Investment strategies of super investors: Explained!

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This is a question which every investor thinks at some point of time. The question is “How do rich people or so-called super investors invest their money? They must be investing into the best opportunity available in the market. So I shall do the same.”

There is nothing wrong in aspiring to create more wealth out of small sums of money but every strategy has some pros and cons which must be understood well before blindly following others. In this article, we bring some unorthodox investment strategies which many rich investors deploy in the hope of market beating returns.

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Strategy 1: Buy the Whole Sector

If you know automobile is going to do well, what shall be your strategy? Buy Maruti Suzuki or Tata motors? Well, there is another way. If you know (based on your analysis) that automobile sector is going to perform well for next couple of years, buy top players of the sector. You can buy Eicher Motors, Maruti Suzuki, Ashok Leyland & Tata Motors. You are destined to perform well and no need to worry about which particular stock will do well. This provides an intra-sector diversification as well. If a sector has to perform, a lion’s share of that performance has to come from top companies in the sector. Some super investor like Dolly Khanna uses this strategy very often to bag good returns.

Pros:

  1. Company specific risks are minimized
  2. Tilting allocation towards a sector boosts overall returns
  3. Getting maximum bucks from the money

Cons:

  1. Need to be very sure of which sector will do well
  2. If it backfires, there is no inter-sector diversification to save the day.

Strategy 2: Bailout Troubled Company

Companies saddled with loans are often willing to sell their business at a discount. If you can buy or bailout a troubled (often debt laden) business which is likely to turnaround, you can make a fortune. Typically, what happens is that companies borrow too much during the sunshine days for exponential growth only to find gloomy days ahead. This invariably happens since economies move in cycles. Now, they try to avert defaulting on loans and keep on struggling for a few years until they give up. This is where stressed asset buyers pitch in. By the time buyers bail out a business, sector outlook start to improve again and it becomes easier for them to resale it to an optimistic buyer and exit.

Banks publish a list of stressed loans or assets that they want to sell at 50% of original loan value without any interest. Such investors keep a look for such assets sale. They buy it only to sell it back to someone else once stress is gone. In the process, they can make a sizable profit. This is not easy since turnaround of such companies & finding next buyer can be challenging. Most such investors have a great network using which they make life easier for the business by either infusing capital or completely changing their business models.

Rakesh Jhunjhunwala has done it for many businesses (listed & un-listed). We know some of the listed businesses and most of them are saddled with huge debts. Once such company is a specialty packaging company for pharmaceuticals. US-FDA observation has forced pharma companies to improve their packing standards for contamination proof & RFID enabled packaging. This can be a turnaround company which is showing signs of revival but it is still too early to decide.

We are deliberately not disclosing names as we don’t want you to speculate and buy that stock pre-maturely. For our subscribers, we have our eye on this stock if it shows promise, we will swiftly recommend it.

Pros:

  1. Early mover advantage.
  2. One can control business model of the investment to drive desired outcomes

Cons:

  1. Highly risky.
  2. Too much experience as well as networking is required.

Strategy 3: Switch Economies

World economy does not move at same pace everywhere. If there is a recession in Japan, there may be boom in Brazil. As common investors, most of us focus on one economy i.e. India. If market sentiments are bad, we wait for tide to turn back and remain invested. What if you have access to stock markets across the world? You can shift or tilt your portfolio towards undervalued economy and reduce exposure to overvalued economies. This is exactly what large institutional bank do for their priviledged or institutional clients. There is always some portion of the world which is undervalued. For example, when Philippines President Rodrigo Duterte came to power in June’2016, he announced various Anti-American measures. Iit broke PSEi (Sensex of Philippines). It crashed from around 8000 to 6000 (drop of 25%). Around the same time, shale oil production was peaking and opec countries were in huddle to avoid crash in oil prices. A good opportunity to move money from oil based middle-east economies to Philippines. There are many such instances where money can be made by shifting across economies. Grecxit or Brexit were also similar events in nature. An exception to this may be Japan which seems permanently in the grip of slowdown. Such opportunity keeps on popping up across the world and if one is able to time them well, a good amount of wealth can be created.

Pros:

  1. Making money across the market cycles by switching economies.

Cons:

  1. Market timing risk.
  2. Currency fluctuation risk
  3. High brokerage fee (This is why institutional banks love to move money in the name of bigger returns)

Strategy 4: Invest @ Larva Stage

The amount of money made also depends on how early you are able to find a promising opportunity. As investors, our scope is often limited to companies listed on stock exchanges. The problem is not every business is listed on exchange. Many larva stage business are yet in a garage or one room office. The biggest money is made if you happen to be the owner of such business or a key investor. It is a very popular investment strategy which many HNIs are adopting. Be it Amitabh Bacchan, Yuvraj Singh or Ratan Tata. They have venture capital firms which invest into startups at early stage. There are also many angel investors or VCs (venture capitalist) who invest in startup ideas. New York based Tiger Global made $3.3 billion from their total investment of $1 billion in Flipkart which was invested across many years. Similarly, Amitabh Bacchan made $17.5 millions from his investment of $250k in a Singapore based blockchain startup. This is another method of making money which is very popular with rich investors and now-a-days very popular in India.

Pros:

  1. Investment at early stage to reap maximum benefit.

Cons:

  1. Highly risky, 8 out of 10 investments will fail.
  2. You need access to startup network to tap into such opportunities.
  3. Minimum investment size goes in multi million dollars.

Conclusion

After reading all this, you must be thinking if you can adopt some of the super-rich investment strategies. You can very well do it if you have large sum of money in tunes of 100s of crores. If not, then fret not. Rich investors choose to adopt certain strategies since they can not buy small or micro cap stocks but you can. Imagine if you are a super investor having 100s of crores. You can not deploy such huge amount of money in small caps. Only safe option in listed space are large caps or bigger mid caps. But they are boring in terms of returns. So, such investor has to find an alternative strategy to yield small cap like returns without investing into small caps.

Dear Ace reader, if you do not have such issue, you can very well invest in quality small cap stocks and have enough patience to see it growing 10, 50 or 100 times. Even Warren Buffet envies you as he famously accepted that he can’t generate same kind of returns (in percentage) as he once used to generate when he was a small investor.

In a nutshell, while it is good to know various investment styles, one must develop his own investment style for surviving long term in dynamic world of stock market. Copying styles will fail but if you have confidence backed by knowledge, none can stop you since you have a strategy that suits you and only you!!

Happy Investing.