Best of stock investing comes with experience

The other day I was interacting with an investor, he asked me about what's the ideal way to invest? How to identify the right stock? It seems he's begun to read books about investing and started to dwell into the financial statements of the companies.

He's still puzzled about how to get this done correctly. In the day, I was driving with one of my partners to his place and he found my driving to be uncomfortable. Of course, I'd asked him if I violated any rules and he replied that I didn't. I was driving according to the rule book but yet it was different or rather rash to his standards.

Likewise, investing is about your own style. Yes, you do have some rules, certain guidelines and many paths but to get right for 'you', you need to find it for yourself. What worked for Buffet may not work for me or for another. So, for years people have written volumes of books about various successful styles, yet people are trying to figure out how to make more money in stock investing.

Going back to the driving example, I might not have violated any rules, but my way of driving confused one motorist though it didn't result into any collision. This made my co-passenger feel risky, but I was comfortable about it. Similarly, when investing my conviction about a stock would vary from that of yours. Despite the same conviction, the amount invested or proportion to the portfolio would vary and hence the experience returns.

This is primarily due to the risk appetite each of us have. We carry different perspectives to the same event due to our different upbringings, attitudes, knowledge and experiences. Basically, it's got lot to do with ourselves, our psychology and our behaviour than the analytical skills or expertise we own. This is where Buffet differs from most of us. He could invest in equities of 'quality' companies during the Great Financial Crisis (GFC) of 2008 when almost every other were dropping equities as hot potatoes.

Also, important is the proportion of exposure he took in each of these stocks. It's not just the conviction but also the proportion that turned into a potent combination. True, when it works everyone recognises and appreciates it. But he's not bothered about what others have to think about but only what he knows about the business.

In a conversation decades back to this event, when quizzed about how he does different from the money managers in the market, he said most professional investors focus on what the stock could do for the next one or two years and have all kinds of arcane methods of approaching that.

The real test of whether you are investing from a value standpoint or not, is whether you care if the stock market is open tomorrow. If you're making an investment in a security, it shouldn't bother you if they closed the stock market for five years.

Let's be honest, how many of us could have this kind of risk tolerance and conviction on a business where we put our money. It's rare and this particular rarity is what makes Buffet who he is! He further explains that all the ticker tells me is the price.

And I can look at the price occasionally to see if the price is outlandishly cheap or high, but prices don't tell me anything about a business. Only business figures tell anything about a business, and I would rather have a stock or a business first and not even know the price.

So that I'm not influenced by the price in establishing my valuation and then look at the price later to see whether it's way out of line with what my value is.

Could we have such higher standards in evaluating business and put to test them in our stock investing? It's not impossible but at a higher degree of difficulty. Greeblatt, another renowned value investor says that stocks aren't pieces of paper that bounce around, they're ownership shares of businesses that we value and try to buy at a discount.

Another critical aspect of investing is not just the ability to value a business but the discipline to hold an investment. He says, when people check their returns 30 times a minute on the internet, time horizons shrink, investors are impatient and sell at any sign of underperformance, so they fail to participate in periods of overperformance.

Despite the rhetoric of having goals to investing, one may not be able to define a set of goals and start investing. Instead, they should experience a set style and/or method of investing and learn from them to tweak over a period.

I asked the investor at last, if he remembers how he learnt ride a bicycle. Most of us have had at least one fall, got hurt and aging tried to succeed. So, why not in investing.

(The author is a co-founder of "Wealocity", a wealth management firm and could be reached at knk@wealocity.com)