Investment Shastra

Parag Parikh’s Style of Stock Investing

After obtaining a Master’s degree in Commerce, I took up a one year Entrepreneurial Management course at a leading college in Mumbai in 1978. This course was first of its kind. It trained students to become entrepreneurs and helped them to set up their own businesses (small to medium scale industries). I did my project on setting up a plant to manufacture plastic collapsible tubes which would replace the conventional aluminum tubes. I was the only one who failed. My project was unviable to the professor whose reason was: tooth paste was sweet and if stored in plastic tubes it could be eaten up by rats. However in 1984 Essel Packaging hit the market with a similar project and it became a stock market favorite. Till today it has created a lot of wealth for its shareholders.

This experience was the turning point in my life. My father’s friend Mr. Chandrakant Sampat advised me that if I had such vision and I could make a study on businesses, I should enter the stock markets. There existed a great opportunity for such business analysts. Moreover why subject myself to the whims of the government officials, bureaucrats etc. for power, raw materials, labor problems, municipal laws etc. If a good study on a business was made, one could enter by buying the stock and exit by selling the same. No hassles. Thus came my entry in to the stock markets and I was one of the very few to do research on various businesses and identify good investment stocks.

Having grown up in a very conservative family my initial grooming was orthodox and based on certain universal principles which were not time bound. One of them was the law of the farm. You cannot sow something today and reap tomorrow. This taught me that there are no short cuts in life. This was so true in the stock markets also. Thus my style concentrated on the long term approach. This also helped me not to get swayed away by the short term temptations the markets offer from time to time. This helped me with self discipline and I was able to keep my greed and fear under control. This also helped me to look at businesses with a long term view. This long term view gave me the patience to wait for the businesses to be available at bargain prices. Enter Value Investing.

This approach was challenged in 1999/2000 during the tech boom. I went through tough times. A client would come up to me and ask about a particular tech stock. I would recommend him to sell. He will go and come back after a week to inform me that he was happy as he had not acted on my recommendation and the stock had doubled. I would insist that he was lucky but the valuations are far too stretched with the doubling of the stock price and he must sell now. Three months later he would come back happy as he had not sold. This led me in to a depressive state. I started wondering if I was out of synch with the fast changing world. What did I need to do? My inner compass told me that these were temporary crazy times and sanity would prevail. How could you have tech stocks quoting in triple digit PE’s? It was against any valuation parameters. Utterly confused by the ways of the market I was going through a turbulent period.

One day I was reading the Economist and I came across an advertisement on a program at the Harvard University, “Investment Decisions and Behavioral Finance”. I enrolled myself and proceeded to Boston to attend the program. That was another deflection point in my career. I realized that if I were to be a successful investor then knowledge of Behavioral Finance was utmost necessary. I pursued my research and study in the field and with every passing day my confidence as an investor increased and so did my knowledge of understanding the markets. I have authored two books “Stocks to Riches: Insights in to Investor Behavior” and “Value Investing and Behavioral Finance: Insights in to Stock Market Realities”. Both the books portray the common sense approach to investing.

Investing is no rocket science. It’s all about common sense. An MBA degree does not guarantee investment expertise, but humility does. Experience teaches you over time. So one must always be prepared for continuous learning. And what could be our best teachers? Failures and setbacks. Learn from every mistake and keep the following in mind.

  1. Be fearful when others are greedy and be greedy when others are fearful.
  2. Buy low and sell high.
  3. There are no short cuts in life.
  4. Opportunities don’t come every day. “LUCK” is preparedness for an opportunity.
  5. Never chase a fancy for you end up paying a fancy price and suffer a fancy loss when the fancy ends.
  6. “Intelligence and Brilliance carries the day but it is the Wisdom that endures”. Peter Drucker
  7. One is always learning so have the courage and humility to always ask “WHY”.

Waiting for another deflection point. Knowing full well that it will teach me something more and make me better and wiser and move forward.

12 comments

Search

Archives

MoneyWorks4ME