Posted by I remember Niraj Shah of Bloomberg Quint having a conversation with Raamdeo Agrawal (this video) where he asked Raamdeo the following question:
“In the Market of around 5000 listed companies, everyone knows which are the 100 or so great companies worth investing, then what are the factors that enables an investor to make money in the market?”
I don’t remember what Raamdeo said, go to the video to see, but from what I have learned, it is the following things:
1. Price
This is the most important part. The price at which you bought the company. No matter how good the company is, you will never make money if you overpay for it. The price must make sense. You can’t buy a 100,000$ house at 150,000$ price and hope to make money from it.
This is the crux of value investing. Waiting hard and buying companies when they go on sale. Buying 100$ bill at 50. This is the stuff of Graham and Buffett. Most important!
2. Quantity
When the opportunity comes, which comes infrequently, you have to be courageous and buy at bulk. You can’t make a ton of money if you don’t buy a huge quantity. Even if you wait hard and buy at right price if your quantity is low, your percentage return will be high but your absolute return will be low.
Example: Buying only 10 shares of IndiGo at 700 whose intrinsic value is 2000 will give you a profit of 1300*10= 13,000 Rs. Vs. Buying 500 shares where profit will be 1300*500= 650,000.
So you need to be courageous and buy at bulk when the price is right.
Opportunities come infrequently when it rains gold put out the bucket, not the thimble. ~Warren Buffett
3. Time
Staying in the game for long time. Your profit is directly proportional to the time you give your stock to compound. The more time you give it the more money it will make for you.
If the company behind your stock is doing great year by year there is nothing that is going to stop your stock from going up year by year. In that case, you need to hold it for a long long time. That is how returns like 2000%, 3000% are earned.
It is not timing the market but time in the market that counts. ~Unknown
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Making Biiiiiig Money in the stock market requires a combination of the above three things. That is how investors become millionaires and multi-millionaires from investing. Let’s understand this from the following examples:
1. Price only (low quantity and little time)
Buying 10 shares of IndiGo at 700, Intrinsic value is 2000. Assuming we don’t wait for long after buying and sell at 900 at a small profit.
Profit = 200*10= 2,000
Believe me, I’ve done exactly this. When IndiGo was selling around 700 in Oct 18, I bought a small quantity and quickly sold around 1000.It is selling now at 1700. What an asshole I was. Back then I didn’t know the concept of intrinsic value. Now, I know.
2. Price and Quantity (with little time)
Buying 300 shares of IndiGo at 700, Intrinsic Value is 2000. Assuming we don’t wait for long after buying and sell quickly at 900.
Profit = 200*300= 60,000
Even if I had sold earlier I would have made decent money (or at least better than the above case) if I had bought a large quantity. This is tough since large money is at stake.
3. Price and time
Buying 10 shares of IndiGo at 700, Intrinsic Value is 2000. We know the Intrinsic Value concept and willing to wait. We sell little below the intrinsic value at 1900.
Profit = 1200*10 = 12,000
I am currently at this stage. I have learnt to wait for a cheap price. And now,
I also know the concept of Intrinsic Value. Now, I wait for a much longer time than before after buying a certain quantity of shares.
4. Price, Quantity and time
Buying 300 shares of IndiGo at 700, Intrinsic Value is 2000. We buy large and we wait for the stock to reach its intrinsic value and sell at 1900.
Profit = 1200*300 = 360,000 !!!
This is the ultimate thing. As you can see the profit is maximum in this case. It doesn’t come easy. Takes time to develop. I am particularly lagging in the “Quantity” area. Buying large quantities requires a lot of courage since a lot of money is at stake. This requires a deep understanding of the company and confidence in our analysis and reasoning. (Which I don’t have right now and I am in the process of developing.)
Developing all these three areas: buying at the right price, buying large quantities and then waiting for the market to price it back correctly requires certain qualities in an investor.
What are those Qualities?? Since this post is already getting longer, will discuss that in the next post. Patience is definitely one of those.
Thank you for reading this article. Hope it provided some value to you. Let me know what you think of it. Do you think it is easy to make money in the market? Comment below and share it with your investor friends.
Till Then. Happy Diwali!