His Elephant Gun is Loaded Again; following other Investors & Quantum Stocks
Buffett’s latest letter makes for very interesting reading for any and every serious investor, click here.
Following Other Investors:
I have known many an investor who lost all their financial wealth by following others. Those horror stories are prime reasons for extreme aversion to stocks and cause of less than 2% of Indian household savings channeled to equity class as of today.
One has to find one’s own style. In a diversified portfolio 60-70% hit rate is very good that that is what all investors get. In trading 30% strike rate is good enough and one finds 90 or so good traders out of a million traders. Thus, investing is far simpler to trading. The odds in investing are superior to casino, gambling, playing cards, hound or horse racing since it isn’t a zero sum game.
Masses get enamored by Automobiles or one or another industry served on their plate. Fashion, thus exceeds the frontiers of clothing and extends to business, politics, investing or even sciences. It makes no sense to follow others blindly. If one does want to follow a successful investor like RJ then one would do well by replicating his entire investing portfolio, and not betting 40% of one’s portfolio on the likes of Adinath Exim, doing the rounds these days due to the “next big thing” aka Coal Bed Methane source of energy in background of rising oil prices. All news anchor speak about the next hot trend, but did anyone mention that Symphony Ltd was available at 2 to 3 Rs in 2003 and is a 500 bagger ? Even if one spotted it in 2009 at 20 Rs, it would have been a 70 bagger by now. Bluest of blue chips pale with these kind of returns. Or a 100 bagger with Mayur Uniquoters in the decade gone by.
One sure way to get poor is blindly buy something that I write about or that anyone else buys especially in a disproportionate weight.
I have noticed an interesting trend driven by Institutional constraints in Quantum Stocks ™ – A term I long wanted to coin.
Quantum Stocks : Similar to sub atomic / quantum phenomenon, where external forces at molecular or higher grade do not affect the dynamic of quantum universe. A stock lying around, perceived as piece of filth in trash bin is unaffected by all external forces of economy, foreign investment, inflation.
The market cap of the stock is so small and insignificant, that once one ventures in this domain with success, in a few years, one would end up buying virtually quarter to half of the entire company. The security is already so cheap that no external force acts upon it. It is simple but not easy to be a sole Quantum Investor. Because a) it takes a significant effort and b) requires pretty strong conviction despite flat returns for an extended time.
I had strong contempt for diversified portfolios and now I am somewhat humbled after I have seen some investors who hold 1000 stocks with at least 200 active positions – who have compounded @ 30% per annum for over a decade, thus the style is entirely yours to choose but following anyone else blindly is a path to nowhere.
The trend I was coming to, I have noticed that for ignored gems, it takes them a decade or longer to reach three figures i.e 100 Rs but the spurt to 4 digits is quite sudden. eg: Symphony, TTK, Hawkins, VIP, Cravatex (still has not), Venky’s India. Institutions are constrained in self imposed fetters by an arbitrary round figure in decimal system chosen by humans and nudge of dividend declaration. The performance also has to do with India’s retail revolution, company’s inflexion point backed by strong earnings.