When Less is More : Investing Decisions for an Amateur investor

Lessons from personal experience

Dear Reader,

Thanks for opening this post.

Today, we focus on an aspect of investing which is often ignored - SIMPLICITY.

“Simplicity is the ultimate sophistication.”

- Leonardo da Vinci

In the world of investing, one can have multiple approaches to wealth creation. On one end, you can have individual amateur investors amassing huge wealth due to compounding effect of great businesses across decades ( interesting earlier post here) , while you have professional investors having horde of analysts trying to beat the benchmarks.

However, for an individual amateur investor , one needs to think of stocks not as a asset whose price changes every millisecond but as an ownership of a business.

Forget the stock market for a bit.

Imagine that you had enough money to buy the whole 100 % of a business. Say , for simplicity sake, you had 100 Million $ in your bank account.

Now, given an option of buying 100% of any business be it either a large farm or a steel plant or chain of restaurants or any other business, how would you go about it?

Leaving business valuation aside, what would you look for the in the business?

You would like to own a business which has great pricing power , a long term structural advantage and which requires very little to low incremental capital for future growth.

But first of all , the business you want to own has to be SIMPLE for YOU to understand.

Imagine a doctor trying to buy a company which does mining for rare earth minerals in a remote corner of the world. Here , the doctor wouldn’t have any advantage be it information/analytical etc as compared to sector experts in the field.

But if the said business is in the pharma/medical health space, then the doctor is at an slight advantage since she/he knows the industry slightly better.

While its not always feasible to be in the same sector as the business you want to invest in, it is critical for you to understand the business you are buying.

Given an option - You wouldn’t pay x% extra when you want to buy 100% of a business, why would you pay up the same x% extra when you are owning 0.00001% of the same business?

When you start thinking like a business owner, the perspective of buying stocks changes.

Knowing what you don’t know is more useful than being brilliant.

- Charlie Munger

The key our dear friend is to pick few stocks where you either know the industry or are generally inquisitive enough to understand the business dyanamics better than the average investor.

An idiot can diversify a portfolio, or a computer. But the whole trick of the game is to have a few times where you know something is better than average, and invest only when you have that extra knowledge. If that gets you few opportunities , its enough.
- Charlie Munger

I myself have made this error of buying stocks earlier just because of some news, recent price corrections etc. At one point of time, I had nearly 15 stocks in my portfolio!! And given the amount of homework required to keep track of the portfolio, I was lost.

But now, a little wiser, a little older, I can see what the power of simplicity can do to a portfolio.( Read an earlier post on my evolution as an amateur investor here)

Now, my portfolio is down to 4 stocks, I am able to track the portfolio better through quarterly reports, investor conference calls , media interactions and whatever I can land my hands on.

I leave you with this quote from Li Lu, one of two people who Charlie Munger , our teacher, has entrusted his personal money apart from the famed Warren Buffett.

“There is some element of a zero sum game in investing. If you buy, somebody else has to sell. And when you sell, somebody has to buy. You can’t both be right. You really want to be sure that you are better informed and better reasoned than the person on the other side of the trade.”

- Li Lu, Himalaya Capital

Hope you enjoyed the post and have a good weekend! Do leave a comment if you want to share anything.