Friday, September 28, 2012

How Investing like a "KID" works well for me

Back in school, I read a book titled, "Beating the Street by Peter Lynch". Of course, for those who know, he is probably the person who made Fidelity what it is today. He was one of the top fund managers of all time, but given the stress of the job, he retired early - at 43 (how I wish). During the tenure of the Magellan fund he managed, the fund size grew from a few hundred million to USD12 billion when he left.

In the first chapter of the book, "The Miracle of St. Agnes", he was showing how a bunch of 7th-grader (about 12 years old) school kids managed to beat 99% of mutual funds and outperformed the S&P Composite by a whopping 70% gain to S&P's 26%. Over the 2 years of that study, those kids were obviously buying stocks that they knew - Disney, Wal-Mart, PepsiCo, Gap, Nike, Mobil, LA Gear - among a few of them.

I wish I had followed that principles from the time I read the book. But, I went on a different route, thinking that the financial education that I had would have made me a better stock picker. Hence, I used all kinds of ratios, PE, P/NA. PEG, P/EBITDA, EV etc you name it. I used to compare which company was cheaper in relative PE, NTA terms. Of course, when choosing the cheaper (in relative term) stocks, we would have picked some lesser size-d or less well know companies. This method is not entirely wrong but it is getting as complex as it can be - and it does not guarantee of us being more successful than a simple type of investing - which is only buy things that you like.

Kids style investment

Ever try giving food to a kid. A fussy one - supposed to be better investor -:) - would only be convinced that the food should taste good then only he/she will try. Now, as an investor, we are supposed to be fussy. We should not be afraid to invest but when comes to picking the right stock, it is always better that there should be a tried and tested experience. Kids tend to eat the same thing most of the time. In picking stocks, we should not be having too many stocks in our universe. Too much is not a good thing.

Only buy things you know

How kid-like is this? Kids only eat things that they like or at least they know that they have tasted them before. In the first chapter of "Beating the Street", the 12 year olds were buying companies that they knew. That was the basic rule. Hence, simple brands like Wal-Mart, Nike, LA Gear, Pepsi, Coke etc.

You know my kid - when she was a little over 1 year old - she was already pointing to that "Golden Arch" - "M" or the "KFC" sign even in a foreign country - imagine the power of the brand. You know she was not eating the food, or even buying the toys but she wanted to still walk into the restaurant. Frankly, until now I am not sure what was the reason - not the toys.

Stuffs that are bad for you does not mean it is bad for investments

Check these non-syariah compliant stocks - Carlsberg, Guinness, Genting, BAT, JTI etc. Err... of course Playboy used to be a good stock in US as well.

Kids do not care if it is bad or good. As long as it is something that is to their taste and liking - Oreos, Cheezels (Kraft), milk (good stuff - Nestle, Dutch Lady), ToyR'Us, Hasbro.

Most important rule - do not spend more than you earn

Why can't adult do this?

When giving money to a kid, the basic rule to those kids is not to spend more than what you have in your pocket. This goes very well to any company as well. Although I do not have the statistics, this principle proves to be good for me in my investments portfolio. In case of any company is in need of additional funds or borrowings, they are still acceptable, but as long as those borrowings would generate more in future. Any company that has proven or shown little that they have made more from their fund raising, the chances of success from generating more in future would probably be lesser than those that have proven to made it before.

Based on those principles, I definitely made more than looking at complex matters. But of course, our horizon of stocks can be larger - cars, banks, healthcare, education, fashion etc. - better right? Not necessary.

Any more kids like behavior and principles?

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