"Are you joking?" asked a perplexed neigbour, when told that the company I work for, Equitymaster, aims to teach long term value investing to retail investors. The very thought that an individual with just few thousands at his disposal for equity investment can learn a lot from billionaires like Buffett and Munger seemed ridiculous to him.
"Don't they buy big stakes in companies?" he asked, trying to reaffirm his point. "How can I do that with just say ten thousand rupees?"
"Well, buying a stake in the company is exactly the way you should treat every investment of yours, no matter how small. That will ensure you evaluate the business and the management thoroughly. Buffett may buy 10-20-30% stakes in the entities he invests in. Your stake in the entity may be 0.001 - 0.003%. Nevertheless the small stake, in a brilliant company at a great price can make an unbelievable difference to your portfolio. So do not worry about the size of your investment. As long as it is done with the right perspective, you should certainly meet your objective." Unfortunately, my lengthy reply too did not adequately convince the gentleman. So I thought of reminding him of a popular Aesop fable that I read to my daughter ever so often. One which we know as the story of a thirsty crow.
In the story, a thirsty crow cannot reach water at the bottom of a pitcher because his beak is too short. Being the clever crow that he is, he flies away and returns with a stone and places it in the pitcher, noticing that the water level rises ever so slightly. He repeats this several more times, placing stone after stone in the pitcher until finally, the water level in the pitcher is high enough for him to reach and drink from. How can the crow's physical inability be compared to an investor's financial limitations, you would ask. Well, it is not the nature of the limitation but the approach taken to meet one's goals and objectives that matters.
Investing in a good business need not be at one go. Also it is not necessary to invest in the business when it is an unknown entity. A good business that continues to be great and well managed can be bought into at any stage of its life cycle, with a reasonable margin of safety in valuations. So if you had bought 100 shares of HDFC Bank when the bank had its IPO in 1995, you would have had to invest Rs 1,000. Not a very large sum even then. But those 100 shares would be sitting pretty in your portfolio, with a market value of Rs 520,000 today, having multiplied over 500 times! But what would have been even better is if you would have consistently bought the stock every time it was available at attractive valuations.
Also it is not necessary to look for a new company every time you wish to invest. As Peter Lynch has said, "The best stock to buy may be the one you already own". So as long as you are convinced that the company you already own is one that you wish to buy more of, just keep buying it at attractive valuations. That way your pitcher will continue to get full as you keep buying miniscule stakes in a great companies.
So do you need to be a millionaire to become an investor or vice versa? Rest assured, this is certainly not a chicken and egg conundrum. A retail investor, with limited funds at his disposal can certainly aim to have a large portfolio over time. However, the objective should be to invest only in the best businesses at the most opportune valuations every time you do so.
"Don't they buy big stakes in companies?" he asked, trying to reaffirm his point. "How can I do that with just say ten thousand rupees?"
"Well, buying a stake in the company is exactly the way you should treat every investment of yours, no matter how small. That will ensure you evaluate the business and the management thoroughly. Buffett may buy 10-20-30% stakes in the entities he invests in. Your stake in the entity may be 0.001 - 0.003%. Nevertheless the small stake, in a brilliant company at a great price can make an unbelievable difference to your portfolio. So do not worry about the size of your investment. As long as it is done with the right perspective, you should certainly meet your objective." Unfortunately, my lengthy reply too did not adequately convince the gentleman. So I thought of reminding him of a popular Aesop fable that I read to my daughter ever so often. One which we know as the story of a thirsty crow.
In the story, a thirsty crow cannot reach water at the bottom of a pitcher because his beak is too short. Being the clever crow that he is, he flies away and returns with a stone and places it in the pitcher, noticing that the water level rises ever so slightly. He repeats this several more times, placing stone after stone in the pitcher until finally, the water level in the pitcher is high enough for him to reach and drink from. How can the crow's physical inability be compared to an investor's financial limitations, you would ask. Well, it is not the nature of the limitation but the approach taken to meet one's goals and objectives that matters.
Investing in a good business need not be at one go. Also it is not necessary to invest in the business when it is an unknown entity. A good business that continues to be great and well managed can be bought into at any stage of its life cycle, with a reasonable margin of safety in valuations. So if you had bought 100 shares of HDFC Bank when the bank had its IPO in 1995, you would have had to invest Rs 1,000. Not a very large sum even then. But those 100 shares would be sitting pretty in your portfolio, with a market value of Rs 520,000 today, having multiplied over 500 times! But what would have been even better is if you would have consistently bought the stock every time it was available at attractive valuations.
Also it is not necessary to look for a new company every time you wish to invest. As Peter Lynch has said, "The best stock to buy may be the one you already own". So as long as you are convinced that the company you already own is one that you wish to buy more of, just keep buying it at attractive valuations. That way your pitcher will continue to get full as you keep buying miniscule stakes in a great companies.
So do you need to be a millionaire to become an investor or vice versa? Rest assured, this is certainly not a chicken and egg conundrum. A retail investor, with limited funds at his disposal can certainly aim to have a large portfolio over time. However, the objective should be to invest only in the best businesses at the most opportune valuations every time you do so.
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