May 10, 2007

How to be a better investor – My approach

I posted the reply from warren buffett on the above question. The key takeaway from his reply is that one should read a lot and invest your own money based on your ‘own’ ideas and analysis.

I will touch upon my approach to improve myself as an investor in this post.

I have been reading various investment related books, articles and annual reports for some time now. However my approach to it was disorganized and did not have any pattern to it. However in the last 2 years I have developed a plan to read with specific goals in mind.

I look at reading with two key objectives

1. Find new ideas (which are profitable)
2. Develop mental models to become a better investor (read this
article from charlie munger on mental models)

I have broken the second objective into the following topics (related to investing)

Finance – topics such as Balance sheet, income statement, various ratios, analysis of these statements etc
Accounting – understand various accounting concepts and standards
Valuation
Competitive advantage and strategy
Probability and analysis of risk
Study of business models
Economics – mainly micro economics
Investing – value investing
Options, derivates and other financial instruments


I have better knowledge in some these areas relative to other topics. For example I have not read much on options and derivatives till date. Somehow I get put off by all the math in it (although I am engineer by background :) ).

So at the beginning of the year I try to assess myself on these areas and try to identify the specific areas on which I would focus. For ex: I am currently focussing on topic 4 – competitive advantage. I identify books for this topic and add it to the list of books I would be reading over the course of the year. I run through all the topics in this manner and try to come up with a tentative book list for the year. This is not a list set in stone. If I find a better book for the topic I am interested in, I end up replacing it with that book.

In addition to the above book list, I have also listed the industry groups I would be focussing on this year. Currently my focus is on pharma. I have shortlisted around 5-6 industry groups for the year (see my industry analysis spreadsheet here). To improve my knowledge in a particular industry (related to topic 6), I read up on the annual reports of some of the top few companies in the industry. In addition, I try to read up on industry reports if I can get access to them for free.

This industry group analysis activity helps me in increasing my circle of competence and also helps me in coming up with new investment idea. Finally as all knowledge in investing is cumulative, I can easily use this knowledge again later to come up with good investment ideas.

Finally I run valuation screens and if I can get some undervalued candidates, I read up on them. This is more haphazard as I may get candidates in industries which I have no prior knowledge. However it is a good starting point in those cases. If the candidate is in an industry in which I have done some prior study, then the analysis is faster.

The last step is – as they say on shampoo labels – rinse and repeat. That is I keep repeating the above process. Ofcourse the books, the topics and the industry groups keep changing, but the approach is the same. This approach has been helpful as it keeps me focussed on areas which i need to improve and also to enhance my circle of competence

17 comments:

Prem Sagar said...

Hi Rohit,
From what I have read on the blog for the past 1.5 yrs, I should say u read a lot.

have you felt the need to stay away from books for a few days entirely and just reflect on what u had read?

Do u take notes to refer to later?

Do u take the time to really reflect on what the author told and what u agree/disagree with?

Also looking back, I had read a lot. But havent maximized learning..because they were not in alignment.. am working on it.

And one last question... dont know if you spend most of the time on work at office and reading/investment related activities.. have you felt the need to explore new avenues?
(I am feeling it now)

Rohit Chauhan said...

Hi prem
i am a complusive reader ..not sure if it is a good thing ..but difficult for me not to read

i generally read books for which i have seen some recommendation ...
books on accounting and other topics are fairly cut and dry so i dont have any opinion or thoughts. but there are other books which i have found useful and some pretty worthless

also i consider time as more of a constraint than money when it comes to books ...so i try to read only books which have been recommended and which would fill some specific knowledge gap for me

i do make notes which i post on my blog to ensure that i capture the key points and learnings of the book

and to your last question - yes most of my time is spent on work and on reading / investment. i am not exploring other avenues because over time i have tried a few other things and finally realised that my passion is with investing. so i am pretty focussed on it - that does not make me a great party guy though ...i rarely discuss investing with my friends ...if others are not interested in investing then it a pretty dull topic to talk about ..especially if there is a bear market on

RaviAranke said...

