In all the previous articles of the series, I discussed buying a cheaper assets / Investment. But buying cheap does not mean that we should go and buy anything which seems cheaper.
We need to prepare a list of investment ideas which are matches with our criteria, matches with our risk tolerance capabilities and exclude which are not matching with our criteria. There are not each and every idea which are compatible with our risk appetite, we need to work on the ideas which fall under our circle of competence. We get many ideas which can be good but not compatible with our criterion then we need to stay away from it.
Before eating a food, we need to know which kind of food we really like to eat. We do not like each and every food so as similar to it, we need to prepare a list of ideas which match with our criterion.
If we are managing the fund of others, then not only our risk appetite but also risk appetite of clients, we need to focus.
The second step is to select an investment idea from the prepared list; which is suitable for the potential returns and risk ratio, value for the money scenario.
After getting the list of the foods which we like then we need to work on the place from where we get a food with requiring quality, where we get food as per our spending, etc. we generally do not prefer to visit the place where food is not available as per our taste and preference.
If we pay high valuation for the any of the assets then it is logical that our potential returns will be kept on reducing and might be chances of occurrence of loss starts increasing. We made an investment for generating returns and enhancing returns.
We buy food for fulfilling our hunger not for exhibiting of our food dish with expensive food. We sometimes eat expensive food, not on a daily basis. As not only expensive foods can able to fulfill our hunger similar to that not only good and quality investment can able to provide us returns.
We need to focus on the bargain through which we can able to generate a potentially higher returns with minimizing risk.
As I quoted an example of a good fundamental IT & Pharma company with cheap sugar company.
We can see that if we have bought the comparatively lower fundamentally good stock at a cheap price than this stock has generated a higher return compared to the good fundamental stocks in last 5 years.
Good food means we get a satisfaction & fulfill our hunger from eating that food, and that never matter how much expensive or cheap it is.
In general buying good assets mean, the assets provide us high potential returns relative to lower risk and also has a low price relative to the value of an asset.
Mr. Howard Marks mentioned that while popularity is high towards stocks and people hates bonds, also many institutions shifting from bond to stocks; such situations provide a bargain for the bonds.
When the time change and people seek for more safety relative to the price appreciation then they start recognizing the potential of bonds.
Generally, people start recognizing the potential of the assets while the price of an assets starts appreciating. But people who have identified assets earlier, those can produce above-average returns.
When the restaurant is crowded then only people recognize the popularity of a restaurant. We make a decision by seeing how much-crowded restaurant is. If no one at a restaurant then we generally not prefers to visit by assuming that particular restaurant provides a low-quality food. Similarly with stocks, when everyone is buying particular stocks then we also run for buying those stocks with assuming high quality with high return. We do not check anything and follow the crowd.
We should try to make an investment into the underpriced assets rather than fairly priced. Fairly priced assets just provide fair returns with risk involvement. So that we should focus on underpriced assets with risk involvement for generating above-average returns.
Bargain only available while perception is worse compared to the reality towards the asset. If everyone feels good and want to own that assets, then that asset will not be available at a bargain more.
When everyone cannot able to see the potential of the asset then we need to check the reason for unloved of the asset. Unloved assets can be available at the bargain if people hate it more than it should be.
If nobody is loved to the asset then nobody holding it So that demand for the asset will increase when people can able to see the potential of the asset. If our assumption has proven wrong and nobody is holding an asset or people unloved an asset then we might get limited downside or get the least loss from our investment.
When nobody to go for visiting a particular restaurant then we get foods at cheap cost with the proper quality for maintaining its customer.
Read for more detail: The Most Important Thing Illuminated by Howard Marks