My Investment Principles

- Stock prices without details about the company does not indicate if a stock is over or undervalued. e.g Rs. 10,000/- per stock may be undervalued for a company while Rs. 10/- may be overvalued for another.

- Do not invest in stocks if you cannot or have no plans to keep the money invested for at least 3 years.

- Don't panic on price fluctuations (for no reasons which affects the company/ industry). Check to see if it is a good opportunity to buy shares of strong companies.

- Before making the investments itself, be prepared to see the stock loose value of up to 50%. And think about what you will do in case that happens. This will act as a practice and you know know exactly what to do when that happens.

- Do your research at a regular intervals (3-6 months) on each of your holdings to verify if all the reasons for which you brought the asset still holds.

- Listen to others and advices, but always do your own research before acting on it. Remember: advice is free, but its your money which is at risk!!

- Invest in good companies only. Don't invest just because a stock is going up or down.

- Read about the investment principles, broaden your knowledge.

- Write down your investment principles, and look at it before you make an investment to make sure that is it according to your principles and does not deviate from your principles.

- Don't invest in stocks to make some quick bucks!! Yea, you may get lucky few times, but when you try to repeat it, you may loose everything. Invest for long term to create wealth.

- After making an investment, if you think you did a mistake, don't wait; just sell that asset and exit. Even if it is down, don't wait it to come back to same level, it could become worse. You will be able to find better opportunities; if not, you are better of not investing at that point of time and keep looking.

- Don't have too many stocks in the portfolio. Yea, diversification is good, but I would rather invest in few very good undervalued companies than to invest in many companies to reduce the risk. If you are not sure, choose index funds.

- Don't invest all of the available fund to an asset at one time. Make multiple transactions over a period of time. Don't think right now is the best time to buy or sell, and that you will miss the opportunity. Remember that you are investing for long term and investing everything at one time can do more harm than good.

- Understand that you are investing in a business. Allow the capital to be used and give the business time to grow and provide returns.

- Don't get into the game of chasing the price and timing the market. You may succeed a few times and make 'some' quick money, but I doubt that anyone can do it repeatedly over a long period of time. But remember, you are not in it for some small quick bucks, but to create wealth which lasts for a very long time.

- Choose an investment strategy which will keep you happy for a very long period of time, not just for few days.

- Never invest with money you don't have!!! "To make money they didn't have and they didn't need, they risked what they did have and did need. That is plain foolish!!" - Warren Buffet on Long Term Capital Management (LTCM) bosses.

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Real Meaning of Risk

An article I found very interesting (From fool.com)...

The world of academic finance tends to promote the modern portfolio theory, which says that, in investing, risk is equal to volatility. We're taught to look at risk in terms of a stock's beta. But I disagree with the notion that beta is an adequate measure of risk.

Now, I have the utmost respect for all of the teachers in my life -- the value they've added to my career is priceless -- but most academics tend to look at the world in neatly packaged scenarios instead of focusing on real-world applications. In the real world, viewing risk in terms of volatility is mere folly. I can even use a real-world example to prove my point.

An illuminating example
Back in 1973, Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) Warren Buffett began accumulating shares in Washington Post (NYSE: WPO). At the time, the Post owned a top-tier collection of media assets, including Newsweek, the Washington Post newspaper, and several television stations in major markets, and it was selling in the market for $80 million. Buffett concluded that the Post's assets could easily fetch some $400 million or more if they were auctioned off.

Shortly after he made his investment, the stock price declined. With a lower market capitalization, the beta of Washington Post stock would have been higher. So, to people who look to beta as a measure of risk, the Post was now a riskier investment. Yet to this day, I can't understand why it would be riskier to buy $400 million worth of assets for $40 million than for $80 million.

The problem with beta as a measure of risk is that it focuses on the one aspect of a stock price's movement that is of the least importance. Beta fails to consider business risk, asset valuations, and all other fundamentally sound business-like valuations. So the idea of selling a business only because its price has declined is not only silly, but it also guarantees subpar investment results in the long run.

Real risk
So what is risk? Well, risk should be viewed as the likelihood of permanent loss of capital. Betting at a casino is a good example. And it is in this context that the risk-versus-reward profile should be assessed. When you buy shares in a business for $30 apiece because you have determined through data analysis and your reasoning that the shares have an intrinsic value of $60, but then the stock tanks to $20, you have not taken on risk but mere price volatility. Of course, you should naturally go back and determine that the intrinsic value has not materially changed for the worse. If it hasn't, then your investment has really become less risky, and you should view the price volatility as an opportunity to take advantage of a better bargain.

It's this misunderstanding of risk that causes investors undue stress and results in sloppy buying and selling. Buffett used to say that you should be able to watch your investment decline by 50% and not feel pressured to sell. Mohnish Pabrai told me that a stock's price immediately tends to decline whenever he buys a stock and shoot up when he sells, yet the declines don't bother him, since he doesn't concern himself with price volatility.

Indeed, several years back, Pabrai was buying Universal Stainless and Alloy (Nasdaq: USAP) at around $15 a share, after which the stock eventually fell to $5 a share. Sitting on a paper loss of more than 50%, Pabrai viewed the decline as nothing more than excessive market volatility and believed that it had nothing to do with the stock's intrinsic value. He was right -- he sold years later for an impressive profit. If Pabrai had sold out at $5 out of fear, he would have taken a substantial loss in capital and would have been forced to look for a three-bagger just to get back to where he started.

With the right temperament and discipline, investing successfully can be rather simple. Just ask the masters.

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