Your reflection on the risks of “hot stock plays” and the importance of avoiding companies with high debt and cyclical vulnerabilities aligns well with a more systematic, rule-based approach to investing. Here are a few reasons why a rule-based approach can be beneficial, especially in light of your experiences:
Risk Management:
Avoiding high-debt companies like RPower is crucial. Rule-based strategy excludes companies with a debt-to-equity ratio above 1.0, which would have flagged these as high-risk.
Eliminating Emotional Bias:
Your fortunate turn with Tata Motors and Voda Idea underscores the role of luck. A rule-based system reduces emotional decisions by following predefined criteria. For example, investing only in stocks with a P/E ratio below 15 and positive cash flow for the past 5 years can be a useful rule.
Consistent Performance:
Your focus on undervalued large businesses aligns with systematic screening. Using metrics like ROE above 15% and earnings growth above 10% consistently (e.g. 8 out of last 10 years) to identify sustainable investments.
Mohnish Pabrai’s disciplined, data-driven approach is a great example of the benefits of rule-based investing. Combining personal conviction with systematic rules can enhance your investment success, reducing risks and increasing growth potential.
Thank you for sharing, and best of luck in your continued investment journey!
Read more on investment rules (fundamental-ratio-based) in this thread.
We share best investment rules for Indian markets and test them across cycles in the last 25 years.