How not to invest

 A lot is said about how to invest. We spend a lot of time trying to become the next Warren Buffett, trying to identify the next multi bagger. I know of a lot of folks who brag about their investment ideas. But to become a good investor, the first gate one needs to cross to know how not to invest. 

In a game of cricket, the real stuff happens on the pitch. And in the dressing rooms. What really matters is the strategy the team has in mind, the batting line up, the bowling statistics etc. And yet the focus often remains on the cheerleaders. They are nice to look at. The draw a lot of attention. At the end of each over, they dominate the screens. And yet they have no impact on the final outcome. Investing is a lot like that. 

Imagine there is a hardware shop in the village that has been operating for a few years and is now on sale. Would you buy the shop only based on the village gossip? And if you did decide to go ahead with the purchase, how much would you pay? Would you want to know how many customers it serves? Would you not want to know how much profit it makes? Or may be it is running losses? 

Would you go ahead merely based on the fact that he has a good looking daughter?  That is what is referred to as hype. Often people depend on the hype while taking investment decisions. With little reference to business fundamentals. Just like a game of cricket, the cheerleaders don't matter. They have no impact on the final result of the match. Remain focused on the game.

Before you invest ask questions about the business. In a sense buying a share of a company is like buying a small part of the hardware shop. Find out if the company is making profits. How consistently has it made profits over the last few years. What does the future hold? Is the company's future protected? How efficiently is it run? How good are the returns on the capital it has deployed? What is the company's position in the industry it operates in? Is there any risk to the company's business in the future?

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This post is not about what to do. It is about what not to do. Don't make decisions based on a random comment or hype. Do research. Understand the company, Understand the industry. Look for signals about the company's future profits.

In the end the cheerleaders don't have any impact on the final outcome of the match