Raamdeo Agrawal became a multi-millionaire with several multi-bagger stocks to his credit because he followed Warren Buffett‘s investment credo “Buy stocks when there is fear in investors’ minds and valuations are low” in letter and spirit.
Raamdeo Agrawal was asked his opinion about the recent economic crisis by a commentator on TV. He replied honestly and candidly “I don’t know“. With disarming candor, Raamdeo Agrawal said that three months ago, he did not know that such an economic crises would hit the globe and stocks would tumble and he does not know what would happen three months later.
So, if Raamdeo Agrawal does not “know” the future, how does he invest and pick his multi-bagger stocks?
The answer is surprising simple.
Raamdeo Agrawal’s investment technique can be formulated in a few words:
(i) Make your shopping list of stocks: Select only those stocks in which you have “high conviction of reasonable returns“. Buy only those stocks which you would be happy to hold in the portfolio even if the stock market “shut down for 10 years“.
Raamdeo Agrawal emphasizes that investors should buy the stocks that they understand. There is strong logic in this advice because investors will only get the conviction in a stock if they understand the business that the stock is engaged in.
(ii) Buy at Low Price: This may sound too simplistic and obvious to be put down as “advice” but it is surprising how many investors ignore it. Investors throng the stock market and buy blindly when the Sensex is soaring. When the valuations are high, investors think nothing of committing large sums of capital to equities. However, when valuations are low and there is despondency all round, investors ignore the stock market. The situation should be exactly the reverse says Raamdeo Agrawal.
(iii) Don’t “time the market” or wait for the “bottom”: Raamdeo Agrawal has earlier openly declared his dislike of the practice amongst amateur investors of trying to “time the market“. He called it “the biggest cancer afflicting the stock market” (see Raamdeo Agrawal Stock Portfolio Picks 2011). Raamdeo Agrawal emphasizes that no investor in the World can predict when the “bottom” of the market will be reached and so waiting for it is an exercise in futility. Instead, investors should start nibbling on stocks the moment it appears that the valuations are cheap in relation to earnings.
(iv) This is the time to buy: Raamdeo Agrawal made it clear that if investors were convinced about the prospects of a stock, they must not dither. Instead, they should act. He said:
“If you have liquidity and you have confidence in the future of any company, you understand the business, you are fairly clear about the integrity of the management then this is the time to buy. You start looking at those stocks. Just because it is cheap don’t look at those stocks. If you understand something and something is available really cheap or at a bargain when the bargains are available you got to act”
Raamdeo Agrawal also made it clear that the reason for the despondency and pessimism in the stock market was that the perception was running far ahead of reality. He pointed out that if the corporate earnings began to grow, the perception would change and stock prices would begin to move up again.
Raamdeo Agrawal’s investment technique is not unique. It is the same technique followed by all the “Gods of Dalal Street” from Rakesh Jhunjhunwala, Samir Arora and Sanjoy Bhattacharyya. This investment technique was made popular by Warren Buffett who made his billions by religiously following the technique.
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