just this much puts you above the average investor or the general market. Now, the task remains of choosing between good and good. However, a mistake in these good-vs-good choices will not have a disastrous impact on your investment. You might do well or a bit better, but you'll be fine. You'll meet your financial goals. The job will get done.
Suggested read: Samir Arora's eight golden lessons in investing
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