Going back to 1784.
Somewhere in Germany, at a school, the teacher asked 7-year old students to perform one demanding task. She told them to find the sum of all the numbers from 1 to 100. Indeed, a complex task for a 7-year old kid! The teacher was expecting that the students would take a lot of time to derive at the sum, and hence, thought of taking some rest. Just after a few seconds, she saw one of the students, Gauss, just idling on his bench. She asked him why he was not working on the addition. Gauss quickly replied that he had found the answer, and that was 5050. Everyone in the class, including the teacher, was surprised.
With a simple idea that there were 50 pairs and when you add the first and last number of the pair, the total is 101. That’s how he instantly calculated that the answer was 50 * 101 = 5050
= 1 + 2 + 3 + 4 + ……. + 97 + 98 + 99 + 100
= (1 + 100) + (2 + 99) + (3 + 98) + ……… + (48 + 53) + (49 + 52) + (50+51)
= 101 + 101 + (for another more 48 times out of total 50 times)
Carl Friedrich Gauss’ simple approach for the most complicated calculations made him the one of the greatest Mathematicians of all time.
Keeping It Simple & Sweet
In life, sometimes we complicate simple things or focus too much on other peripheral factors.
Be it writing essays with complex vocabularies, or appearing for examinations, I always thought complexity is always appreciated.
But then things changed.
While I was pursuing my Master in Business Administration (MBA), I got fascinated with how Peter Drucker explained management concepts and strategies with such ease.
I remember listening to one of his videos; where he defined ‘Strategy’ in three simple steps:
- Understanding where you are today
- Where you wish to go
- And, how are you going to reach there
Well, this is quite simple to define a complex and intricate term, which is now intertwined with many jargons and indecipherable terminologies. Most importantly, it gives answers to your questions.
And now, when I advise or talk to many investors, I see that investing had made too complicated by many of them.
I always thought investing was – Spending less, saving a part of income and investing the difference in fundamentally sound businesses and then allowing time to multiply wealth for me.
But for many investors, it is all about complex formulas, algorithms, jargons, models and calculations which only add to the layers of confusion and dilemmas. And then to top it, news channels and WhatsApp present tons of information on a company level, country level, macro-level and global level.
I am not saying they are not necessary, but in the end, we all use it for one common purpose – Achieving our financial goals.
Investors more often than not tend to miss the opportunities – and by the way, not because they are scared, but because they are so confused with where, why and when to of ‘investing’.
So how do you practice simplicity while investing in equities?
#1. Invest in businesses that you understand.
“Invest in what you know.” – Peter Lynch
The number of businesses to invest in is almost infinite now. Few companies are relatively straightforward to understand, while few are complex. Ideally, your objective should be to identify companies that you can understand and help you achieve your goal. No more, no less.
So, a few days back, I was talking to one investor holding a stock portfolio of 80-100 stocks and around 10-12 mutual fund schemes.
When I asked him the objective of owning so many stocks and mutual fund schemes, he told he owns it because “people” kept recommending them as good bets.
This is not investing. It is gambling. We don’t like bets, neither recommend them.
When I understood more, these schemes had the same goal – i.e. they ranked the same in terms of stability, growth and returns. So, more stocks and schemes were just blindly added with no additional value or purpose.
So, coming back to the previous question – how to identify good businesses for you?
Well, if Covid-19 has taught me one thing, it is – Stick to simplicity and never forget the fundamentals.
While I see many posh fine dining restaurants vacant, I see small restaurants (probably not even air-conditioned) but known for their food, pepping themselves to prepare the orders and delivering them.
Why? They stuck to the fundamentals of the business, i.e. Good food. They kept the model that is simple to operate and understand. The had built trust amongst their customers.
How do you find such simple companies for investing? No big calculations or algorithms required. Simple common sense here would also work fine!
So, when we get up, we are exposed to many companies whose products we love using or maybe cannot imagine life without such products. These companies are simple to understand and run by competent and transparent management. They resemble trust. They symbolize quality. They stand for transparency. These are the companies you can consider to start investing in.
For example: Since my school days, I don’t remember using products other than Fevicol for craft purposes. And same with my schoolmates. Till now, when I see school kids, Fevicol is still a favourite adhesive product. Kids love it! However, apart from craft purposes like binding books, wood, etc.; it is widely used for industrial purposes also. Had I known about investing even a bit, I would have passed this investing wisdom to my father way back in late 1999s or 2000 and become wealthier till now. Imagine investing Rs. 1 lac in 2000 turning close to Rs 75 lacs now!
| Price in June 2000 | Price in June 2010 | Price in June 2015 | Price in June 2020 | |
|---|---|---|---|---|
| Pidilite Industries share price | Rs. 19 | Rs. 112 | Rs. 537 | Rs. 1,421 |
| Absolute returns in 20 years | 7,378% | |||
| Absolute returns in 10 years | 1,168% | |||
| Absolute returns in 5 years | 164% |
However, the point to note over here is – to create wealth from such companies, you need to give them time to grow!
#2. Easy to monitor
With a hundred things on our plate, the last thing we want is our portfolio, giving us sleepless nights in an attempt to monitor them. Like, I would want to have a stock portfolio of 15-20 businesses, which I can monitor periodically, rebalance and then go back to living my life.
If I can add an example, I recently saw a picture of a “Gujarati Thali” in Surat that serves around 55 food varieties on one plate. To start with, it surely looks “WOW” but, when it comes in front of you – close your eyes in a real sense, imagine it in front of you, and tell me if you can even think of starting to eat it? I am sure the answer is no.
When you build such a portfolio of companies that you understand and monitor easily – the experience is incredibly liberating while investing in share market.
#3. Competitive advantage
“A good business is like a strong castle with a deep moat around it. I want sharks in the moat to make the business untouchable”. – Warren Buffett
Warren Buffett has always promoted the idea of investing in companies which have a substantial and sustainable competitive advantage over its competitors. The competitive advantage can be in the quality of product, process, distribution, technology, innovation, pricing, entry barriers, etc.
The classic example is his investment in Coca-Cola and Apple.
Invest in companies that are unique. Companies that are different. Companies that stand apart from the rest. Companies that are irreplaceable or holds a lot of value in the lives of their customers.
#4. Buy and hold
“If you are not willing to own a stock for ten years, do not even think about owning it for 10 minutes.” -Warren Buffett
Markets have been through many ups and downs, but if you do a simple exercise, Nifty has grown approx. 570% since June 2000.
But did stock markets reward those investors who ran away during the dotcom bubble or 2008 financial crisis? Did it reward investors who speculated or churned portfolio frequently? No, only those investors who were patient, disciplined and kept investing simple by investing in good businesses for the long run.
No, I am not saying buy and forget while investing in equities, but stay away from unnecessary action or temptation to indulge in frequent churning. Sometimes no action can be the best action for your equity portfolio!
My goal today was to give you a broad guideline while investing, especially while crafting your stock portfolio and help you avoid eliminate complexity which most often doesn’t add proportionate value to your portfolio when compared to time and efforts that go into building or monitoring them.
So, without adding much complexity (as the objective is to keep things simple here), all I wish to say is – you can become a successful investor by sticking to the basics and embracing simplicity, patience, common sense and discipline. Always remember – simplicity always triumphs over complexity.
To invest in a well-diversified portfolio of 20-25 multibagger stocks click here.
Related investing topics
Read more: How Long-term investing helps create life-changing wealth – TOI.