Spotlight: Where Do Great (Investment) Ideas Come From?

It was sometime in 2003 when, after joining my job as an equity analyst and after getting my first measly paycheque, I wanted to get my rented apartment painted. I was about to get married and welcoming my bride in a house with unpainted walls was a bad idea.

So, with the little I could afford then, I searched for the cheapest painter, and with him, went searching for the cheapest paint. But I couldn’t find one. In fact, no paint store was willing to sell me the cheapest paint, and instead, everyone seemed to nudge me to buy the most expensive of the lot.

“Sir, you would get your house painted once in five years, so why go for a cheap, low-quality paint?” one shopkeeper tried his persuasion technique, “So my suggestion is that you must go with this XYZ brand of paint.” My painter added, “This brand is really good, sir. Or why would everyone buy this one only?”

“But isn’t this expensive as compared to other brands?” I revolted.

“If you don’t buy this now and come back a year later,” a shopkeeper warned me, “it would get even more expensive!”

“How can you say that?” I retaliated. “Because this company has been raising its prices every year,” he replied, “and despite this, more and more people are buying it.”

Well, what I had heard from these paint shopkeepers was true, as I saw from the previous years’ financial statements of this XYZ company. Year after year, the company had been raising the price of its products, and year after year, its volume sales were also rising.

When I talked about this business with my senior colleague, he dismissed it as a random idea coming from a junior.

“But see the pricing power,” I told him, “And everyone is buying its products despite the constant increases in prices every year! And the company has no debt. And the management is clean.”

I tried to hard-sell this idea to my seniors, but not many took it seriously. And I, being an obedient, inexperienced junior into his very first job, stopped taking it very seriously, and did not buy the stock. What a huge mistake of omission it turned out to be!

If you have not realized by now, the XYZ company was Asian Paints, and the quoting price then was less than Rs 30 per share. Today, it’s around Rs 800, a 27-bagger in 12 years, or a 31% CAGR return.

I did not buy Asian Paints in 2003, which was otherwise a great insight then and one that was sparked off by nothing more than an observation of what people around me were buying and what people around me were hard-selling.

If I were to use the language of human psychology, Asian Paints was a business (and still is) that benefited tremendously from the biases of social proof (everyone was buying) and anchoring (high and rising price, and thus better products). And, to repeat, I got the insight out of simple observation and common sense, and no deep analysis of the business and no complex theories to support my arguments.

“My simple art,” said Sherlock Holmes in The Blanched Soldier, “is but a systematized common sense.”

Many times in life, all we need is a touch of common sense to reach a Eureka moment. And of course, we need the knowledge of separating sense from nonsense, because the latter is in great supply all around.

Want to Read More? This content is exclusive for members of Value Investing Almanack. Login to read if you are a member. Else, click here to subscribe.