An inch wide and a mile deep

This is the punchline which Phil Town a famous investor often uses. Now, what does it mean? It means that we will succeed in any investment operation if we go deep and understand each and every aspect of the business.

We have to understand that when we are buying shares, we are actually buying businesses. And in order to make a big return out of our investments, we must not panic in times of trouble in those businesses and sell out our shares at a loss.

And in order for us to not panic in times of trouble we must FULLY understand the business. This is why I love this sentence.

We must understand what factors affect the revenue of the company and what factors affect the cost. The ups and downs in this two things, the revenue and the cost, is what drives the profit and loss for the company.

For example, In IndiGo, the fuel prices and the exchange rate are the two biggest factors that affect the cost. And revenue is affected by the pricing of competitors, the ASK and the load factor.

Seeing these two factors I can arrive at a rough estimate 3 years from now how IndiGo is going to fare compared to its competitors. And when I go this deep I am far better than other investors out there who just look at the price and the price fluctuations.

Having this knowledge at the back of my mind I can profit from the corrections rather than sell my shares and book a loss.

I think this philosophy of going “An inch wide and a mile deep” is applicable not only to investing but life too. We must have relationships and friendships who we know inside out rather than just know them from the surface and have a lot of them.

In stock market what people do is they go a mile wide and just an inch deep. They will buy a bunch of, sometimes even hundreds, companies and they will know very little or nothing about it. And more often than not, they do this in the name of diversification (which I think does more harm than good these days). And when the market takes a nose dive they will panic and sell all their shares at a loss.

At the other end, will be the intelligent investor who has done his homework and will buy all the shares that this dumb investor sells. And will make all the profit that this dumb investor would’ve made had he not sold.

Don’t be a dumb investor! Be an intelligent investor! Go only an inch wide and a mile deep and know what you are buying!