Warren Buffett once declared that he wouldn't lose sleep if the stock market shut down for several years the day after he made a major investment.
His timeframe on equity holdings is ideally, forever. He only invests in businesses that he understands and only buys when the price is right.
Most of us lack the self-discipline to emulate Buffett. Nevertheless, while WB's consistency in picking only businesses he understands is admirable, it should be noted that the strategy of 'invest for eternity' works only because of the types of businesses he understands.
One Buffett specialty is consumer-centric franchises - the Cokes and Gillettes he has so famously made fortunes from. Another, less noted but actually more important, focus-area is finance. He understands the insides of banking and insurance.
These industries happen to be long-term, non-cyclical cash-cows. If you understand them, you can buy and hold forever.
Insurance in fact, has been the fastest growth industry for the last two or three centuries while people use soap, brush their teeth and drink flavoured water even in recessions.
Any wannabe stock picker should certainly emulate Buffett in sticking to businesses that he or she understands. But if your competence lies in a cyclical industry, it will be a mistake to insist on buy and hold forever. There are times when a cyclical is peaking and over-valued. There are times when industry-leadership changes.
Understanding a business depends on a combination of life and work experiences and natural aptitudes. Where you work, and your educational background are important and often, there are large random elements involved.
You may have tossed a coin and chosen to study engineering rather than medicine. Or the first decent job offer was in a cyclical like IT, or shipping or automobiles rather than a non-cyclical FMCG.
Early decisions set the tenor of life-experiences. Most people don't make dramatic career shifts - resumes reflect that. Whether the work-experience is in cyclicals or non-cyclicals, the experience and understanding can be parlayed into more efficient investments.
Everybody understands their own industry better than an outsider and most industries offer profitable investments, sometime or the other. For example, an IT worker has a better understanding of IT than an outsider.
An accountant in an auto-business knows what's happening in autos better than an accountant at a construction firm. A medical practitioner can evaluate healthcare and pharma. A government servant or lawyer has a take on policy-making processes.
Work-experiences can help people make better investment calls. But shockingly, most of us refuse to recognise this fact and don't use our specific knowledge to improve portfolio returns. Instead, we act upon tips from various sources and frequently buy into businesses we don't really understand.
I am not referring to insider trading. I am referring to the fact that an insider knows when things are going well and when there are clouds on the horizon in his industry. He knows which companies are winning market share. He can appreciate the impact of a policy-change or a technological innovation quicker than an outsider.
That is what Buffett really has to teach us. He's always stuck to the things he knows and refused to be diverted even by extraordinary opportunities outside his zone.
That is the key lesson. His specific methods and timeframes evolved naturally because he understands non-cyclicals and he was born into a first world economy.
If your industry focus is cyclical, or technology-driven, or both, you cannot employ the same strategies as Buffett with the same degree of safety. Instead you can do some things that may seem like hard work.
First, identify the focus areas where you have a specific edge in terms of understanding due to background and work-experience.
Then, develop an understanding of how those industries works in terms of investment timeframes. If it's a cyclical, how does it swing? If it's non-cyclical how does competition measure up? What are the feeder industries both up and downstream and how do they work?
Chances are, you already know the answers to most of these questions. But few of us bother to articulate these and to translate knowledge into action on the demat front. It's easier to just go along with what your broker tells you! But it's also a lot less efficient.
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