Learnings from the book “The Thoughtful Investor” by Basant Maheshwari {Part 1}

March 18, 201910:31 am

I think what makes an investor wiser is only by the way of “Learning”. Learning can be from your own mistakes, someone else’s mistake or through learning from books. The later two is immensely helpful as it would make you to skip the potential damages caused by your mistakes. Coming to the book “The Thoughtful Investor” by Basant Maheshwari is a very practical book giving insights on the way markets behave. Believe me its very different from other theoretical books.

The book ‘The Thoughtful Investor’ gives a lot of emphasis on how market work in bull or bear market and in particular how to ride along the sectoral theme playing in the market.

Learnings from the book “The Thoughtful Investor” by Basant Maheshwari

1. Creating Initial corpus: You can grow as an investor only if your corpus grows and how the initial lump sum is created is of extreme importance. So, If you have a great investment idea, you should be able to bet big and hold it entirely during the entire upmove. 

The author stresses a lot on the duration of the holdings rather than the prices at which one has bought. The reason is as long as the company is doing well, the leading stock will continue to perform.

Between 1992-2003, Sensex did not move much but smart investors who were able to catch the underlying theme made loads of money. During this period Tech & Pharma stocks gave mind-blowing returns(some more than 100 times). 

One should be on a lookout for sectoral themes playing in the market to maximize the gains. 

3. Finding and sticking to the market theme early on: It is very important to find theme in the market and go along with them rather than being a contrarian.

For eg: Cement was the theme in 1990-92s, IT companies in mid-1990s to early 2000s, 2003-07- it was Infrastructure and Real estate companies, and NBFCs in the last ended bull run.

4. When to buy:

For high quality companies, you can buy them a little early as their recovery is assured. For low quality companies, it should be bought only after it starts showing first signs of recovery.

An investor tries buying the past bull market stock on every decline not realising that stocks are to be bought when they are going up on improving fundamentals rather than when they are coming down on deteriorating perception.

5. Market moves on anticipation:

In Jan 2008, Sensex was at a peak,India had Current Account Surplus, Low inflation, Low interest rates, and GDP growing at more than 9% , still the market collapsed. In March 2009, the numbers were very weak, but still the Sensex bounced back.

There is only one explainable factor behind this: Things move in a cycle. In Jan 2008, market expected that things cant get better than this whereas in March 2009, it expected that this is the worse and things are supposed to get better from here.

Usually, Markets leads economy by 6-9 months.

Stock prices discounts events before they happen, valuation is at its lowest point when the perceived risk is maximum.

If every one is aware of certain impending event, the event don’t become significant from stock market point of view. In 2008, though the markets had discounted the US housing problem, the markets fell due to the unexpected collapse of Lehman brothers.

6. Stock price is a slave of earnings:

The primary driver of  share price is earnings but the secondary and almost equally powerful driver of prices are the perception of those earnings.

The more the market is confident of the continued performance of the company, more will be it’s price to earnings multiple.

7. Top & Bottom formation:

A top formation is quite sudden and short lived whereas bottom formation is a slow process. Investor gets enough time to buy at the bottom but no time to sell at top.

For bottom formation, first its the price correction where the stock prices gradually falls(Price correction) and then is stagnant for a long period of time(Time correction).

An investor should buy a stock after it has traded in a range for a while so that one can get a sense that the absorbing capacity of the bulls is enough to match the ferocity of selling by the bears.

Stocks that show strength in a bear market do so due to the inherent fundamentals are strong, are the ones to move forward when bulls come.

8. Last bull market stocks should not be touched:

If the bull market has ended, then an investor should not buy the leading bull market stocks as they face maximum damage. One should not buy stocks of the last bull run even when they are available very cheap. The profitability expectations are quite high.

The stock on the way down creates a flood of investors who buy the fall expecting a sudden recovery in prices. But when that doesn’t happen even after waiting for long, these investors just want to sell to recover their cost price. So any upmove in prices is absorbed by the sellers.

The industry attracts competition and no longer can maintain the same margins.

9. Investor should buy the leading companies of the new bull market sector as stocks that move first in a sector move the longest and create the maximum wealth.

10. Investors who run away from bear are generally aren’t around to receive the gains when the bulls comes along.

11. Every bull market create a new set of winners. So, it is not wise to stick to the old winners. So always keep looking for new emerging ones.

Given the size of the book”The Thoughtful Investor”, I wont be able to cover the entire learning in this blog. Will add one more covering the remaining ones.

If you are looking to buy the book, the book can be ONLY BOUGHT from the website “http://www.thethoughtfulinvestor.in/”

By, Shekhar Yadav

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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