Part II : East India Company, what can we learn from it
As explained in Part I, the principles for owning a ‘digital’ stock today is no different as it was 400 years back. Here, I’ll cover why the prices of our “shares” move so damn much and how we can find such powerful ships (companies) in today’s brave new world.
In the old days, the investors on-shore would get telegrams or messenger pigeons (I guess) or word from fellow sea-farers of status of the ship is in its current voyage: maybe it’s lost, maybe there’s a change of captain, or maybe they found more bounty than earlier planned.
If the news came in that a ship had been taken over by pirates, investors would try to get rid of the shares — since no one would be willing to buy it at full price, they would have to sell it someone at a discount. Similarly there’d be more demand for ‘paper shares’ of a ship, if the news came in that this ship scored 800 kilos of cinammon instead of the 500 kilos originally expected— taking the profit up and hence the demand of that share up.
In the past, the news would come less frequently as compared to today. Now, we hear news every second, minute, day, and week. Nike’s factory in China went on strike, or Apple new phone has a chip problem, or the local laws of a new country are trickier than it seems for Amazon. We also hear positive news that Peloton delivered more bikes than expected because of the lockdown, or cost of a steel has come down and profits of Ford are up. News like this, moves the price of our shares up and down. The key is to figure out is it a temporary win or loss, or is it something more ominous like an iceberg in-view of the Titanic.
The problem is it isn’t easy to figure whether a company is facing a road bump or annihilation. Its difficulty is further compounded by television, media and the stock price reaction. It’s really hard to hold on to a share that has fallen 25%-50% and everyone (your gut too) is telling you sell. I’ve fallen prey from time to time to such mistakes.
One simple way to avoid such pitfalls is to BUY WHAT YOU KNOW.
Far too often I see investors/friends who have day jobs in the real-estate buying oil stocks, or day jobs in the medical industry buying automobile stocks. What does a real-estate guy know about oil, and won’t a doctor know more about effectiveness of a latest medical trial than about demand for the latest Ford truck?
Truth is if you’ve working in manufacturing or auto or pharma or real estate, you have an edge compared to anyone outside the industry. In auto, if you are supplying parts, you would know which car company purchases are increasing, who has the best payment terms, you are reading the trade journals and networking with “insiders” at Automobile exhibitions. Your collegues will have more insights than an MBA suit sitting at his desk analyzing the industry from miles away. (A lesson I learned from legendary investor Peter Lynch and his seminal book: One Up on Wall Street)
As far as possible: buy what you know and if you don’t know what to buy, buy an Index fund. For me, I’ve been in the food business (pizza delivery) for 10 years, and spent most of my investing money buying stocks from banks to manufacturing to FMCG. When all the while in front of me, I knew Domino’s India (JUBI) and Zomato (NAUKRI) were killing it!
I’ve hired and worked with employees from both these organisations and well aware of their business models and competitive advantages. Both Domino’s (JUBI) and Zomato (NAUKRI) have been multi-baggers going up 500%-1000% during this time. At times, both stock prices have corrected at least 25% or more in the last 5–7 years. But, being a part of the industry I would have had a better sense if these corrections were road bumps or icebergs.
Even though I didn’t own them, my other investments did well. But I chose a more stressful and uncertain route to returns. After 7 years, I know better and prefer to buy shares of ships (companies) who’s navigating in waters (industries) I know very very well or I buy Index funds.
On a parting note, think about industries you have an edge or deep knowledge in? You’d be surprised to know the companies that you probably know well and love — are available for you to own. Once you’ve found such companies, try to match them into the 4 criteria I mentioned in my earlier article (https://aditya-s.medium.com/east-india-company-worlds-first-paper-investors-70947791be82) and you’ll have a better edge than 80% of the muggles out there.