There are thousands of companies listed on the Indian stock market. I am sure it’s safe to say that each of those listed stocks has, at some point, hit price levels at which it would have proved to be two, three or ten bagger from its all time low.
Does it mean that all those stocks are missed opportunities because we never studied them?
Not really. As value investors and practitioners of rationality, we constantly remind ourselves that it’s foolhardy to chase ideas based only on their price movements.
We believe that the way to create long term wealth in the stock market is to keep our focus inside our circle of competence — an idea made popular by Warren Buffett. In his 1996 letter to shareholders, Buffett wrote —
What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
At this stage there are about 40-50 listed companies that lie in our circle of competence. We have spent hours upon hours digging into the details of their financials, deciphering annual reports, and studying industry dynamics. This gives us reasonably sound understanding of these businesses and the industries they operate in.