Goals of an Investor

We have set the following goals for ourselves as a portfolio manager – and all goals are long term of course.

1. Protecting Capital
2. Beating inflation
3. Beating the Equity Index

The above goals are in order of priority. Protecting Capital is our foremost objective. As Warren Buffett says, there are 2 rules to investing:

Rule No 1 – Don’t lose money
Rule No 2 – Don’t forget Rule No 1

We are custodians of our clients’ faith and it is hard-earned money that has been entrusted to us by our clients. It is very important to us that we treat this responsibility very seriously and hence safety of principal is the foremost in our minds when selecting stocks to invest in our portfolio.

The principle of safety permeates everything that we do. We look for companies with low debt on their balance sheet and typically sitting on piles of cash; these companies are very profitable when measured on Return on Equity and also generate cash on a consistent basis. As excessive debt is one of the leading reasons why companies fail, low debt on our companies’ balance sheets keeps our investors’ money safe with little likelihood of long-term loss of capital.

Benjamin Graham, considered the Father of Value Investing, centered his teachings around the principle of ‘margin of safety’ – which talks about buying companies sufficiently below their intrinsic value so as to make them bargains. Importantly, margin of safety also means making conservative assumptions about the future – where one is not led into flights of fantasy led by the current fad in the market. We believe that conservative investors sleep well and it is with this attitude that we like to approach investing.

Beating inflation is our Priority No 2. Inflation is continuously eating away at an investor’s wealth and is one of the prime enemies of an investor. It is estimated that the average Indian investor has a fixed income to equity proportion of 75:25 in their investment portfolio and the fixed income proportion is dominated by bank fixed deposits. Now while you are dead certain not to lose money in a fixed deposit, the post-tax, post-inflation rate of return on a fixed deposit is often zero and sometimes even negative. It is like running hard on a treadmill but staying in the same place with respect to your investment goals.

Our third priority is to beat the market rate of return and we have benchmarked ourselves to the Nifty50 Index. As an investor, one has the option to buy a low- cost index fund and if we at Banyan Tree are unable to beat that over the long term, we have not done our job satisfactorily.

However it should be noted that beating the market is Priority No 3 while protecting capital is Priority No 1. Yet it has played out well for our clients over the long term in terms of their portfolio returns.

The next question, of course, is: what sort of a strategy does one need to meet these 3 goals of an investor? We believe that if we are able to do two things diligently, we can hope to meet our objectives:

Buy a High Quality Company
Buy it at a reasonable price