"How to Invest Like a Guru: Learn the Secrets to Building Wealth"

 

This week I have been reading the book "Invest Like a Guru" by Charlie Tian. I find it very interesting, and it is fascinating to see how the author presents all the data and his learning in a very simple manner. Although we all know that we should buy good companies that are consistently killing the market with their products or services, we all know that we should buy companies at a good price instead of at the peak of the market cycle.

But in reality, it's too easy to get blinded by the rising market. So it is worth it to repeat these lessons so that you can remind yourself again and again how to make a large amount of wealth by keeping aside your short-term greed.

There are three main learnings from this book which are basic to know before investing, but at the same time very powerful.

 

You are not more intelligent than the market.

 

There are three types of investors in the market: first, "the average folk", who get excited about every new idea such as green energy, electric vehicles, online payment networks like UPI, etc. They are always searching for tips that can make them rich in a short time. An example of these people are the investors of  Paytm IPO, who got excited by the unique business of the company and put in their hard-earned money, but in the end they burned their fingers as share of Paytm is trading at Rs 650 from Rs 2100 which was the IPO price.

Second, "the smart one", thinks that they can ride all the way to the peak of the market and get out before the crash happens. There are people who can do this, but these are only 0.1% of all the investors. You cannot be smarter than the market.

Third, "the forced buyers", are people who are forced to invest at the time of a bubble in the market to gain short-term returns. This can include mutual fund managers, as most of the time they know that the market is overvalued, but they cannot stop themselves from investing in it due to the short-term gains and the conflict of interest that they have with your money.

  Why should you focus on buying good companies?

 

“It's far better to buy a wonderful company at a fair price than a fair company at a       wonderful price.”

-Warren Buffett

First of all, it is better to know which company is a good company. As per me and the author of this book, a company that has the following things can be classified as a good company:

·       Consistent rise in sales and profits in the last 10 years, even in the bad times.

·       Asset-light models simply mean you need less money to run the business. For example, Paytm and TCS are the light businesses; on the other hand, Adani Ports and Reliance Retail are the capital-intensive businesses, which simply means you need a relatively large amount of money to run the business.

·       Stability in profits and profit margins, in simple words, means how much money you have after deducting all the expenses as compared to sales. If you have 100 sales and a profit of 20, that means you have a 20% profit margin (20/100).

 

It is much easier to buy a good company at a fair price than to buy a fair business at a good price, but why? The answer is super simple: whenever you invest in a fair business, its value does not increase at a good rate for the future, and you have to sell it when it reaches its real value or intrinsic value. On the other side, a good business continuously increases its value, and therefore you make wealth in this good business, whereas you create profit in a fair business, and the difference is huge between the two.

Let’s take an example: if you invest Rs 10,000 in both types of businesses, one is fair business and the other is good business. In fair business, you invest your money for 10 years and get 20%, whereas in good business, you invest your money for 30 years and get only 15%. Guess the amount?

 

 

 

I hope this little illustration has helped you understand the whole concept. I have basically assumed that in fair business, you would have only invested for 10 years, and after that, you would have invested your money in debt as you could not find a good opportunity. But in good business, you invested for a longer period but received a little less return.

Does size matter? Idk, but Price does.

 

You can find a large number of good companies out there, but the real question is whether now is the right time to buy them or not. I know many of you still do not know what impact it can have on your wealth. Let’s take the example of one of the greatest companies "Microsoft".

As you can see in the price chart of the MSFT, if you had invested in it at its expensive valuation or price, it would have taken more than 14 years just to break even on the investment. There is no doubt that Microsoft is a good business, as it has grown its earnings by four times in these 14 years, which is why the PE ratio has been reduced to 15 from the whopping 60 back then in the dot com bubble. So next time someone says that valuation does not matter and that a company should be good only, give them this example to shut their mouth.