“The Stock Market Is Designed To Transfer Money From The Active To The Patient.”
Similar to how trading works on different strategies, even investing has different approaches although the base idea is the same – Make more money than you initially invested in an asset.
There’s dividend investing, which focuses more on stocks that pay high dividends per year on their profits, the buy and forget approach or Coffee Can Investing.
There’s another approach that you might not have come across often but plays the role of an underdog even among ace investors such as Warren Buffett and Charlie Munger and that is focus investing.
What Is Focused Investing?
Focused Investing is a strategy where you invest in a small number of companies, whereas the value of investment is higher and concentrated.
The point of focused investing is simply to reduce clutter in your portfolio and concentrate only on those companies which you understand, research and strongly believe in.
A majority of ace investors concentrate on focused investing, betting big on a small set of companies, and only investing when the odds are highly in their favour.
Instead of adding another mutual fund to your portfolio and hoping that it will somehow beat the market indices, either SENSEX or NIFTY, going stronger on your existing companies give you better odds.
The 5 Golden Rules Of Focused Investing
Let’s learn more about the five golden rules of focused investing which every investor should be aware of.
1. Concentrated Investing
When investing in shares, it’s smarter to choose a handful of companies (preferably 5 or less) which have a strong internal management. This means studying a handful of companies in-depth. Some of the key metrics to keep in mind are
- Revenue
- Year On Year Growth
- Profitability
- Promoter Holdings
- Dividend Yield
- ROE, ROCE and P/E
2. Number Of Companies
Limit yourself to the companies that you can truly understand. It could be the business model of the company, its performance, competitors, scope of growth and more.
That being said, investing in twenty or more companies will be very demanding to track on a regular basis unless your job is that of a full time fund manager.
3. Pick The Best Companies
Of the basket of companies you have researched and chosen as your investments, pick the best one and focus a majority of your investments into that one company. Most investors gained their multibaggers by betting big on a few companies which have doubled and tripled their returns.
While a diversified portfolio is safer, it will mostly help you beat inflation in the long run, but not necessarily make you rich. For example, a closer look at ace investor Rakesh Jhunjhunwala’s portfolio shows that his biggest investment and best bet has been Titan, which he had bought at a CMP of ₹ 3 per share.
Today, that investment is worth ₹ 10,424 crores today with a current market price of ₹ 2,324. Irrespective of how the other investments have turned out, this one stock will forever be the defining moment in Jhunjhunwala’s career and that one big bet was enough to skyrocket his portfolio.
Read more about Rakesh Jhunjhunwala’s portfolio here.
4. Long Term Vs Short Term
When investing, always think long term versus short term. Remember that you’re investing in a part of a business and it takes time for that business to grow.
Only when that business increases revenue do you receive capital appreciation as well as higher dividends. Keep a timeline of about 5 to 10 years for your investment returns.
Even the best performing funds wouldn’t be able to provide 50% return year on year, especially when markets are volatile in between the years due to various factors.
A 50% return on an investment of ₹10,000 brings your total investment value to ₹15,000, which is not enough to become a self-sufficient millionaire.
5. Accept That Markets Will Shift Either Way
There’s always a chance of losing money in the markets and they can’t be timed or predicted. The crashes we’ve seen the past few decades hold ground on this statement.
But that doesn’t mean every listed company will disappear from the map. Volatility is short term, whereas your investment goals are long term, so focus on the big picture.
Markets fluctuate due to external as well as internal reasons.
Some external reasons are
- Government policy
- GDP of the country
- Competitors
- Annual Budget
- Inflation
- Consumer Behaviour
Internal Reasons could be
- Sales and Profit Margins
- Manufacturing capacity
- Ability to turn over inventory
- Company Expansion and Investments
- Change In Upper Management
Internal factors can be controlled to an extent by the company management. But external factors like consumer behaviour and government policy, although predictable, cannot be avoided.
In Closing
That’s all for this blog on Focused Investing. If you’d like to learn more on finance and stock markets, then sign up to the basket of courses available now on Fingrad. Happy Investing!