Let us start today's video, and in the start of the video itself, I want to ask you a question
What kind of investor do you want to be?
And maybe out of 100, 90 people would say they want to be an investor like Warren Buffett
But for that it is very important for us to know
What are Warren Buffett's three golden rules of investing?
And using that how can we choose a good stock
And we can make a lot of money because of it in the coming time?
I, Jagdeep Singh, welcome you to the Groww channel
Let us start today's video
In which we are going to talk about Warren Buffett's three golden rules
Which tells us that if you incorporate them as an investor
Then you can become a very good investor
And by becoming a good investor, you can pick a good stock and earn a lot of money
Let us talk about the first rule
What is Warren Buffett's first rule of investment
And what can you learn from it as an investor
So if I talk about the first rule then that is time related
Now what is this time for and what is the rule related to it
So friends, whenever time comes to your mind when it is investment related
Two questions must come to your mind
First, what is the right time to invest
What is the right time when I should invest in any stock?
And the second and most important question
For how long should I invest?
So we will relate these two questions to Warren Buffett's rule and answer these two questions
First, what is the right time to invest
So here Warren Buffett says that there is no right time to invest
And the right time is today
If you want to invest in any particular stock
The best day to invest in that is today
Which means that if you feel that a particular stock is very good
And you want to think about investing in that
You have convinced yourself that its business model is very good
And it can give you very good returns in the coming days
In that case, you should not wait for the right time
But when you feel that that stock is good, that is the day you should invest in that stock
But here you might want to ask a lot more questions
Why should go and buy any stock on any day, instead the day the market goes down
I will buy that stock on that day
So that I can get that stock at a lower price and I can make more returns on it
But speculating that one day the market will go down
And you will get that stock at a lower price
It can be very risky
Here I remember a very nice quote by Warren Buffett, which relates to this question a lot
So Warren Buffett says, It's far better to buy a company at a fair price,
Rather than buying a fair company at a wonderful price
So if the company is very good, you can buy it at a fair price
But what would be worse than this is to buy a normal company at a high price
Now I will talk about the second question under time
Which impacts retail investors like us a lot
We always ask the question that if I am investing in any company, how long should i invest for?
So here Warren Buffett says that
The best time horizon for which you should invest in any company
It should be your lifetime
Which means you should choose such a business
Which you would never think about selling in your lifetime
Because, what does buying a share mean?
That you are buying the business of that particular company
You are buying your share in that company
And whenever think of investing in any business
Can you only judge that on the basis of its price
No, for that it is very important for you to understand its business
And after understanding you should convince yourself
That this company is very good and in the coming time it can perform really well
And after that you should invest in that company
Without thinking that if the market goes down, you will get it at a lower price
If you find a good company, invest in that on that day itself
When you convinced yourself and your investment period
It should be long enough for you to never feel the need to sell that company
Now I will come to the second important rule
But for that I would like to ask you a question
How do you think you should choose your stock
A retail investor first asks this question
To every investment advisor about how they should choose a good stock
Should I, before choosing a good stock, have finance or accounting knowledge
And if I don't have finance or accounting knowledge, can I start investing?
So here I will talk about Warren Buffett
So Warren Buffett says that
To invest, it is not necessary that you have a lot of knowledge about finance or accounting
But what's most important is if you understand the business or not
So if you understand a business really well
You can come and invest in the share market
But another question that people do not understand here is
How do I understand the business?
