5 MANTRAS OF VALUE

INVESTING

The short term traders often end up naming their loss making trades as "Investments" because they
lack the discipline to cut their losses. This is one of the very big mistakes which people commit in
stock market. So its very important to stick to your discipline. This is not an appropriate way of
making long term investments. Following are the few important points which an investor should keep
in mind before making long term investment:

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(i) Power of compounding: Investors like Warren Buffett, Charlie Munger, Rakesh Jhunjhunwala
etc always believe in long term value investing because they understand the power of compounding.
Equities over a long term time frame have always outperformed the broader asset class. As Warren
Buffet says ”Our favourite holding period is forever”. The benefit of compounding works very well for
long term investments. Say if someone invests $1 today compounding at an annual rate of 20% p.a.
will result in $15.41 in 15 years, $38.34 in 20 years and $95.40 in 25 years. We can clearly see that
more is the number of years, the better is the result from compounding. “If you aren’t thinking about
owning a stock for 10 years, don’t even think about owning it for 10 minutes” - Warren Buffett.

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(ii) There should be a margin of safety- There should always be a margin of safety in whatever
you buy because it reduces the risk and gives you a cushion in case of any unforeseen negative events
in the future. “It’s far better to buy a wonderful company at a fair price than a fair company at a
wonderful price” - Warren Buffett. So its always advisable to buy a stock below its intrinsic value in
order to get the margin of safety. Even the finest business could be a bad investments if bought at a
huge premium.

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(iii) Invest in a business you understand i.e. it should be in your circle of competence- It
is very important to invest in business which are simple and easy to understand. The reason is
understanding the business well can help you identify any trouble lying on the way. So the chances of
loosing will be very minimal which is a very important aspect of investing and as Warren Buffet says -
“Rule No. 1: never lose money; rule No. 2: don’t forget rule No. 1″.

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(iv) Look for companies with moat - Always try to invest in a companies with moat i.e. with some
competitive advantage which may be due to barriers to entry, brand name, pricing power etc. The
presence of moat acts as a barrier against other companies seeking to enter into the industry and thus
enjoying the supernormal profit. Companies like Colgate, Pidilite, Ajanta Pharma,Kitex garments,
Page industries etc are amongst the companies with moat which are listed in the Indian Stock
Exchange.

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(v) Keeping the idle cash - Keeping cash in hand is very important aspect in value investing
because given the high volatility in the equity market, there are times when the stocks are available at
throwaway prices. There’s a very famous quote- “buy when there’s blood in the streets, even if the
blood is your own”. So in order to buy at those times, it is very important to have cash with you.