If you think I am going to talk about some mystical way to increase your luck in stock market, then you’ll be disappointed. Being fortunate in life and in investing is largely about increasing your odds of success. And how do you increase your odds?
“Study the principles of sound investing and work hard to implement those principles,” you might say. But is that sufficient? Studying, reading and working hard are all necessarily conditions for being successful in the stock market, however they are not sufficient. You need one more thing.
Let’s turn to world’s greatest investor to give us some clue. In his 1982 letter to investors, talking about two of his managers Phil Liesche and Ben Rosner, Warren Buffett wrote –
Both Ben and Phil ran their businesses for Berkshire with every bit of the care and drive that they would have exhibited had they personally owned 100% of these businesses. No rules were necessary to enforce or even encourage this attitude; it was embedded in the character of these men long before we came on the scene. Their good character became our good fortune. If we can continue to attract managers with the qualities of Ben and Phil, you need not worry about Berkshire’s future.
The lesson for an investor is that in stock market, you’re not just in the business of finding good businesses. Your real job is to find people who are running good businesses. That brings good fortune.
The words “we are fortunate” appears more than a dozen times in Buffett’s letters. Every time he has uttered those words, it was to describe his association with great managers running the businesses Berkshire owns.
Time and again Buffett has extolled the significance of associating with good people. In his 1987 letter, quoting Winston Churchill, he wrote-
Churchill once said, “You shape your houses and then they shape you.” We know the manner in which we wish to be shaped. For that reason, we would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110% of X by exchanging these relationships for uninteresting or unpleasant ones.
It’s not sufficient to find a great business and ignore the character of the management. If you invest in a great business which is being run by crooked or dishonest management, it may bring profit to you in short term. However, on the longer term you will end up regretting your decision.
I have seen an example of this in my life. In 2008 I had a colleague who was assisting (part time) a group of people in setting up the technical infrastructure for a mobile software startup. He was working very hard because he had a full time job and he was also working nights and weekends in the startup. Although he was excited about the work, he would always complain to me about the integrity of his partners because of their questionable practices of generating funds for their operations. In the end, he was left with a personal debt of few lac without any results for his years of hard work.
Working with unscrupulous people, even if they’re on your side, is a deliberate invitation to misfortune. As Thomas Phelps wrote in his book 100 to 1 in the Stock Market – “Remember that a man who will steal for you, will steal from you.” Put simply, you can never strike a good deal with a bad person.
A wise man once said, your future is decided by the books you read and people you associate with. When you buy a stock, you decide to associate, albeit indirectly as a minority shareholder, with the owners/managers of the business. You’re essentially putting a trust on the managers running the business.
That person may be extremely good in his job, he may be a very smart businessman. He may also be growing the business profitably. But if you aren’t sure about his honesty and integrity then heed the advice of Woody Allen who said, “While the lamb may lie down with the lion, the lamb shouldn’t count on getting a whole lot of sleep.”
Once you find a good business, being run by competent and honest management, stick with it for a longer term, provided the quality of the business and management doesn’t deteriorate. Because the moment you break the partnership, you’re left with a task of finding another honest manager, which by the way isn’t an easy task.
Don’t be a fair-weather friend to the good stocks in your portfolio.
What if an honest manager suddenly turns evil? Well, chances are that he was always crooked, and you failed to judge his character. In that case, learn from it and move on.
At the same time, it’s delusional to hope that a dishonest CEO will have a change of heart. Crooks turn into saints only in movies and stories. It’s not impossible but very uncommon because people don’t change. Turnarounds seldom turn – Buffett may have said this for businesses, but it’s equally applicable to people’s character.
If a CEO has been known to display a clean character for a long time, he will seldom turn out to be of questionable character in future.
Fortune favours the brave, goes the saying. And in investing, fortune favours those who are brave enough to stick with their honest and competent partners through the ups and downs of market cycles.
Apart from investing, if you want to be fortunate in life too, you now know the drill.
Surround yourself with people who posses the qualities that you admire. Who inspire, uplift and motivate you. Who set the right example by doing the right thing.
