How do you apply the art of exclusion in investing?
The art of exclusion is a very powerful idea in investing. You must filter out things such as bad management and bad business. Some of these filters are powerful enough to help you identify what to knock off your list. Businesses that do not have a material size of opportunity even after a considerable time period will continue to perform poorly.
Investing is both an 'art' and a 'science'. Art must precede science. What to reject comes from the 'art'. Then comes the character of the business and its valuation, which to my mind, is 'science'. If you start with 'science', not many options will be eliminated. For instance, if we apply the valuation filter, 90% of the companies, which are today trading at a single digit P/E, will land at your doorstep. On the contrary, if you start with the 'art' part of investing, 90% of these companies will be purged out and then you need to devote your time only to the remaining ones, maybe 4-5% of the entire universe. That is a far more efficient and time-saving exercise. It will make your decision-making skills sharper.
Tell us how has your investing evolved over the years?
Over my 29 year-long investing career, there are four to five elements that have altered. First, the 'art' part of investing, which is the difficult part, has been refined. The 'science' part is relatively easy to grasp and replicate. Once you are able to improve the 'art' part of investing, then you move ahead. At this stage, for a proportionate effort, you get disproportionate rewards.
In this business, you need not necessarily have Einstein’s grey cells. Broadly speaking, you need to understand the character of a business, which means what makes a business work, what makes it succeed and what will happen to it in the future. If you cannot understand diverse businesses; you cannot be an investor. The ability to value a business is more of a skill.
If you cannot value a business, then price has no meaning. Only if you are capable of comparing price to a certain value, will it make sense. Price is disobedient, volatile at times and depressed at times. The ma