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  • Ankur Kapur

Knowing your stock investing approach is the key.

Benjamin Graham wrote two books Security Analysis (1934) and The Intelligent Investor (1949). Even after so many decades, these books are still relevant. However, a lot has changed, and you cannot purely rely on what was recommended by Graham. Still, these books are excellent for the kind of work done when stock investing was speculative at best.



Decide on the investment approach that you understand best

You make money, investing in anything if your pay is less than the value you are getting. No matter which approach you use, you cannot change this equation.


At a basic level, there are two approaches: fundamental and technical.


Fundamental approach

The fundamental investing approach requires an in-depth understanding of the business you are evaluating.


“Investing is most intelligent when it's most businesslike” – Benjamin Graham.


I prefer looking at fundamental analysis from two perspectives, commodity business or franchise business. Commodities are generally natural resources, and the asset base drives the price. In contrast, a franchise business has a distinct advantage. Often franchise uses commodities and creates a branding around it. E.g. Nestle India is primarily a dairy company but commands pricing power due to its branding power.


Technical approach


The technical investing approach involves analysing charts of the past movements of a stock price and its trading volume. Based on the charts, the investor tries to predict future price movement.


Rakesh Jhunjhunwala is a great investor and a trader too. It is sporadic to see one individual with both qualities and that too with perfect emotion management. As a trader, he does not look at charts etc. but instead focuses on big trends. Maybe because of his vast experience, he can base his decisions on a reference point.


Trading or technical analysis is not for everyone. It may lead to emotional involvement daily, and not everyone is equipped to handle it.


Whenever there is a bull run, a lot of amateur investors join the crowd. There may be courses, short-term strategies etc., to meet the ‘greed’ emotion. A lucky one would quit before the party ends.


However, a fundamental investor would often invest in the long-term. The shortest timeframe maybe 18-24 months, and the most prolonged holding period would be forever. Fundamental investing is less risky but requires patience.


I would further extend the style of fundamental investing as growth and value. Growth investor tries to invest in companies that are expected to witness high growth in their sales and profitability. In contrast, a value investor finds the business fair value irrespective of the potential for gain or not.


Letter of 1992 from Warren Buffet

“In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield – are in no way inconsistent with a “value” purchase.”


A good and safe strategy would be to invest in companies that can grow, but the price you pay for growth should be fair.

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