How do you find such people? Let them find you.
Like attracts like. Which means the best ways to find honest people is to be honest yourself. If you develop a good character yourself and practice those qualities which you’re looking in others, it attracts similar people in your life. I can personally vouch for it. The strategy has worked remarkably well in my life so far.
In the end, Lady Fortuna doesn’t just smile on honest business people. She likes anyone who possesses a good character.
Loved this quote “Remember that a man who will steal for you, will steal from you”
Whenever judging quality of management I try to find how honest promoter is in paying his taxes, regulatory dues, investment in meeting compliances like pollution norms, labour norms etc. whether philosophy is to comply on paper or genuine. Though many contest this tool being too stringent as according them every one does this. But I personally found this to be most reliable tool of judging management integrity.
Thanks Indrajeet.
Let Lady fortuna gladly submit .. and she will.. if you wait long enough .. Be there when she appears ..
Buy and hold for a long time
Hii Sir any plans to conduct workshop in Mumbai? Waiting for your workshop in Mumbai from long time.
Very soon Chirag 🙂
Dear Anshul
This was a lovely piece of advice, mostly followed in the breach?. Most of us decide based on financial ratios and rarely think of the people behind those ratios. There are exceptions, when even the most digilent, can’t see what is coming. I am referring to the most elaborately conceived fraud in Indian business history- Satyam. When I saw it live on TV, I went to town informing all and sundry, even as my Satyam stock hit single digits. Thankfully this was one instance when the govt responded quickly and in the best interest of everyone and today Tech Mahindra has created enormous wealth for people who held on and more so for those who bought on that fateful day?
True RKC. As I learnt later from Vishal, Satyam used to have 150 subsidiaries at one point of time and that was much before Ramalinga Raju confessed cooking the books.
Great article Anshul as always. Love the way you connect the dots from various books and articles.
Quotes that i absolutely loved:
1) ‘The lesson for an investor is that in stock market, you’re not just in the business of finding good businesses. Your real job is to find people who are running good businesses. That brings good fortune’
2) ‘A wise man once said, your future is decided by the books you read and people you associate with. When you buy a stock, you decide to associate, albeit indirectly as a minority shareholder, with the owners/managers of the business. You’re essentially putting a trust on the managers running the business.’ – People often overlook this aspect.
3) the advice of Woody Allen who said, “While the lamb may lie down with the lion, the lamb shouldn’t count on getting a whole lot of sleep.”
Thanks Ganesh.
Could not agree more!
Good Character is the basis of long term relationship.
But sometimes in life, we stick to the bad ones even we know they are the wrong people to be with.
How do we keep our discipline here?
Part of the reason one would continue to be in the bad company (even after realizing it) is because he/she sees some short term benefit in the relationship. And as they say — A man who steals for you, will steal from you. So it’s just a matter of time before that short term benefit turns into a long term harm. Keeping that in mind, it’s rational to end that relationship.
Sounds right!
Its the typical case of knowing what is right but not acting on it.
Rational in thoughts but Irrational in action.
Would love Vishal sir’s article on the above.
Thanks for responding.
Cheers!
very nice piece of advice. great job sir!
Excellent views. Very well defined. Thanks 😊👍
Absolutely Perfect
No way to believe that contrarian view holds true
Not a short cut to be fortunate investor but definitely a Sure shot cut
Absolutely amazing…
But sir how should I evaluate management because being a small investor generally we don’t have much resources to put management through the test..
This will give you some clues — https://www.safalniveshak.com/value-investing-course-assessing-management-quality/
Thanks sir…
I totally agree with you!
Surrounding yourself with inspiring characters is the best way to stay inspired.
You have put it very nicely. Thanks for sharing such a brilliant post.
Great Article Anshul Sir! Loved the points covered in this article.
They’re really worthy for investors like us.
Thank you so much for sharing this blog with us. It provides a collection of useful information. You obviously put a lot of effort into it.
Thanks for sharing post.
Very helpful article about market and investment
Keep it up