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K.I.S.S.: Secret to strong portfolio
Outlook Money | May 14, 2007
K.I.S.S. is a term I've loved ever since I first heard it. Simplicity is always attractive, the "Stupid" has loads of attitude. And, of course, the word to which the acronym is fitted is full of sex appeal.
But for stockmarket players, life seems inevitably complicated. Interest rates are going up! Sell real estate stocks. Rupee strengthening? Downgrade IT. Heat wave in Australia? Bandits in Nigeria? Hurricane in Texas? Every headline from a news-rich world needs to be processed and presumably, acted upon.
By the time I've had my first coffee, the Nikkei is ticking away. The Hang Seng kicks off next, and by 9:55 am, the Indian markets are charting their jagged curves. The European markets kick in at mid-day, and well before dinner, Wall Street goes live. All the while, company news is surging in, and analysts' reports clog my inbox. At the end of a five-day week of riding this cycle, I feel like begging to be let off.
Against the noise of 24x7 quotes and news, the search for simplicity in investing takes one directly to Warren Buffett. With 60 years in the game, he has beaten every hedge fund and contrarian, every number cruncher and derivatives trader, to amass a fortune of $40 billion and counting.
Buffett's attitude to investing has been called the "Tao of investing", named for the Chinese philosophy which seeks to distil life to its essential principles. I do not presume to be an expert on Buffett, but I would express his investment philosophy thus: "Buy a good company, at a good price, and forget about it."
Of course, you need to define "good", for both company and price, and there is a great deal of literature available on his approach to company financials. But believe me, it is not very demanding in terms of either the math, or the accounting principles involved.
What seems to me more demanding is the restraint his approach demands. The first level of restraint is in holding off buying into an attractive stock till the price is right. The second is in staying away from sectors he doesn't understand - thus, he sat out the entire tech boom, while it seemed every other teenager in California was making hundreds of millions on the Nasdaq.
The third is in refusing to sell stocks just because they have lost favour with the market. The fourth Buffett restraint is in being satisfied with holding just a few stocks.
If you follow these principles, Buffett believes, you can go to sleep for 10 years, and wake up without worrying about how the markets moved. Or, correspondingly, remain unperturbed if the stock market remains shut for a decade.
All of this sounds extremely naive in the context of the rapidity of economic change. Bill Gates, for example, made more money than Buffett, and Sunil Mittal probably made his pile at a faster rate. But there's nothing wrong with Buffett's bank balance either, and there is something to be said for longevity.
When I look at my own investments in the Buffett way, I find myself lacking in every one of his restraints. The one I am best at is staying away from businesses I don't understand. The one I am worst at is in holding just a few stocks. When I look at 2006, for example, I was really enthusiastic about only three stocks - Tata Tea, NIIT and KPIT Cummins.
And yet, in the name of diversification and safety, I bought into a dozen other stocks. It is a different matter that some of them made money. And it is also irrelevant that Tata Tea was a big-time loser. Nevertheless, my portfolio would have performed much better if I had focused on just these three stocks.
It is a long leap from my own numbers of one year to a philosophy of investing for a lifetime, but I think there is a resonance here with the restraint of the master - Less is More.The author is an investment advisor to a select group of clients.