I have 8 or 10 kinds of businesses in front of me
Which business do I have to understand first
So for that as well, Warren Buffett gives a very good concept which we call Circle of competence
By talk about Circle of competence, Warren Buffett says that
If you have to choose your first stock ever and you don't understand other businesses
So first, whatever your competence is
Consider that if you work in the agriculture sector
And you understand agriculture very well
About how agriculture works
And if any company performs well in the coming time, in the agriculture sector
So how can it do that, because you know the ins and outs of the agriculture sector
So in that case if I have to choose my first stock
The first stock I choose should be from the agriculture sector
And I should see how its business performs
And after understanding its business, if I like that company, I should invest in it
Regarding this Warren Buffett has two very nice rules
Which he says, the first rule is, Never lose money
And after this the second rule is
Never forget the first rule
That you should never lose money and you should remember the first rule
For this, it is very important for you to choose a very god company in which you have to invest
And if you want to invest in a very good company
It is not necessary for you to have finance or accounting knowledge
But it is very important for you to have a business sense
You should understand how the company's business is
How does the company run its operations
And how can it perform in the coming days
If all these questions are clear in your mind
Then you can choose a good stock
And without thinking much, you can invest in it for a long time
And the chances can increase for you to get good returns
Here I remember another quote of Warren Buffett
And he says that, you should never see the return on your investment
But now you must be thinking that everyone tells you that when you pick a good stock
You should see how the return on investment is
Which tells you that if you invested Rs 100
What is the return you get on that
But Warren Buffett says that
Along with return on investment, you should see return of investment
Now what is the difference between the two
Return of investment tells you how safe it is
For you, that the business that you have invested in
For how long can I hold it and keep
Consider that I chose a company that doesn't have a lot of stability
And maybe in the coming days, it can perform well
Looking at that, that the return on investment can be good in one year
And I invested in that
But after one year, the company doesn't perform well
So here you neglected the return of investment
So it is very important that along with return on investment
You should see the company's stability
And see that if you want to keep the money invested for the next 10-15 years
How stable will that be
What is the risk of investing in that
When all these concepts are clear about a particular investment
At that time, without thinking too much you can invest in that business
Let us talk about the third principle
In the third rule Warren Buffett says that, always choose companies with a good competitive advantage
Now you might get this question in mind
How can I decide which company has a competitive advantage
Which can help me choose a good stock
So I will tell you two ways, using which you can get a small idea
Whether that company has a competitive advantage or not
If I talk about those two ways then the first one is slightly theoretical
In which I will tell you about Porter five forces
Which is a model that can help a lot for you to decide
Which company has a competitive advantage
The second one is about awareness and practical advantage
In which you can be a little extra aware
And then decide which company has a competitive advantage
Without going into any model
So here Warren Buffett says that a business which is very big and very good
Their brand recognition is very good
Like if I ask two simple questions
First, if I talk about running shoes
What is the first brand that comes to your mind
It is possible that a lot of us, think of Nike as the first name
There, if I talk about any fast food chain where you probably like to eat
If I talk about the name of that then maybe in your mind you must be thinking of Mcdonald's or KFC
So for this Warren Buffett says that he likes to invest in those businesses
Whose brand recognition is very good
And where the customer starts recognising the brand with the product itself, that company's competitive advantage becomes very good
Like if I talk about cold drink
Then coca cola's name might come to your mind
In which Warren Buffett has a very big stake as well
But now you must be thinking that this way through which you can guess with which brand do people associate more with
That can be very case to case and subjective
It can be possible that Adidas comes to mind
Someone else thinks of Nike
Because of which I cannot get a clear idea about which brand has more recognition
So here there is a theoretical model which is called Porter five forces model
Using which you can see how good the competitive advantage of every business and every industry is
If I talk about Porter five forces then you should mainly look at 5 things
Using which you can get an idea that that company's or that industry's
How the competitive advantage is
If I talk about the first thing, then that is Threat of new entrants
Which tells you in any industry
If a new player wants to come, what are the restriction on them
Or how difficult it will be for them
Like if I talk about a sector in India, Oil marketing sector
Where there are mainly only two or three companies
There the threat of new entrants is very less
Because there for a new entrant to come is very difficult
So what are those factors that reduce the threat of new entrants
