I think it is extremely important to have well defined investing philosophy to guide one’s decisions and to also to keep your head when there is too much fear or greed in the market.

With the Indian market touching new highs everyday, resisting the urge to get on the bandwagon is fairly important. I have had a loosely defined approach with which I have become comfortable both in terms of the risk and the return and most importantly I am able to sleep soundly in the night.

So here goes my personal investing philosophy (in no specific order)

1. Invest in companies with sustainable competitive advantage in my own circle of competence with a time horizon of 3-5 years.
2. Invest in companies where the risk reward ratio is atleast 3:1 in my favor and I have a ‘variant perception’ from the market.
3. Avoid investing based on any macro-economic point of view or short term opinion (mine or someone else) of the market
4. Try to beat the market by 5% over a period of 10 years and lowest possible risk (the key word being try)
5. Avoid loosing money

Thoughts behind each point

1. I feel comfortable investing in a company whose business is simple to understand and preferably will increase its intrinsic value over a period of time. This enable me to practise a buy and hold philosophy
2. I prefer 3:1 odds in my favour and a 40-50% discount from conservatively calculated intrinsic value as it enable me to get an average return of 18% per annum
3. I have avoided investing based on macro-economic point of view or any short term outlook as I am not good at it and consider most of it as noise to be avoided
4. A return of 5% over the market give translate roughly into 17-18% per annum. Not exactly a return which would get me into investing hall of fame, but over a long period of time it is good for me as it comes with low risk
5. Point 5 has meant that I have passed a lot of opportunities which looked good, but were not obvious slam dunks. As a result I have been guilty of omission than commision (though I have had my share of duds)

So how has above philosophy worked for me. I would say pretty well, because I think I have been able to achieve more than my targeted returns with very low risk and most importantly, have been able to sleep well.

Please feel free to share your investing philosophy

I use a hurdle rate which I need to cross if I need to justify the time and effort I spend on investing actively, rather than using a mechanical approach of rupee cost averaging (using an ETF or an index fund)

A rupee cost averaging approach of investing Rs 1000/- per month, every month for the last 10 years would have lead to an average return of around 15% per annum (As an added factor, I added a filter of stopping the plan when the market P/E exceeded 25. I added this filter to ensure that I would avoid putting money in the market when the market seemed overpriced by a decent margin).

This strategy would work even better with a mutual fund with a good long term record of beating the market by a resonable margin (resonable being +3% above market return over a period of 5 years or more).

So in effect if the portfolio of stocks picked by me, does not exceed this hurdle rate of 15% per annum (for a rolling cycle of 5 years and not for every year), then it would not justify the time and the effort.

Luckily till date I have exceeded this rate. But the results are not conclusive, because it could be due to dumb luck. I would consider the results to be conclusive only if I can achieve this kind of outperformance for a period of 10 years or more.