The Evolution of an Amateur Investor
The journey to financial freedom
Dear Reader,
Thanks for opening this post and giving us your valuable time.
If you are reading this, then there is a high probability that you are interested in being financially rich or wealthy (?).
But there is a fine difference between both of them.
If someone is earning 100 K $ but spends most of it on non experiential items like latest gadgets, fancy cars etc , one can term them as rich but not wealthy. Being wealthy/ financially independent allows freedom for the pursuits not bound by a regular day-to-day job , exploring one’s interests and passions etc.
To put it better, being wealthy allows you to be INDEPENDENT.
As the famed Charlie Munger , partner and close friend of Warren Buffet rightly said:
Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris, – I wanted the independence. I desperately wanted it
This pursuit of wealth can be either by a) becoming a successful entrepreneur b) using regular job income to create a sizable corpus allowing for financial independence.
For majority of the working population, regular salary is the primary source for the building the investment capital required for financial independence.
However, utilizing the salary for such a pursuit can entail significant short term pressures like postponing of discretionary expenses, high savings rate, investing in highly volatile assets like equities, peer pressures around investment returns and host of other challenges.
However, the path to financial freedom is an experience in itself. In this case, the journey is AS IMPORTANT as the destination.
My personal journey for building a nest egg corpus was initiated by investing in mutual funds - look up the best rated funds on Valueresearch Online, glance through the 1-3-5-10+ year returns of the funds and invest accordingly.
While mutual funds are best for a novice investor where an individual gives her/his hard earned money to professional fund managers for beating market returns in lieu of fees in the range of 1%-2%, what one should really do is also have a look at the fund portfolio.
All mutual fund houses disclose their monthly portfolio as mandated by SEBI, one can go the mutual fund website and search for their monthly disclosures / factsheets for the same.
For some people like us, who are personally interested in knowing more about investing and creating wealth, equity investing provides the perfect avenue for the intellectual freedom and pursuit of financial independence.
"If you don't know who you are, [the stock market] is an expensive place to find out." -Adam Smith.
Buoyed by my naivety and usual foolish exuberance of beating the market, i jumped head in with minuscule amounts of capital into direct equity investing.
As I did have the beginner’s luck (duh!). I was happy with a short term gain of 70% in a stock in a year only to miss a 5x+ gain in 4 years (more on the link)
It was then during that period of time I was introduced to the great legend of Warren Buffet. I went through all his letters from 1977 onwards (They are available for free here!) If you are genuinely interested to learn more about investing, running a business, running a large company , READ ALL the letters. It will transform you for sure.
On a sidenote, even Google has imbibed the learnings from Warren Buffett & Berkshire Hathway!
Warren ‘s teachings and values led me to a host of other famed investors like Charlie Munger, Howard Marks, Peter Lynch and many many more.
The internet is a great learning medium - in this age of abundance of information, one has to know what to look for when searching for things.
Here is a short checklist of things which one should read if you want to invest in any stock:
Annual reports of the company
Investor presentations of the company
Listen to management con calls/ read con call transcripts
Credit rating reports of the company
Go through the quarterly/annual results & commentary diligently
Read directly from the source and form your own thesis for the business.
DO NOT OUTSOURCE YOUR THINKING!
Here is a famous story regarding the same with Warren Buffett.
In September 2008, Ken Lewis hired two different banks to provide him with a fairness opinion so that he could buy Merrill Lynch. Lewis badly wanted to buy Merrill. The banks he hired to value Merrill knew this. And those two banks dutifully performed their job, giving Lewis the value he needed to justify the acquisition. So, on the Sunday of the epic "Lehman weekend", Bank of America decided to pay $50 billion for a company whose equity would have most likely been worthless just two or three days later.
Conversely, earlier in the summer, Buffett got a call from Dick Fuld late on a Friday evening. Fuld wanted Buffett to invest fresh capital into Lehman. This was before the crisis was in full force, but Lehman was starting to hemorrhage cash and was clearly struggling to survive. Buffett told Fuld he would think about it over the weekend. That same night, Buffett pulled out Lehman's 10-k and began reading it, making notes in the margin. After a couple hours, he put the filing down and called Fuld back and told him he wasn't interested. There was simply too much about Lehman's books that he didn't understand and couldn't figure out, and so he found it too risky and quickly decided to pass. He came to this conclusion on his own after reading a document that was publicly available. He didn't make calls to Berkshire CEO's in the finance industry, he sent no analysts to talk to bankers on Wall Street, and he certainly didn't read any third party research. He simply pulled up a filing that any one of us could have accessed, and decided to see if the company was worth investing in.
One guy outsourced his thinking, and one guy did the thinking for himself.
If you manage to do the above checklists for each of the stocks you have invested in, you will know more about the your investment company and its industry more than majority of retail investors in the market.
This will help you in building your variant perception and if honed well, will work wonders in the long term(click on the link for a short note written on it earlier).
So dear Reader, hope you are on the right path to financial freedom and creation of long lasting wealth.
Have patience.
Do leave us a comment if you have any feedback / inputs!
NOTE: Please consult your financial advisor for advice before investing in any financial product. Please also note that I am not a SEBI registered investment advisor, these articles are for learning purpose only and should not be considered as investment advice.