CHAPTER 1: AN INTRODUCTION TO FOCUSED INVESTING
As the name suggests, focused investing otherwise known as concentrated investing lets the investor focus on a handful of companies rather than investing in dozens of companies. In this strategy, the investors put the maximum of his corpus in the top 8-10 opportunities which have been well-researched.
In the stock market, we have a variety of investors, some are employees who save on monthly basis, some professionals who depend upon their commissions for investments, some businessmen who invest their profits and then there are some who are professional investors.
Except for the professional investors, the majority of investors as mentioned above have a mainstream line of the profession which keeps them occupied and the reason they invest in the stock market is to grow their savings. But since the majority of their time is occupied by their work, they have very little time to do their own research behind their investments and hence it is absolutely difficult for them to maintain, track and efficiently manage their huge portfolios with 20-30-40 stocks otherwise known as diversification investing.
This is where this strategy of focused investing or concentrated investing comes in to save the day by offering superior returns and the ease of tracking the portfolio with as less as 8 to 10 stocks in them with proper fund allocations.
ORIGIN OF THE TERM – FOCUSED INVESTING
The origin of focus investing can be traced to 1934 when John Keynes became the major investor for the Chest Fund at King’s College in Cambridge. He wrote a letter to his colleague explaining why he limited his investments to a few select companies and not a wide range of securities. In the same year, there were few more investors like Graham and Dodd, who wrote a book on Security Analysis, which is now popularly referred to as the Bible of Investing. Keynes contributed a lot towards modern economics, but his investing ability and philosophy have remained under the wraps.
Benjamin Graham, a professor, who taught the secrets of investment to Warren Buffet, was another advocate of focused investment strategy. Though he didn’t specifically teach the characteristics of focus investment in the class he contributed to the immense knowledge that shaped the mindset of the focus investor. Graham was a negotiator; he was always on the lookout for the stocks that were selling at less than the current asset value and was willing to hold it for a long period until he could be proven right or wrong.
And then there came the king of the investment world, Warren Buffet who advocated the concept of focus investment and made it popular among the millennial generation by publishing different books. Installed with Graham mindset, Warren Buffet used this strategy again and again to outperform the market blues.
All the above-mentioned men were the forerunner of this concept and share the similar beliefs as that of a focus investor.
WHAT IS THE DIFFERENCE BETWEEN FOCUSED INVESTING AND DIVERSIFIED INVESTING
The first rule that most of the investors are taught is “don’t put all your eggs in one basket.” Essentially this cliché forces the investor to build a diversified portfolio into the different companies from various industries. Most of the financial planners will advocate this concept and will recommend you to hold a higher number of stocks to balance your risk but this approach has various limitations. So, instead of following the traditional approach of spreading the corpus in the different companies and not having the bandwidth to track those stocks, we can put them in few well-researched companies which are easy to monitor and maintain.
The debate whether to follow a traditional approach or a modern approach is not new, probably it has been there from the ages. While some academic theory makes us believe that investing in 20-30-40 stocks offer ample opportunities in portfolio diversification, but research makes us believe otherwise. The investor could go as low as 8-10 quality shares without too much volatility and earn high returns. The basic idea is to find out quality companies and stick to stock in their growth stories. One of the major limitations of the traditional approach is the investors tend to over-diversify their investments, which may ultimately erode their portfolio.
BENEFITS OF FOCUSED INVESTING
Warren Buffet is a strong advocate of this philosophy because it offers a wide range of benefits to the investors. For example, it helps the investors to focus on the incredible companies (that are both technically and fundamentally qualified) to invest in them. So, they don’t have to worry about the returns. Another drawback of the traditional approach is regular trading of stocks can lead to decrease in the investment returns because as the portfolio turnover increases the investor has to pay more taxes on capital gains and increase the total amount of commission that is to be paid in a given year.
This way, the investor will be able to reap a high amount of earnings or dividends over time.
Focused Investment Strategy simply means consolidating your large investment into a few well-researched companies. It is the best way to beat the market woes and makes perfect sense but the investor needs to be careful and research the companies before investing. So, we can say that Focused Investment is an approach that will help the investors to build steady returns, but it is a skill that needs to be mastered upon.
Or to save your time diving deep into the complicated and tedious equity analysis universe, you can outsource this work and hire a professional Investment Advisor who follows the Focused Investing philosophy – Someone like us, Excel Stock Research.)
We built our service, Focused Portfolio, around this philosophy of have minimum number of companies in the portfolio with high conviction. Another big benefit of this service is that it can deliver up to 30% annualized returns for you, this means your investment of Rs. 1 lakh can turn into almost Rs. 4 lakhs if compounded 30% annually for next 5 years.
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