I’ve said in the past you should think of investment as though you have a punch card with 20 holes in it. You have to think really hard about each one, and in fact 20 (in a lifetime) is way more than you need to do extremely well as an investor – Warrent Buffett
There is very little in common between Amir Khan (Bollywood actor) and Warren Buffett. One is an actor, the other, an investor. The former says he doesn’t care about money while the latter used to dream of being rich even when he was still a youngster. Etc.
And yet, there IS something similar between them: the desire to excel.
And, something else that is even more relevant to this article – the fact that they both choose the ‘project’ that they want to be associated with, very very carefully.
Warrent Buffett, is the master of inactivity. If anyone ever had any doubts about that, they should read some of his quotes:
"Wall Street makes its money on activity…You make your money on inactivity"
"Charlie and I decided long ago that in an investment lifetime it's too hard to make hundreds of smart decisions. ... Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year" - Warren Buffett
NO ONE ever rushes Warren Buffett into an investment. He invests when he is ready for it.
He probably learnt this from his teacher, Ben Graham who had this to say:
"While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster" - Benjamin Graham
Bitten by the Great Depression, Ben Graham could similarly never be pushed into investing. Many, including Buffett, would recommend companies to Ben Graham. But he would reject most – till he found the one company that met all his criteria for investment.
Amir Khan, on the other hand, is known to take on one acting project a year. And when THAT one movie comes out, people wait for that movie with great eagerness and more often than not, is a blockbuster hit.
This is not a blog on movies or I would have talked about how each of Aamir’s movies in the recent past has delivered a meaningful message to the masses. Suffice to say that he chooses the story, the director and the producer of his movies very very carefully – and then makes a success out of it.
And there is a financial logic to this as well.
As per a study called “The Cost of Active Investing,” by Kenneth R. French, a finance professor at Dartmouth (known for his collaboration with Eugene F. Fama, a finance professor at the University of Chicago, in creating the Fama-French model that is widely used to calculate risk-adjusted performance), investors (in US) collectively spend around $100 billion as (brokerage and other) fees.
Thats a heck of a lot of money to line someone else's pocket.
You can bet Warren Buffett didn't contribute much to the fees figure - since he likes to buy and then hold his investments.
You might argue that as an individual, one doesn’t end up spending all that much on fees.
That may well be true in your case, but then don't forget that the government also taxes only the short term gains (if at all one has a profit)- so the more buying and selling one does, the higher the tax one pays.
Making investments at the drop of a hat (Ben Graham would have called these speculations) could also mean that not enough research has been gone into it, and hence the likelihood of losses is higher.
So on one hand, one has a situation where as an ‘active’ investor, one pays more fees, more taxes (if there is a profit) and/ or suffer losses (if it is a bad decision).
Alternatively, one can wait for the right opportunity, research it well thereby ensuring that the odds are in one's favour. And then invest a good sum behind it.
I wonder which strategy makes more sense?
Umm... no need to ask Aamir or Mr Buffett.
Over the last few weeks, I have not bought anything in the stock market (save for one opportunity that I did invest in, but that was not discovered by me and hence not fair to talk about it). Most stocks that I have looked at seem to be fairly (or over) priced.
And besides that, I haven’t even had too much time to do research – with my professional life keeping me busy and some bug in my research software making it difficult to do full justice to the research.
But as I have rationalized above, I have not felt obliged to invest into something that I would regret later. Better to commit an error of omission (missing out on a buying opportunity) than commission (error of judgment in the buying) as Mr Buffett says.
Quite the contrary, I have SOLD some of my holdings such that all stocks which had reached their potential have been converted to cash.
And so I will wait for the right opportunity to invest, till I feel that the odds are overwhelmingly in my favour of making good money.
With Amir Khan and Warren Buffett thinking along the same lines, I am in august company.
