Good investors learn how to think beyond the obvious and to make deeper, less obvious judgments. This involves developing a certain attitude and learning how to think in a certain way. When there are apparent problems, the good investor is the one who judges if the problems are permanent, or temporary, or cyclical in nature.
For example, there could be a panic sell off, such as the one caused by Volkswagen's emissions scandal. Every sensible person will try to judge if the reasons for panic are valid. A good investor will go beyond that and assess when and if, the panic starts to cause over-reaction.
Good investors also appreciate the big opportunities arising with major structural shifts. For example, a predominantly agrarian economy becomes more industrial as it grows, and an industrial, manufacturing economy becomes more services-oriented. Or in India's case, a services-oriented economy tries to develop industrial manufacturing. Historically speaking, shifts like this create large investment opportunities. Entirely new sectors become growth areas. The advent of new technologies can also create similar growth-based opportunities and such shifts often go together.
Great investors pick up early on those shifts and they also have the judgment to pick winners in such new landscapes. Every new industry triggers bubbles at some stage because many investors will correctly identify a broad opportunity and money will flood in. But, once the bubble starts inflating, investors also end up chasing the wrong stocks, at the wrong time, and the wrong price. The good investor will avoid being swept along by wild enthusiasm in such cases. To revert to a fairly recent example, the Information Technology (IT) and internet boom in the late 1990s threw up many great opportunities. But the valuations of IT-internet businesses became ridiculous as money was pumped into those sectors.
Infosys, Wipro and HCL Tech to take a few examples, were all trading at triple digit Price to Earnings (PEs) (along with many less well-known companies). Share prices were doubling every few months. An ability to stay objective under those circumstances is rare. Any investor could see that these were well-run businesses. Indeed, these IT players are still highly profitable, more than 15 years later.
But, those who bought these stocks at high prices during the bubble have not received great long-term returns. On the other hand, those who bought after the bubble burst and prices collapsed, have done pretty well. Good investors have the self-control and patience to identify a potential winner and then wait for the right price.
Why you might wonder, is this relevant? Well, we could see some tectonic shifts occurring in the Indian economy if even some of the grandiose plans now on the table go through. Initiatives like Smart Cities, Make in India, revamping of inland water, coastal and river infrastructure, the renewable energy drive, the Dedicated Freight Corridor, multiple metro rail developments, sundry infrastructure initiatives, even campaigns like Swacch Bharat, etc., have the potential to change India's landscape.
All of these represent potentially enormous investment opportunities. But, how many of these schemes will actually come through? How many will come through in meaningful timeframes? How many will only swallow resources? How many will offer serious return on capital? What policy structures must be adopted? Where exactly will the investment opportunities arise for individuals?
Answering those questions is impossible right now and it will be difficult to find answers soon. These are long-gestation schemes that will take years to fructify, or fail, as the case may be. That offers investors the time to marshal relevant details and start tracking businesses that might be directly, or indirectly affected. That in itself will take quite a lot of research, with no immediate payoff.
But, this could be a very useful exercise for the long term. First off, it will help if the investor is well-informed as these initiatives take off, (or stumble). There will be multi-baggers hidden within the schemes that do take off, and there will undoubtedly be bubbles as well.
Most of all, trying to make sense of these situations will help the investor train himself, or herself, to think more deeply and more objectively, about possible investments. Once that becomes a habit, returns should improve.
For example, there could be a panic sell off, such as the one caused by Volkswagen's emissions scandal. Every sensible person will try to judge if the reasons for panic are valid. A good investor will go beyond that and assess when and if, the panic starts to cause over-reaction.
Good investors also appreciate the big opportunities arising with major structural shifts. For example, a predominantly agrarian economy becomes more industrial as it grows, and an industrial, manufacturing economy becomes more services-oriented. Or in India's case, a services-oriented economy tries to develop industrial manufacturing. Historically speaking, shifts like this create large investment opportunities. Entirely new sectors become growth areas. The advent of new technologies can also create similar growth-based opportunities and such shifts often go together.
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For example, the coming of the automobile and earlier, of the railways and of steamships, led to tectonic shifts in global economic patterns. We are now living through the huge changes caused by advances in computing and electronics that started back in the 1970s. We are only beginning to appreciate the possible impact of high mobile coverage and smartphone use.
Great investors pick up early on those shifts and they also have the judgment to pick winners in such new landscapes. Every new industry triggers bubbles at some stage because many investors will correctly identify a broad opportunity and money will flood in. But, once the bubble starts inflating, investors also end up chasing the wrong stocks, at the wrong time, and the wrong price. The good investor will avoid being swept along by wild enthusiasm in such cases. To revert to a fairly recent example, the Information Technology (IT) and internet boom in the late 1990s threw up many great opportunities. But the valuations of IT-internet businesses became ridiculous as money was pumped into those sectors.
Infosys, Wipro and HCL Tech to take a few examples, were all trading at triple digit Price to Earnings (PEs) (along with many less well-known companies). Share prices were doubling every few months. An ability to stay objective under those circumstances is rare. Any investor could see that these were well-run businesses. Indeed, these IT players are still highly profitable, more than 15 years later.
But, those who bought these stocks at high prices during the bubble have not received great long-term returns. On the other hand, those who bought after the bubble burst and prices collapsed, have done pretty well. Good investors have the self-control and patience to identify a potential winner and then wait for the right price.
Why you might wonder, is this relevant? Well, we could see some tectonic shifts occurring in the Indian economy if even some of the grandiose plans now on the table go through. Initiatives like Smart Cities, Make in India, revamping of inland water, coastal and river infrastructure, the renewable energy drive, the Dedicated Freight Corridor, multiple metro rail developments, sundry infrastructure initiatives, even campaigns like Swacch Bharat, etc., have the potential to change India's landscape.
All of these represent potentially enormous investment opportunities. But, how many of these schemes will actually come through? How many will come through in meaningful timeframes? How many will only swallow resources? How many will offer serious return on capital? What policy structures must be adopted? Where exactly will the investment opportunities arise for individuals?
Answering those questions is impossible right now and it will be difficult to find answers soon. These are long-gestation schemes that will take years to fructify, or fail, as the case may be. That offers investors the time to marshal relevant details and start tracking businesses that might be directly, or indirectly affected. That in itself will take quite a lot of research, with no immediate payoff.
But, this could be a very useful exercise for the long term. First off, it will help if the investor is well-informed as these initiatives take off, (or stumble). There will be multi-baggers hidden within the schemes that do take off, and there will undoubtedly be bubbles as well.
Most of all, trying to make sense of these situations will help the investor train himself, or herself, to think more deeply and more objectively, about possible investments. Once that becomes a habit, returns should improve.