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Attributes of a great investor


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Attributes of a great investor

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Attributes of a great investor

  2. 2. 1. UNDERSTAND ACCOUNTING  You have to be able to read financial statements  Use financial statements to understand how the business is doing and correlating management commentary to reality Reference:   Dr Anil Sharma of IIT Roorkee on Financial Reporting and Analysis- 60 sessions of roughly 30 min each
  3. 3. 2. UNDERSTANDVALUE  Intrinsic value is the present value of all future cash flows  Drivers of value  Cash flow (certain for bonds, uncertain for equities)  Timing (certain for bonds, uncertain for equities)  Risk (uncertain for bonds, uncertain for equities)  Focus on understanding the magnitude and sustainability of free cash flow  Industry life cycle  Competitive position  Entry barriers  Economics of the business  Capital allocation skills of management 1. Understand DCF process 2. Study companies in an industry together 3.Talk to industry experts
  4. 4. 3. UNDERSTAND HOWTHE BUSINESS MAKES MONEY  Understand the basic unit economics – different for different industries  Understand the drivers of profitability  Understand the drivers of sustainability of profitability and return on capital Read reports from KPMG, PwC, EY, BCG, IBEF etc and try to understand business models Understand the inputs and outputs of the business and how one part affects other parts
  5. 5. 4. COMPARE FUNDAMENTALS WITH EXPECTATIONS  Fundamental value is different from the value that is already in the price  Price has embedded future expectations of all market participants  Significant money can be made only if there is “variant perception” 1. Read “Expectations Investing” 2. Don’t chase story stocks without understanding or conviction
  6. 6. 5.THINK IN PROBABILITIES  Nothing is certain  Focus on the process and not on individual outcomes  Magnitude of win vs loss matters more than frequency You can lose money in large cap established companies Never be out of the market
  7. 7. 6. CONSTANTLY TESTYOUR THESIS  All investments are based on a thesis  No investment thesis is always sacrosanct  Seek non-confirming evidence  Update your thesis when new information arrives Follow quarterly results Follow the competitors
  8. 8. 7. BE CAREFUL OF MENTAL BIASES  Behavioral biases like endowment effect, loss aversion, sunk cost fallacy are very powerful  Checklist based approach  Written down process  Use frameworks for stock selection, portfolio allocation, selling decisions etc excellent compilation of mental models QGLP Model for stock selection
  9. 9. 8. PORTFOLIO ALLOCATION IS KEY  Investing has two components  Identifying a great opportunity  Meaningful allocation to it  Increased allocation with higher conviction and better prospective payout  Following a rule based approach with a minimum and maximum stock and sector allocation for risk management purposes Learning to average up with increased conviction Reducing allocation / selling when valuation is extreme or conviction reduces wards-a-capital-allocation- framework/504 Valuation & Conviction matrix
  10. 10. 9. READ MORE  Allocate dedicated time to read every day  Read across a wide spectrum of disciplines – business, history, biographies, sociology, psychology etc  Read material which is opposite your point of view and try to understand the opposing perspective  Pursue active reading