Goal setting is very important for anyone to ensure progress. This is applicable in aspect of life be it personal, career or finance. Goals puts in motion the continuous improvement process which is what we should seek in our like. As part of my investing journey, I wanted to set some clearly defined investment process goals which I want to achieve. If we take care of the process the outcomes will take of themselves. Business performance goals for the calendar year 2014 are given below. At the end of the year, I would like to review the goals.
Goal # 1 : Evaluate only business performance and not price performance
Only reason for me to invest in stock market is that it gives me opportunity to own many outstanding businesses and compound my investment return at a decent rate. If I start and operate my own business, apart from exposing myself to base rate risk of high failure rate, it would take too much of my available time which is not the purpose for which I invest. Close watching of prices and evaluating price performance leads to too much activity which is not advisable for long term investing. If I had really invested in a business, would I be buying and selling that business every quarter or every year? Why should it be different while investing into businesses through stock market. Market liquidity gives us the ability to quickly switch but it does not mean we need to be hyperactive. From here on, I would be grouping my businesses into industrial grouping and report how the group as a whole did and how our earning yield has grown from our investment perspective. No more references will be made on market price. Market price has only one purpose, to decide when to buy. I will sell business only when I either think the business potential has reduced or turned out to be wrong or a better bargain is available.
Goal # 2 : Reduce the number of businesses to 20 or below.
In reality, it is not possible to start 20+ businesses or even if you start to maintain so many of them is a difficult task. This is possible only through stock market as except for monitoring the performance, as investor there is no need to involve in day to day operations. While this limitation is not there, it is not possible to monitor or maintain a portfolio with too many stocks. Diversification over a limit only Diworsifies the situation. Also, in our lifetime it is difficult to find 20 high quality businesses available at fair value. Goal here is to focus the portfolio and reduce the number of businesses to ones that are easily understood and have high predictability. Finding these kind of businesses at right price is a mammoth task in a country like India. This years goal is 20 and it would further reduce as years go by to have only those that are of high quality. As part of this goal, I would be exiting from low quality businesses and those that does not have good corporate governance.
Goal # 3: Improve quality of businesses
Right now, if I look at the quality of the businesses I hold they are mostly cyclical. Mostly cyclical companies are one that would be available at throw away valuation because of the negative investor sentiment. If we buy cautiously and get the timing right, there is lot of money to be made in cyclical businesses. Key to this investing is understanding business and economic cycles. This kind of investing works well for short to medium term but not good on long term investing basis. While I will not be completely doing away with this kind of investing, my goal would be reduce the dominance of these in my portfolio and stick to only high quality. Once, I reach the quantitative goal of 20, if a business is to be included, it has to replace some other business in the pack. This process will ensure that overall the portfolio will only get better and better.
Goal # 4: Bet big on high conviction businesses
While there are numerous occasions in which I have identified right businesses one common mistake of mine is not to have bet big on them. In almost all occasions either I did not invest big portion due to self doubt or stopped investing due to anchor bias, when the price went up slightly higher than my initial investment price. When we start a business we are ready to invest a huge start up amount on that business we start but we are reluctant to invest like that when it comes to stock investing. Only explanation here is that we feel confident (over confident ?) about us being in control of the business in first case. Since one of the goals is to lower activity, it would also be prudent to increase bet size to make up for that.
Goal # 5: Do not lose money
Many investors confuse this term of do not lose money to lost money in the investment based on price variation for stocks that are not sold. This is not correct. If we look for cues at Mr. Market as a person who has the ability to price a business accordingly, we will be doomed. Mr. Market is there only to exploit and we should not be exploited. What I mean by losing money here is either if the business go bankrupt or it has provided a return below risk free return when the business is sold from portfolio. This is primarily determined by understanding the nature of the business clearly and also the price we pay to buy the business. If the buy price considers enough margin of safety, our businesses would provide profits at an acceptable rate even in the event of reduced profits for a year or two. The exercise required for this is time consuming but however very critical. Going forward, my goal will be to buy a business only after I have posted a write up with risks, valuation and exit criteria.
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