Investing 101

My Investment Philosophy & The Circle of Competence

Dear investors today I decided to talk about My Investment Philosophy. This is where and how I like to invest. My time horizon is 20 to 50 years from now. So I usually don’t worry about the short term or medium-term volatility. Because investing is not a T20I or ODI it’s a TEST MATCH and it is played 365 days a year. So I like to stay in the crease as long as possible because if you stay long enough in the crease you know how the track is and how the ball is swinging. You may score 0 runs in your first 50 balls, score a 50 in the next 25 balls, you get to hit boundaries once in a while and all this will happen only if you stay in the crease.

Not getting out is the best thing you can do in the stock market. If you can do that then the scoreboard will automatically keep moving. So I love buying quality businesses at a reasonable valuation and hold on to it unit the fundamentals of the company changes whether it takes 10 years or 20 years or 50 years. Even if the company share I bought yesterday loses its value by 30% today due to the current sentiments of the market. It won’t bother me, I’m in it for the long run. This is how I usually approach the businesses that I’m interested in buying.

In the short term, the stock price will always move with respect to the global sentiments i.e. what’s happening in the world markets today. But in the long term stock will always move with respect to the earnings of the company. And that’s a fact 7 days a week.

Circle of Competence

In the beginning, I have no circle of competence with me I went blindly into the markets and paid the price as well. And I started reading where I went wrong and how I went wrong. After reading tons of reports and various styles of legendary investors I stuck upon this concept called “Circle of Competence” and managed to create my own circle.

Circle of competence is nothing but the gap between what we think we know and what we actually know.

The concept of the circle of competence has been used over the years by Warren buffet as a way to focus investors on only operating in areas they knew the best. He said in 1996 Shareholder Letter :

“ What an investor needs is the ability to correctly evaluate selected businesses. Note that world “selected” : you don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of the circle is not very important; knowing its boundaries, however is vital.”

Staying in your boundaries is as important as finding your boundaries.

Where I play my game

Warren Buffet used to say when you pick a business think long term. Ask yourself whether people buy the products or services the company offers after 20 years? So by going this way I concluded that these two sectors will always be in demand.

Financials- People will always need money always!!!!!! So when people need money to buy a new home or car or anything big where do they go? Loans obviously. Where do they get those loans? Banks, NBFCs, etc.

FMCG- These are the products that are used in our daily lives. Eg; personal hygiene products, healthcare products, snacks. These are all come under the FMCG group. These products will always be in demand as long as the human civilization exists.

So when it comes to owning businesses “I strongly believe in these 2 sectors financials and consumer staple aka FMCG sector”. I stay in those sectors because that’s my circle of competence and I can’t afford to spoil my nature of the game by trying to play the fancy shots. So I do my basics thoroughly and try to maintain my own style.

Also, that doesn’t mean I hate other sectors but I understand these sectors better than other sectors. I know how this will perform in a good business cycle and in a bad business cycle. I keep my portfolio simple 50% Financials and 50% FMCG. There is no changing that.

Why I love financials

Financials are the backbone of the country and its economy. The economic development of the country depends mostly on the financial system of the country. No one can deny that. At the end of the day, financials play a major role in each and every individual life. I don’t know whether we buy mobile phones or computers or vehicles we use today after 3 decades. But people will always need financial services whether they make 50K a year or 50Cr a year. They all need financial services, even after 100 years. The banking system cannot go away. That’s what I love about financials.

I strongly believe in the saying “ If you want to bet on a country’s economy you should bet on its financials.”

After the COVID hit there is a new buzz word in the market which is “ Sell financial, stay away from financials and so on”. As I said financials are well in the area of my circle of competence. So I went into the market and bagged the financial businesses. I believe my portfolio will always comprise of 50% and even more of the financials. Because I know them and I love the way they make money. There is a huge interest difference between savings deposits and loans. That difference will actually benefit the banks in profits.

Also, I want to point out one thing here, the world of finance has changed “ There are only 3-4% profit margins in housing loans. On the other hand, Gold loan companies are enjoying 12-14% Profit margins.

The one thing

One thing I want to say to all new investors is that never ever reduce your standards in selecting the business.

“ Go out there figure out your circle, restrict the boundaries and start playing”


3 replies on “My Investment Philosophy & The Circle of Competence”

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