Sir John Tempelton made some rules for investing…in fact 16 of them. Some are very easy to understand..some are not. Here is an attempt to bring to you..the explanations behind the rules…
No. 5 WHEN BUYING STOCKS, SEARCH FOR BARGAINS AMONG QUALITY STOCKS
Quality in equity markets is very difficult to define. In the Indian context when you look for quality, what do you look for in a company?
Quality is a company strongly entrenched as the leader in a growing market. (Asian Paints, Carborundum Universal, Coromandel International, Hdfc bank, …are some of the examples).
Quality is a company which is a tech leader in a market dependent on innovation. Hero Motors, Force Motors, Cummins, TCS, Biocon, etc.
Quality is a strong management team with a proven track record. Hdfc Ltd, Cholamandalam Investment and Finance, TCS, Tata Motors, Hdfc bank, Kotak, Maruti Suzuki, Sun Pharma, Indigo, Lupin, Cipla,….
Quality is a well-capitalized company that is among the first into a new market. Icici Prudential Life Insurance,
Quality is a well-known trusted brand for a high-profit-margin consumer product. Colgate, Gillette, PnG,
You also have to ensure that many of these quality attributes exist in tandem with each other. You also have to see whether the companies are ethical and moral in their activities. Many companies which make money for you border on the right and wrong very closely. A company may be the low-cost producer, but may not have the pricing power because of competition (HUL being hit by Baba Ramdev products). Companies with good innovative technology may be suffering because it is poor in sales and marketing. Or they are not adequately capitalized (Subhiksha)
Determining quality in a share while investing is not easy. Apart from all the above attributes you need to see whether the management is ethical enough to share a big part of the profits with the small shareholder who does not have a voice. You don’t expect it to be perfect, but before it gets a star rating you expect to have your foot in.
No. 6 BUY VALUE, NOT MARKET TRENDS OR THE ECONOMIC OUTLOOK
As Buffett keeps saying “buy a business” – a good and experienced investor knows that the share market is really a market of businesses. While individual shares may be pulled along in a momentum play by a bull market, ultimately the companies have to perform well for the market to do well, and not the reverse. Many investors focus on the market trend, cash flow, interest rates or economic outlook. But individual shares can behave very differently in a bull market or a bear market. For a long term investor, the trend may not be a friend!
The share market and the economy may not go hand in hand. Bull markets may actually mean that the growth has been fully felt and a market contraction is round the corner and bear markets may not coincide with a recession. An overall decline in corporate earnings may not immediately see a decline in share prices. So go out there and buy individual businesses, not the macro!
No. 7 DIVERSIFY. IN STOCKS AND BONDS, AS IN MUCH ELSE, THERE IS SAFETY IN NUMBERS
Each fund manager has his style. John Templeton had a style too – he diversified. He invested in many countries – including Japan when nobody else was willing to look at it. He believed that no matter how careful you are, you are taking a chance with the future. A natural calamity, a strike at a supplier, some technological upheaval, or a government-ordered product recall (Maggi) —any one of these can cost a company lots of money and future prospects. Then, too, what looked like such a well-managed company may turn out to have serious internal problems that weren’t apparent when you bought the share (Ratan Tata vs Cyrus Mistry).
So you diversify—by industry, by risk, by business groups, by currency, by geography, by country, ….and so on. By investing across countries you will find better PE for equities in some companies and better interest rates for your debt portfolio.
Caveat: I could be holding a Call option/ put option or a position in all the above-mentioned shares. Here I have just given them as examples.
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