Foundation of my Investment Criteria

I like to think of myself as a 'Value investor'. This is not to say that I avoid growth companies, it implies that I am not willing to pay a fortune in high fliers. In simple terms, I look for value regardless of how a company is categorized.

I believe that every investor is different, and have unique goals and circumstances. No one particular investing style/strategy fits all investors because there are too many variables involved.

Let me bring up an example to demonstrate my point, Warren Buffet has often said - "You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life. I think people would be better off if they only had 10 opportunities to buy stocks throughout their lifetime." Contrast that with Peter Lynch -"I've always believed that searching for companies is like looking for grubs under rocks; if you turn over 10 rocks you'll likely find one grub; if you turn 20 rocks you'll find two. The person that turns over the most rocks wins the game. And that's always been my philosophy." Not surprisingly, Peter Lynch at one point of time had has more than 1,500 stocks in his portfolio. While Warren Buffet has very low turnover in his portfolio, Peter Lynch often bought and sold stocks on a daily basis.

This does not make any one of them right or wrong, both of them are one of the greatest investors of our time. The point I am trying to demonstrate is - one of the most important task for an individual investor is to ensure that he learns about different investing strategies and chooses the one that fits within his intellectual/philosophical framework.

As an investor it is of paramount importance that we all understanding our shortcoming and limitations. Below is my attempt at understanding and articulating my shortcoming and strengths.

  • I do not have the capability to time the market.
  • Identifying the strongest business with favorable economic characteristics and wide moats is not one of my strength. For the sake of argument let us assume that I could find a business that I both understood, had favorable economic characteristic and a wide moat. I would still need to arrive at a price at which that investment makes sense, which bring me to the next point.
  • Valuing a business in absolute range of dollar value is also not one of my strengths. Charlie Munger/Warren Buffet has often said, 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.' This requires one to be able to first identify a wonderful business and second arrive at a fair price through valuation.
  • I believe that time in the market is more important that timing the market. There is no doubt that I would have been better-off starting investing earlier in my life. As they say, 'Time is on your side when you invest for the long term', I still have a good 35 years before I reach the 'official' retirement rate.
  • I have a strong stomach to ride the ups and downs of the market. In the words of legendary investor Peter Lynch - ”Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.  It isn’t the head but the stomach that determines the fate of the stock-picker. Everyone has the brain power to make money in stocks. Not everyone has the stomach.
  • Like most of the humanity I am fairly good at relative valuation. Research has shown that people are better at estimating relative sizes (A – C is twice as far as A – B, Basket X is about 1/3 the weight of Basket Y) than coming up with absolute estimates (A to B is 15km, Basket X is 7.5kg). I find relative valuation much quicker; and I need less information to get started.
  • I am a voracious reader have a strong inclination to learn.
One important thing to note is that I do not take these shortcomings as immutable. By continuously learning about investing I aim to slowly and gradually overcome my current shortcoming and strengthen my strengths.

I do not have any lump-sum money to invest. I work in a full time job and have used all of my saving so far in the purchase of my home (mortgage). My investment savings come from my monthly paycheck. I have concluded to invest in market on monthly basis. This decision has more to do with my current circumstances, although it does effectively put me under the dollar cost averaging camp. I do, however, understand that there are arguments both in favor of and against dollar cost averaging.

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