Friday, December 03, 2010

Habits and Snowballing

The Snowball, the much talked about book on Warren Buffett sits on my shelf waiting to be read. It would probably take me some time to get to it, as my reading list is so damn long, with at least 10 books on it. Not to mention the other big book that also lies in waiting: Poor Charlie's Almanac.

The concept of the title was made known by its author, again both simple and insightful and really apt to describe Warren Buffett. Perhaps you might already have heard of it. Anyways, here is my interpretation of it.

Basically, the idea is that something which starts small can grow very big given enough time, consistency and momentum, just like a snowball. When you first push a small snow ball, it rolls and gathers a bit of snow with every turn but stays small. It takes a while for the consistency to set in, more effort, and finally the momentum kicks in and it can cause an avalanche if you want it to.

It also reminds me of this mass email that basically transpired the same concept. A picture showed a beautiful field of tulips, or was it lavender? But anyways, what was interesting was the signboard next to the field which says:

Who: A woman
How: 1 tulip a day for 60 years
Why: For everyone

Or something like that.

Value philosophy shares the same idea. It is not about quick profits or the next trade of the year. It is consistency, patience, effort and time. One angle of it is about identifying companies that are basically doing that. These are the great consumer staples that basically keep growing their markets by selling the same products with the same strategies. Look at Coke, just do the same thing over and over again in different parts of the world, and the earnings will follow. They were in Asia long before we started talking about it. Now they are in Africa!

One big plus why these companies can do it is because they have planted enough seeds such that their brand is entrenched. Just like the field of tulips that take our breath away when we see it. It is also about mindshare - market share of people's minds. When it's as big as Coke or the tulip field, it's difficult for you and I to start a new drink today to compete. The snowball just keeps rolling until it causes an avalanche.

The other angle is how we as investors exercise and implement this idea thoroughly. That is how we consistently implement the same investment process, find good stocks, at a very cheap price, wait for them to grow and see the return compound to some astronomical number. It is not as easy as it sounds. The big hurdle is, as usual, ourselves. Or more specifically our emotions which inhibit our ability to make rational decisions.

This is the habits part. Good habits adopted at an early stage bring profound results over time. Think about exercising just 15 mins a day, or saving just $20 a day. Bad habits ruin lives: smoking, drinking alcohol. Investing is then also about adopting good processes or good habits.

I would say some important do's would be like reading a couple of newspapers daily, talking to at least a few experts per week. Specifically when looking at stocks, it would involve pouring through at least of couple of years of the firm's financials, trying out the products, talking to other users and finally waiting for the right price.

Don't's would naturally be don't buy on tips/rumours, don't look at the share price daily, don't sell to take 20% profits.

With good habits cultivated, it would then be applying the same processes over and over again when buying each and every stock or investment, for many many years, and hopefully the returns will snowball into something big and meaningful.

1 comment:

  1. Totally agree that our big hurdle is always ourselves. Charlie is right that all there's to investment is to be right once and all you need is to sit on it. For this class of investors, an initial investment of $15k in 1965 would have been worth $120m now, compounded at a rate of over 22% over 45 years. Now surely, this is close to impossible for us mere mortals, unless we are that lucky to find, know and trust our money with another Buffett type of people. But what is possible is that for mere ordinary people, a $15k (which i think is affordable for most people to set aside), they can get some great companies like Coke, and invest in it, and sit on their butt and let it work out. If Coke can churn out 10% compounded for 45 years, it'd be worth over a million. And Coke today is not as expensive as it was 10 years ago, and gives decent dividend. But neither was it as cheap as it was early this year or in the 1980s when they were finding their way to grow, but made some mistakes when they didn't focus on its core product and brand.