So those factors are fixed cost
In any industry where the fixed cost is very high
There, the chances for a new entrant becomes very low
Like when I was talking about the oil marketing sector
That sector is quite a regulated sector
That's why the chance of a new entrant there becomes very less
So if you think of investing in any company
You should go there and see the industry that it operates in
How the threat of new entrants is, in that industry
If it is very high
Which means that any entrant can enter there at anytime
And they can take the market share of the company that you're thinking of investing in
So you should think twice before investing in that company
Let us talk about the second force
And the second force becomes very important in that industry
The industry which depends on suppliers a lot
The second force is bargaining power of suppliers
If I talk about an industry in India where the bargaining power of suppliers is a lot
The name of that industry is Auto sector
So before you invest in any company or any industry
The industry that you are investing in
There, the bargaining power of suppliers shouldn't be that much
Because when the bargaining power of suppliers becomes too much
They can start charging more money from companies
And when suppliers start charging more money
Then that company's production cost increases
And when that company's cost increases
Then the company will have to increase the price, but in the case that the company cannot increase the price
In that case the company's operating profit margin will start to go down
If I talk about the third force, then the third force is Threat of substitute products
Like if you chose a company where you felt that the company's business model is very good
And it can perform very well in the coming time
Because that company's product sells very well in the market
But now you should see that whether in the coming time
That product or service can be replaced by another product or service
If that product or service cannot be replaced by others in the coming time
Then it is possible that choice of investing in that company is very good
But if you feel that there is a risk
That that company's product can be replaced in the coming time
Then you should stay away from that company
Because in that case the risk can be very high
If that product is replaced by another
The company won't be able to expand itself
The company's sales won't be able to increase that much
And the company's share won't go up that much
Like I want you give you a very small example
You should not take this in investment terms, I am giving a layman example
Consider that until recently you used plastic spoons
Then one company that used to make plastic spoons
You thought of investing in that company
Because nowadays, the plastic spoons have been replaced by wood spoons
Because people don't think its good to use plastic nowadays
Apart from that, we used to use fossil fuels a lot recently
But now people are getting out of that now and going into green energy
So you can get an idea from this that when you invest in any company
So you should see whether that company's product can't get replaced by another in the coming time
Now I will talk about the fourth force
And the fourth force says that
That if you invest in any company
In that case you should how the bargaining power of buyers is
Which means that if you're thinking of investing in Company A
And the product that the company makes
If the buyer has very less bargaining power at the time of buying
There can be good control in the pricing of that company
Which can help a lot in improving the margins of that company
But if I talk about another case, consider Company B
When it sells its products
There the buyer comes and bargains a lot when it comes to price
And when the buyer has a lot of bargaining power it tries to buy the product at a lower price
And when he buys it at a lower price
The company's sales value will go down
Because of which the company's operating profit margin will go down
And as a shareholder your chances of getting losses will increase
If I talk about the fifth and last force
That tells us rivalry among competitors
Consider that there is a company in which you are thinking of investing
And there are only three companies in that industry
And there is a lot of rivalry between those three companies
They get into a lot of competition among themselves
Because of which they reduce the price of their product a lot
So consider that if one industry only has two or three companies and one company reduced the price of its product
Then even the other company has to reduce the price
And when the rivalry is a lot
Every company starts cutting its price
And if you invest in any company of a industry where there is a lot of rivalry
Then it is possible for that company to have to compromise with prices in the coming time
And in the case where a company has to compromise with its price, the company does not have a lot of control over it PnL
Which doesn't impact you well as a shareholder
So Porter five forces tell you that if you pay attention to these five things
While selecting a good company and a good industry
Then the chances increase
That what Warren Buffett said that you should choose a company which has a good competitive advantage
Then using Porter five forces you can achieve that golden rule
You can choose a company which has a high competitive advantage
So this video we made, was purely for educational purposes
Every example we used of any company
Was only for educational purpose
We absolutely do not recommend the buying or selling of any stock
So I will end this video with a question for you
Which golden rule out of these three is your favourite?
And which rule do you think will help you make a lot of money as a retail investor?
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