characteristics that force us to make a mess of simple and easy to
understand things and turn them complex. And nowhere do these habits
hurt us the most than in the field of stock investments. We liken it to some
IQ testing event like the Math or the Science Olympiad. Tempted by
stories that they could be potential multi baggers, we tend to invest in companies
with the most obscure names having the most complex business models.
But unfortunately, our rewards, which in this case are the returns,
are not linked to the degree of success we have had in unraveling complex
business models but the extent to which we have correctly identified its
intrinsic value and obstacles that have the potential to erode the same. Not
surprisingly then, these pre-requisites call for businesses, which are
simple and easy to evaluate. Thus, as in life so also in investing,
easy does it. This is precisely what the master has to say in his 1994
letter to shareholders. Laid out below are his comments on the issue.
"Investors should remember that their scorecard is not computed using
Olympic-diving methods: Degree-of-difficulty doesn't count. If you are
right about a business whose value is largely dependent on a single key
factor that is both easy to understand and enduring, the payoff is the same
as if you had correctly analyzed an investment alternative characterized by
many constantly shifting and complex variables."
Another habit that we often fall prey to is conforming to the herd
mentality and this habit too deprives us of attractive money making
opportunities. One look at the attitude of people towards investing before and after the
recent correction in the Indian stock markets and you would know what we are
talking about?
*Before the recent correction, when the market was trading at its peak
and most of the business way above their intrinsic values, investors were
queuing up to buy stocks in the hope that since the times are good,
there will always be buyers ready to buy from them what they themselves have
bought at exorbitant prices. But alas, that was not to be the case and
they had to pay dearly for their mistakes. *
*On the other hand, when quite a few businesses have now come down to
a fraction of their intrinsic value after the correction, investors seem
to be running away under the pretext that the time is not good to buy
equities.
These people could take a lesson or two from the master who has the
following to say on this tendency among investors. *
*"We try to price, rather than time, purchases.* In our view, it is
folly to forego buying shares in an outstanding business whose long-term future
is predictable, because of short-term worries about an economy or a stock
market that we know to be unpredictable. Why scrap an informed
decision because of an uninformed guess?"
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