A week ago, during one of our frequent WhatsApp conversations, my childhood friend, Nitesh, sent me this picture of a piece of paper he found in a fortune cookie.
For those of you who don’t know, fortune cookie is a common after-meal treat served in the United States. It’s a cookie with a piece of paper inside with your, ahem, fortune printed on it. 🙂
The exchange prompted a discussion about Nitesh’s stock portfolio and I learned, to my delight, that he had been doing pretty well.
Now let me give you some background about him. He is a Software Engineer and now is successfully running his own company in the US. He has always been a “techie”, and, like most of us has zero finance background. He doesn’t have time and interest in watching CNBC all day or reading investment blogs.
So how does he manage to do well?
It turns out, he is a typical Stable Investor. 🙂
Below, I outline Nitesh’s strategy. He wants me to warn you all, in true Stable Investor style, that he has only been investing for last 5 years which is a very short amount of time to declare an investment strategy a success.
But I find the strategy very interesting which is why I wanted to share it with you. The words in italics are his own.
1. Set Reasonable Expectations
Berkshire Hathaway makes almost 20% a year. And the Dow Jones Industrial Average (US Index) has grown at an average 11-12% a year in the last 30 years. It would be stupid to think that one can beat Warren Buffet consistently. And if one spends time to pick stocks instead of just buying an index fund or ETF, one expects more than just achieving returns similar to the index. So, if one can make anywhere between 12-20%, one should be happy. There is no point chasing stocks which can become 10x in a year.
2. Invest in Companies You Like
The logic is simple – if you like a company, it must be doing something right. It’s just like real life – you only want to stay in touch with people you like. More often than not, you use the company’s products yourself. In the rare case that you don’t, you support the company’s mission.
Has this strategy caused him to miss a good investment?
Certainly. And he says: “I really wanted to buy shares of Airlines last year as they were quite down and out of favor. I did my due diligence and chose Hawaiian Airlines. It was a $5 stock. But I never flew Hawaiian so I did not buy it. In fact, I haven’t flown a US Airline that I liked. So I did not buy any. In less than a year, the stock went to $16. Am I disappointed? Yes…A little. But here is the thing – with the same money I bought the New York Times, which grew from $10 to $15 in the same time frame. My investment strategy is not optimized to pick the absolute best stocks in the market every time (it’s really not possible to do that), but to pick, on average, good stocks with stable returns. As long as I pick more good stocks than bad stocks, I win. I don’t need to win every single time.”
Has this strategy led to bad investments?
Certainly. And he says: “I have held the IMAX stock for a couple of years now and it has gone nowhere. But every time I go to an IMAX theater, I am amazed by it. That investment is not doing financially well, yet, but I am proud to support the business. Investing for me isn’t just about monetary returns, but also being able to fund a world I’d like to inhabit in the process.”
The same strategy has led to good investments though. “I invested in TESLA when their stock plummeted post IPO. The automobile industry had not seen serious innovation in decades. This company was bringing that elusive innovation and I wanted to support it. What happened? I am up 800% (8x) on the stock right now.”
3. Invest in your Circle of Competence
“I like a wide variety of companies – retail, transport, media, healthcare, but my investments are skewed more in the tech industry. The reason is simple. (1) I understand the tech business better than an average investor. I can see the potential of a company before the market can. (2) I don’t need to make an effort to stay up to date with the industry. But I still stay away from new tech IPOS. I did not invest in Twitter or Groupon or Linkedin or Zynga. That’s because tech stocks are a historically bad investment. There is a new winner in this market every 10 years. There is pretty much only one 100-year-old tech company, IBM, which is, technically, now a services company.”
4. Account for luck
When Berkshire invests in a company, they buy such a big chunk of the company, that they have the capacity to be involved in running the company. They just don’t throw money at it. They protect their investment with their sweat. Most of us don’t have that luxury. We all make investments with very limited information about a company. Even if we went through every single filing of a company, for all you know, it may be lying about its numbers (Enron/Satyam). You could invest in a company for its leadership and the CEO may die of cancer (Apple). Or something new comes in the market that completely destroys a company’s business (Blackberry).
As average investors, we are always making decisions based on limited information. “So diversify – in terms of industries, company sizes, asset class. Even though I am a techie, I don’t own all tech stocks. I don’t own all massive companies. I own ETFs. Don’t have a portfolio that could be completely ruined by a single external event.”
5. Have a budget for experimentation
Does he ever break his own strategy?
“I do. The fun is in the outliers, sometimes. But I budget for it. E.g. last year I invested in a company that has filed for bankruptcy protection. The stock was trading at less than a cent. I liked the company and even though its current finances were less than stellar, my rationale was – if the company gets out of bankruptcy, as companies in the US generally do, the stock would be worth like 100x (Yes, it sounds like gambling and it is). So I invested a very small amount in it – small enough that if I lost it all, I wouldn’t be too unhappy, but if I won, I would have bragging rights. The company did not make it. I lost all my money. For me, the budget is 1% of my portfolio value.”
6. How has the strategy changed over time?
“It has changed a lot. In the beginning, I would go to fool.com and buy the 2 stocks they recommended. I lost money, learned my lesson. More importantly, I found that when I bought a company that I did not like, I was constantly checking the share prices, worrying about temporary lows, and hi-fiving myself and fool.com for temporary highs. Buying companies that I liked gave me peace of mind. I did not care too much about how the share price did. I was just happy to be a part of it.”
7. How often do you invest?
Like most of us who are working professionals, free time is a rare commodity for my friend too. Also, since he is running his own own company 24×7, he is much more busy than most of us who are simply working for our employers.
So does he invest very often?
“I really don’t have the time to be constantly checking out stocks. If there is a company I like, I buy their stock. If the market is reacting foolishly to a company I own, I double down on it. I don’t go – “Oh, I’ll spend 2 hours on Sunday looking for companies to buy.” E.g. over a period of 2 months, I had some really good experiences with American Express. I did some basic research and realized that in terms of customer service, they were above all other credit card companies. I wasn’t their only happy customer. I bought their stock. I am 27% up on it in one year. In another case, the market was shorting Apple because, allegedly, they hadn’t come up with a world-changing device post iPad. As a techie, I know that devices like the iPhone and iPad happen like once a decade at best. The market was being stupid. I just bought more Apple when I heard the news (I am, overall, 50% up on my Apple investments).”
Usually, that leads to a frequency of 1-2 trades 1-2 times a year. I pretty much don’t sell a stock unless I need the money to buy another stock.
So these are some of the interesting thoughts which my friend shared with me. What do you think? If you are also a non-investor who invests, then share your thoughts with everyone here.