Utilising Lockdown to sharpen investment strategy

Covid-19 lockdown provided me sufficient time and mental peace to rethink the approach in life, my philosophies and the fundamentals I believe in. This naturally extended to reviewing my investing skills and principles, wherein I got to objectively relook at my successes/failures, and assess my decision- making approach . I am grateful to be able to utilise this time , and hope that it has provided me with significant leverage to sharpen my principles for becoming a better investor in future.

Below are the six principles that I adopted or re-emphasized during this period-

1. Quality Companies as a Business Owner

I will only own quality companies , and aim for an indefinite duration of holding, unless the business economics prompts me to do otherwise. Owning stocks is owning the business, not just electronic money trading instrument. I would want to be a part of the business, its challenges , growth and be with it throughput the journey .

2. Stricter value standards

My Value Standards for finding investments have even gone stricter than the past. I am demanding even higher margins of safety , as a strict selection criteria, to decrease possibility of capital loss and generate higher than Overall market returns (Nifty/Sensex). Unless there is significantly high odds of beating the market (by at least 3% CAGR), I would pass the opportunity and rather invest in the index, or other vehicles.

3. Sitting-idle and not investing and rejecting majority investment opportunities is great

This is about acceptance that good ideas will be very rare. We are all so prone to action and associate our success with only making an action. Sitting idle and waiting for a long period of time, without investing till my strict criteria are met will hold a key in my long-term success and must be cherished . Too much action will be cautioned against. Finding 8 potential investment opportunities in a year, and investing in all of them will not be entertained. Each and every opportunity must be assessed with regards to the current businesses I own, and maximum of 2-3 would be chosen to invest at a given period of time .

4. Consolidation of Portfolio –

I sold my investments in those Businesses that were lousy (low ROCE) or the ones I didn’t understand clearly. No matter how good or bad returns they had given in the recent past, I ended up selling them to consolidate my portfolio. While I held 30 companies before the lockdown , the consolidation helped me to cut to 18. My next phase of downsizing will aim for another sequence of consolidation to bring number close to 10 or even less. I will invest only in businesses that I understand, and want to be associated with it for a significantly long duration.Over-diversification will not be entertained, at any costs. If every my instincts go towards over-diversification, I must buy ETFs/Index funds and stop this exercise of picking individual companies.

5. Tracking My investments

My philosophy for tracking investments has been altered. Rather than tracking the market prices (every year), I would rather focus on tracking the earnings of each business I own every year. If I ran my own company, I would only focus on my cash profits and not at what it is being valued in the market place.

Looking at market prices , if used, will only be to either buy more with lower prices or Sell if the business economics suffer badly. The market will only be used for my benefits and would not influence my decisions in long term investing.

6. High CAPEX Businesses

Economic depressions bring out the inherent risks in high capex businesses. The high capital investment creates a major cash drag in these firms during bad times. Unless theses business involves essential products and services (which are demanded in all weather conditions), they are open to cash burns and high debts in bad times.. Investing in these firms, if possible must be avoided, and should only be done at even higher margins of safety than other low CAPEX businesses, to avoid loss of capital .

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