Sunday, June 13, 2010

The Business of Investing

I was recently having a chat with a few of my colleagues during lunch and  the topic of investing in a Flat/Plot(Real estate) came up during the discussion. Most of them easily concurred that its a very good idea to put lacs of rupees in Real estate as they would be assured of good returns. This mainly stemmed from the fact that most of our friends/senior or colleagues/relatives etc had made good money(multibaggers) in the last decade by investing in Real Estate.  The word 'investing' struck me and as i was an active investor in the stock markets, i spontaneously suggested that investing in Equity could also be an alternative matching the returns of Real Estate if not beat it. This statement of mine was immediately met with strong disagreement by my colleagues. They immediately said that investing in stocks was very risky and it was more or less gambling. Having invested in the markets for more than 1.5 yrs and having been an ardent follower of Benjamin Graham & Warren Buffett i tried defending my case by setting forth the basic fundamentals of Investing. There was nothing wrong with my colleagues  as such because they were just reiterating the same things that probably most people would say. Most of us have grown up being told by our parents,grandparents,relatives etc that stock markets are risky  and its better one stay away from them. However nothing could be further from the truth than this, lets understand why it is so.

I think the main reason for this kind of behavior is that most of us treat stocks like pieces of paper. A stock is simply put , a part of a business no more or no less. Hence Every stockholder of a company is a partner in that business and likewise eligible for dividends & voting. Just because you can buy and sell stocks at will and get a ticker showing second by second price changes doesn't mean it is pieces of paper one is trading. Also just because a stock is not a hard asset like Real estate or Gold doesn't mean it is more riskier than them. The simple fact about any investment be it gold,real estate or stocks is that you cannot make money if you pay a high price or in other words buy low sell high is what works. Just like buying a plot/flat requires us to think like house-owners,we should look at buying stocks like businessman. This is one of the key lessons i learnt early on upon reading 'The Intelligent Investor' where Ben graham repeatedly tries to drill this point home. A quote by Buffet is apt :

I am a better investor because I am a businessman and a better businessman because I am an investor.’

This is such an obvious fact but i am sure the majority of Dalaal /Wall street doesn't look at investing this way. Its a simple yet powerful idea that can change the way one looks at stocks. Do we ever rush and buy Real Estate without doing a decent amount of research & analysis?? Why shouldn't the same rule apply when buying a part of a business(stock) to ensure safety of capital & appreciation. Any Investment be it a hard or soft asset when done without any homework or by overpaying is bound to be risky & speculative. An asset class by itself is never risky inherently and investment  success depends on the amount of work put in and the price paid relative to the value.With respect to stocks sticking to Ben Graham's principle of looking at stocks as part ownership in a business can go a long way in ensuring capital protection and increasing the odds of capital appreciation. Having said that it is not an easy thing to do and many a times i have been swayed by rising and falling markets and behave speculatively rather than as a business owner would. It is simple but definitely not an easy thing to do(Taking a businessman like approach) but one can strive to get better at it by reading and building a circle of competence.  How do you all approach investing in stocks and view stocks in general?? Would love to hear from you all.
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