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23/06/2012 17:44

The Game of Investing

One of my pet hobbies is to collect investment analogies. Here, I have picked out some of my favourite investment analogies derived from the field of sports. All of these analogies were coined by Warren Buffett. Some of these have been suitably altered to make them more understandable in the Indian context.

Cricket
(1) "The game of investing can be compared with the game of cricket but with one vital difference. In cricket, the bowler throws the ball at you, and if it's on the stumps, you have to swing your bat and try to hit the ball. In investing, you don't have to swing your bat at every ball that is thrown at you. If you don't swing your bat, then no matter where the ball goes, you cannot be called out. You stand there and the bowler throws Tisco at 240 and he throws Reliance at 200 and you don't have to swing at any of them. They may be wonderful balls to swing at, but if you don't know enough, you don't have to swing. And you can stand there and watch thousands of balls and finally you get one right there, where you want it, something that you understand. And then you swing." Interpretation: It is not necessary that for achieving successful investment results, one must have an opinion about all stocks and bonds available for investment. Investors should restrict themselves to their circle of competence. For example, if you're an engineer, you'll do better with engineering companies. If you're a doctor, you should study pharmaceutical companies. If you're a housewife, restrict your investments to the consumer product companies. Investors should invest in businesses and financial instruments they understand. If you don't understand the inside out of a business or a financial instrument, keep well away from it. If you don't understand anything about the business world, but understand that equities offer the best long-term returns, then hire a competent mutual fund manager to mange your money. (2) "In investing, just as in cricket, to put runs on the scoreboard one must watch the playing field, not the scoreboard." Interpretation: Investors should concentrate on long-term business prospects rather then short-term market prospects. If a business in which you have invested does well over the long term and you did not pay an exorbitant price in the first place, then the market price of your investment will almost definitely rise, provided you are patient. Over the long term, stock prices display remarkable correlation with longterm business values.

Marathon
"In investing, like in marathon, to finish first, you must first finish." Interpretation: If you speculate, it is very likely that you will make a lot of money once in a while. You will also, eventually go broke. Never put the safety of your original principal at risk. The primary objective of intelligent investment is to earn the highest returns while taking the minimum of risks. Investors should not forget the second part about minimising risk. Don't try to be too aggressive with your investments. If you constantly shift in and out of the market, taxes and transaction costs will make sure that you end up doing much worse than the investor who simply buys and holds a diversified portfolio of carefully selected investments at reasonable prices.
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Horse Riding
"Good jockeys will do well on good horses, but not on broken down nags." Interpretation: While investing in companies with good management is important, it is even more important to select industries with good fundamental economics. Investors should stick with industries having favourable long-term prospects and keep away from fad industries as well as industries with poor fundamental economics such as the airlines industry.

Hurdles
"After 25 years of buying and supervising a great variety of businesses, we have not learnt how to solve difficult business problems. What we have learnt is to avoid them. To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers." Interpretation: In business as well as investments, it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult. Also see the interpretation of 1st analogy on cricket.

Olympic Diving
"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count." Interpretation: In Olympic diving the gold medal goes to the diver who performs the most difficult dive flawlessly. Successful investing doesn't work like that. The truly big investment idea can usually be explained in a short paragraph. If you're right about a business whose value is largely dependent upon a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterised by many constantly shifting and complex variables. Note This article is submitted by Sanjay Bakshi who is the Chief Executive Officer of a New Delhi based company called Corporate Investment Research Private Limited. Sanjay Bakshi. 1996.

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