Rohit,

I admire your approach. IMO, the latticework of mental models which you build is the most interesting aspect of investing.

I would recommend adding 'behavioral finance' if it is not already covered under one of your subtopics. The more I read the Value gurus, the more I appreciate how they apply the behavioral psychology to generate outsize returns. e.g. Greenblatt terms his approach as 'time arbitrage'. Mr. market is too short term focused - rather, the majority of the players in it (Mutual fund managers) ensure that their own survival directly will lead to short term focus of Mr. Market. Taking advantage of Mr. Market is the name of the game.

Regarding options and derivatives: Are there long term options available in Indian markets? (equivalent to LEAPs in US which have expiry few years out). From what I see in newspapers, the options available here are only a couple of months out. If that is the case, then it is essentially a zero sum game and tantamount to gambling.

Maybe convertibles is a way to play this in Indian markets.

Please post your reading list, if possible. It might be great to organise an online reading club.

I am looking at 'Black swan' and the 'The dhando investor' as possible next reads.

Regards,
Ravi

Rohit Chauhan said...

yes, i forgot to add behavioral finance and actually financial history to this list
i agree - options and futures is still a nascent market in india ..but i am looking at it from a learning standpoint and maybe hedging standpoint later
my reading list is under the side bar - books i have read and i agree an online reading club would be a good idea

black swan is supposed to be good. taleb's first book - fooled by randomness is also quite good

koty said...

Do you guys actually buy and read these books or download the ebooks?? If yes,can you post some links to Peter Lynch and Taleb??

Rohit Chauhan said...

hi koty
i am not been able to get any ebooks. peter lynch books are easily available. for taleb's book you need to go to a big store and ask specifically for these books to be ordered

koty said...

Hi! I managed to download most of the books except for Peter Lynch. So I was just wondering..... I find them easy to read and also they occupy less volume... for my transferable job! And they are FREE!!

Rohit Chauhan said...

can you tell me where you downloaded these books from ?

Prem Sagar said...

Hi Rohit,
I have several ebooks of Warren Buffett, Ben Graham, Joel Greenblatt, Jack Welch, Alexander Elder, Jesse Livermore, Michael Porter, Peter Drucker, Phil Kotler and others.

would u want me to email them to u?They take a lot of space. Give me any id that has lot of space.

And though I have a lot of ebooks, never read any of them!! I hate ebooks!!

koty said...

most of the books you get in this link. Perform a search.
http://www.esnips.com/

If you require links for any specific book let me know. I will upload / send the link

Rohit Chauhan said...

hi prem
appreciate the offer
can you email the ebooks to the following id
rohitc99@indiatimes.com

Prem Sagar said...

Hi Rohit,
Tried mailing you a few..but its taking too long. i will upload the files here. pls download. It will be useful to others too.
regards
Prem

http://www.esnips.com/webfolder/93b99b8c-2098-42fb-891a-1061019936f0

Prem Sagar said...

Sorry, that link is incorrect

This is the one (I saved it in file, it went to videos :-) )

http://www.esnips.com/web/kpremsagar80sHomeVideos

Rohit Chauhan said...

Hi prem
i have been able to download the books you have uploaded. thanks a lot for it

koty - i have been able to find a lot of books i always wanted to read again and i have been able find gems like security analysis etc.

thanks a lot both of you, really appreciate it

Value Architects said...

U may find this useful - Charlie's check list
http://pink-sheets.blogspot.com/2006/02/checklist.html

Rohit Chauhan said...

i am regular visitor to bruce's website. he is a very smart and intelligent guy. i have read his posts on motley fool BRK board (he writes under the name delilama) and found them extremely insightful.
i have seen this list earlier, but did not look at it closely. i think it is a good checklist to use and would most probably do so

Anonymous said...

Hi Guys,
Esnips has closed all the files. Can you upload the books to other sites and inform me. If needed, you can give the download URL to my email. Email is r.muthuswamy@gmail.com