Investing, as a positive-sum game: why I'm writing this newsletter
Hello! I'm Sharad I decided to start this newsletter to share my share what I've learnt about companies and investing in general and get feedback which will help me continue my learning journey.
A bit of history: I was born and grew up in India and am now living in Singapore. I spent most of my 11 year career in the Supply Chain and Logistics space, which has given me a good understanding of how companies operate in terms of business strategy, product creation, sourcing, production, distribution and customer experience.
I few years ago, my sister-in-law gifted me a book about Warren Buffett's life (Buffett: The Making of an American Capitalist). Her dad, who is a full-time investor, had successfully followed Buffett’s investing principles for decades and also visited the Berkshire Hathaway annual meeting in Omaha. My various conversations with him finally convinced me to read the book and learn a bit more about investing.
Non-zero-sum?
Most people have a healthy degree of skepticism when it comes to the investing profession in general. This is pretty understandable, as the main stream media reporting focuses on:
Hot stocks, “alternative investments” and the latest trends in “financial innovation”
Investors who have recently made large profits via “genius” trading moves
Financial fraud, morally corrupt executives and this season’s latest Ponzi scheme
It’s natural that these topics are widely covered, as the majority of their audience is either looking to:
“Get rich quick”, with the least amount of research and effort needed.
Pick up “stock market tips” and juicy content for the office gossip session tomorrow
Hence, a majority of investors view company stocks as tokens to be “bought low” and “sold high”. From this point of view, investing is truly a “zero-sum” game: you buy and sell stocks in the hope of making money by depriving some other investors in the process, who buy stocks at prices above fair value (because of greed) or sell them cheapy (because of fear).
However, Buffett and Munger have a different point of view. You, as an investor, are parting ways with your hard-earner capital to gain partial ownership of a business enterprise. Due to the euphoric cycles of fear and greed caused by “get rich quick” investors described earlier, you are presented with ample opportunities of buying into wonderful businesses that trade at below their fair value. A wonderful business, as defined by Guy Spier, is one that benefits its customers, its employees and the environment it operates in (Guy calls this a “win-win-win” situation).
Wonderful businesses have loyal customers and employees and are able to thrive for decades and even centuries. Hence, they form a “moat”, or sustained competitive advantage and end up generating a lot of excess earnings over their lifetimes. If these earnings are rationally allocated by their management, it can lead to compounded growth of the business. If the management treats you as an “equal” owner of the business, your ownership of the company will also compound at roughly the same rate. Hence, investing, if done in the right way, could lead to a positive-sum outcome, where all stakeholders benefit from the transaction (customers, employees, the environment and the investor). The powerful nature of compound growth also has the pleasant side effect of exponentially increasing your net worth, as demonstrated by Buffett below.
As I was a few years into my career and starting to generate some savings, this concept became more and more interesting. If I could use these investment principles to meaningfully grow my savings, pretty soon I could reach financial independence and also have some money left over, which I could funnel towards a effective social causes. Another investor I follow, Mohnish Pabrai, has been able to do just that: after generating significant amounts of excess capital using the “value investing” playbook I described above, he started a charitable foundation which helps underprivileged students predominantly from rural India prepare for college entrance exams.
Since I bought my first stock in 2016, I haven't looked back. A good chunk my non-work time has been spent reading company filings, annual reports and on YouTube (which is a great resource, if used correctly!)
A few companies that I view as “wonderful businesses” are listed below (although many of them trade higher than their fair value, as of today’s prices).
United states
Berkshire Hathaway
Costco
Microsoft
Google (Alphabet)
Amazon
Shopify
India
HDFC Bank
Asian Paints
DMart
Pidilite
Tata group (Titan, Tata Consumer, Tata Coffee)
Murugappa group (EID Parry, Coromandel, CUMI, TII)
China
Tencent
Alibaba
Ping An Insurance
Rest of the world
Singapore: DBS Bank
Netherlands: Prosus
Netherlands: ASML
United Kingdom: Unilever
Japan: Uniqlo (Fast Retailing)
What makes a “wonderful investment”?
Outstanding entrepreneurs with “skin in the game” (alignment with minority shareholders + fiduciary responsibility)
High returns on capital & prudent capital allocation, ideally with a track record of 10 years or longer
Attractive industry which has rational competitors and isn’t rapidly changing
Asymmetric risk-reward (don’t overpay!) - this is the main difference between a “wonderful business” and a “wonderful investment”
Why the name “open source investor”?
In this day and age of information abundance, the individual investor is on an even footing with professionals in terms of information availability and has the freedom to invest in virtually any global market, industry or size of company. An investment manager has a myriad of issues to deal with, which we, as individual investors, can blissfully ignore: they are limited in terms of company size relative their fund, they cannot be overly concentrated in one company or industry, they are constantly under pressure to act, they cannot only focus on long term performance and must also care about the next quarter. These and many more are outlined in Peter Lynch’s book “One Up on Wall Street” (which is a great read!)
However, a majority of people with savings to invest are not very interested in spending their weekend and holiday hours poring over company disclosures and annual reports. The best option for them would be a low cost index fund, which can still compound wealth at a reasonable % above inflation if you religiously invest in it every month and never sell (even if your television, neighbor, family and significant others are telling you to). Some examples:
S&P 500 (top 500 US companies)
NIFTY 500 (top 500 Indian companies)
Vanguard Total World Index (top 9700 companies across 42 countries)
Open source means each problem only has to be solved once - @naval
What’s in it for me?
I also believe teaching is the best way to learn about a subject, which brings us to this newsletter. I want to share what I've learnt about companies and investing in general to get feedback from the investing community, like-minded and non-like-minded peers! (as my like-minded peers probably share the same biases as me)
My focus will be companies or themes that have not widely been written about, both in India and abroad.
Anyway, that’s it for now - thanks for reading, the first newsletter should be coming out (hopefully) soon!
Good stuff man. Greatly enjoy your writeups!