For most of us, change can be quite unsettling. It certainly was for my friend. She does not like change. But after a lot of thinking, she acknowledged that it was very crucial if she wanted to grow and did not want to stagnate.
Change ultimately is an integral part of our life. And while the example that I have given is related to work, our personal lives require change as well. This is if we want to become wholly rounded individuals.
But is change a good thing when it comes to investing in equities? Probably not. Now the decision to invest in stocks, among many other things, depends a lot on the 'business model' of the company. This means as an investor, you would need to understand the business first, get a grasp of the competitive advantage that a particular company enjoys before you choose to invest in it.
Understanding a business can become quite challenging if it is part of an industry whose dynamics keep changing. Warren Buffett certainly did not like change. In his 1987 letter to shareholders, he wrote, "Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or 10 years ago."
The tech industry is a classic example of this. Today, Apple is the world's most valued company and the recent result season saw Apple post a healthy growth in earnings. This is commendable given the general air of uncertainty in the US economy. Apple's growth was largely driven by the iPhone, which accounts for a significant chunk of the company's sales. This in itself could be a problem. It is questionable whether the company can continue to rely on one dominant product to drive growth for a long time. And it is highly possible that another company, probably, could come out with a product that could once again change the entire landscape of the industry, the way Apple had done some years back.
And that is probably why Buffett is reluctant to invest in the company even though he acknowledges Apple's firm position in the smart phone market and superior financials. He does not understand the business too well and is not sure whether Apple has that competitive edge or moat that can be durable for the next 10 years.
Only time will tell whether Buffett is right or wrong. And I am certainly not suggesting that Apple is not a good investment. That will be a different discussion altogether.
The point is that as an investor, it makes sense for you to invest in businesses that you understand. And this becomes possible, when the business models are simple with not too many changes and disruptions.
By Radhika Pandit
Change ultimately is an integral part of our life. And while the example that I have given is related to work, our personal lives require change as well. This is if we want to become wholly rounded individuals.
But is change a good thing when it comes to investing in equities? Probably not. Now the decision to invest in stocks, among many other things, depends a lot on the 'business model' of the company. This means as an investor, you would need to understand the business first, get a grasp of the competitive advantage that a particular company enjoys before you choose to invest in it.
Understanding a business can become quite challenging if it is part of an industry whose dynamics keep changing. Warren Buffett certainly did not like change. In his 1987 letter to shareholders, he wrote, "Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or 10 years ago."
The tech industry is a classic example of this. Today, Apple is the world's most valued company and the recent result season saw Apple post a healthy growth in earnings. This is commendable given the general air of uncertainty in the US economy. Apple's growth was largely driven by the iPhone, which accounts for a significant chunk of the company's sales. This in itself could be a problem. It is questionable whether the company can continue to rely on one dominant product to drive growth for a long time. And it is highly possible that another company, probably, could come out with a product that could once again change the entire landscape of the industry, the way Apple had done some years back.
And that is probably why Buffett is reluctant to invest in the company even though he acknowledges Apple's firm position in the smart phone market and superior financials. He does not understand the business too well and is not sure whether Apple has that competitive edge or moat that can be durable for the next 10 years.
Only time will tell whether Buffett is right or wrong. And I am certainly not suggesting that Apple is not a good investment. That will be a different discussion altogether.
The point is that as an investor, it makes sense for you to invest in businesses that you understand. And this becomes possible, when the business models are simple with not too many changes and disruptions.
By Radhika Pandit
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