Coffee Can Investing

Most Indians do not invest in equity at all, and those who do, do so in a very hazardous manner. The result is that the long-term gains from what is a very powerful asset class have eluded the majority of affluent Indians. Equity carries more volatility than other asset classes.

Warren Buffett’s choice of companies where he likes to invest in:

1. A business that he understands.
2. Favorable long-term economics.
3. Able and trustworthy management.
4. A sensible price tag.
5. “A truly great business must have an enduring moat that protects excellent returns on invested capital” . There were many companies in business history whose Moats proved illusionary and were soon crossed by its competitors. “Though capitalism's creative destruction is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.”
6. Long-term competitive advantage in a stable industry is what he seeks in a business,
7. ‘When we own portions of outstanding businesses with outstanding management, our favourite holding period is forever.’  Just opposite of those who hurry to sell and book profit when companies perform well but who tenaciously hold on to the business that disappoints. ‘Peter Lynch aptly likens such behaviour to cutting the flowers and watering the weeds.’

Investing is simple but it is complicated by us.

Most of what Warren Buffett did was reading reports and trade journals that any small investor could also do. He felt very deeply that the common wisdom was dead wrong, the little guy could invest in the market so long as he stuck to his Graham and Dodd knitting. 

In 1934, Benjamin Graham and David Dodd, came up with a method for selecting  stocks, where they looked for stocks which went down significantly over the past periods. They looked for stocks which qualified the following criterias. 

• Low P/E ratio,
• Price below its current book value,
• High dividend yield.

Akash Prakash, a very successful institutional investor who focuses on investing in India has 2 philosophies:

1. Trust the people who are running the company.
2. How long you hold on to a position. For good and clean companies, we should not sell the stocks that we own.

Our view is that there are a limited number of companies in India where everything lines up, i.e., a good business, capable and ethical management, an investor’s access to the management, etc. Such combinations are not available often.

Learning from the legendary investors, invest in  high-quality companies and then sit tight for long (often very long) without losing sleep about where the share price is going.