My understanding of Investing Framework

The thought for writing this post came from a tweet by @shyamsek this morning followed by my reply.

I wanted to share my thoughts on my Investing Framework – as how I see it and practice it.

In my opinion,
Science part, can be cultivated, learned and developed by anyone who has interest/passion in learning
Art part, difficult to learn as a skill, but over years of continuously reading annual reports, call transcripts, books, from others, can be developed to a reasonable level.
But, there will always be a difference between one who naturally has this and one who learns this.
That difference will make a difference in the investment returns between them.

The art part plays a little more role than the science part because we have seen markets punishing great businesses and rewarding mediocre businesses for an extended period of time.

During this time the art part comes handy to hold on to your conviction and continue to stick on to great businesses and even accumulate them.

As the science part can be developed as a skill, having that as a base, I think following categories of stock market investors emerge:

  1. One who has a perfect balance of both Science+Art are the ones who make out sized returns and become well known names of the investing world.
    Warren Buffett for one. Less than 1% of the investing world are here.
  2. One who knows the science part well and can handle the behavioral part, tend to make great returns over long time.
    They may stick to blue chip category of stocks. They dont sell early, or buy late.
    We know many who have bought Reliance, MRF, Dabur, Wipro etc., decades ago, and have passed on to next generation.
    Numbers / results dictate their decisions and they have patience and conviction to hold during ups and downs.
  3. One who knows the science and business and management aspects very well, but lacks the behavioral part, may churn portfolio frequently.
    They make good returns in the market, but, may miss opportunities to make enormous wealth.
    For ex., they may anchor to a price or valuation ratio and wait… Or, may sell winners and hold on to loosers
  4. One who only knows the science part – they may want to try and test their skills in the market
    May lose some / win some – only based on number crunching and some luck
    Will be better off with a couple of index/diversified mutual funds over long time

Please let me know your comments and feedback.

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