Dinesh Sairam's Portfolio: Requesting Feedback

I feel one can avoid this situation by investing slowly in a company over a period of 2 to 5 years. This helps us to understand deeper about a company and has indeed helped me avoid losses. Unless one is trading, the slow and steady investment process will be safe and rewarding. Just a few cents from my side as I see that you are buying and selling stocks too quickly and this seems almost like trading.

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Just curious. You have some serious conviction on goodyear. This whole automation of agriculture theme and you are playing it via tractor tyres.

You dont know when this trend will play out. What returns are you expecting out of this idea in the next 5 years or 10 years at that?

Taking a 10 year view on a company like goodyear India in a space where RM cost is everything etc etc…will this idea outperform the index over a decade??

Maybe there is some bias on this idea of yours. Would like to know more.

Thank you for the feedback.

However, I don’t really have a time period within which I will sell a stock. I sell if:

  1. The logic or story with which I bought the stock in the first place is challenged
  2. The stock is extremely overvalued
  3. Neither of the above, but I found a better opportunity with similar or better fundamentals

It’s pretty straightforward and I will make the sale regardless of when it happens after the initial purchase. I could care less about whether it looks like trading or not.

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I do not know. I use a 15% Cost of Capital on most of my valuations and a 20%-30% Margin of Safety. So if my projection of the company’s Cash Flows turn out to be correct, I should earn at least 18-19% on these investments. If the projections turn out to be slightly wrong, I should earn the minimum of 15% or so. If the projections turn out way more wrong i.e. probably the story I have from the stock itself is incorrect, I should earn even lesser (Hopefully I sense that the story is wrong and would have sold the stock). But of course, this is all just in theory.

But I believe an investor has no tools with which he can gauge the actual maximum returns he can earn in a given stock. If the market is extremely biased towards the stock, he may earn well north of 20% or if the market is extremely biased against the stock, he may end up earning lesser than 15% or so (In spite of good performance by the company). Nobody really knows. And as investor in stocks, that is the cross we have to bear.

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Portfolio Update

Exit: Exited Mirza International about 2-3 weeks back. It was already just ~3% of my Portfolio, so didn’t take the time to update this separately. My initial thesis for investing in Mirza was their legacy business driving most of the value, while the retail venture being just an experiment. Clearly, I have been proven wrong by the management’s actions over the past few months. More resources are committed to the retail business without even testing the viability of the model. I am not comfortable with this. I wish them well. I still think the company holds a promise. But I would much rather watch from the sidelines until the storm passes.

New Entry: Purchased an interesting company called ‘B&A Limited’ (Not Bengal & Assam Limited). The company holds several Tea Estates and is involved in the manufacturing/sales of Tea products. The company also holds a subsidiary named 'B&A Packaging Limited’, which is engaged in the manufacturing of Paper Sacks and Laminates under the brand ‘Baggage’. While I think both the businesses are mediocre at best, the parent sells at an extremely low price. The subsidiary sells at a more ridiculous discount to Book Value, but it has 0 liquidity. So, I chose to invest in it via the Parent (Which is undervalued by itself a little). This is the kind of Classic Graham-type Value investment that I have always wanted to do. Of course, now it is only a meager ~2% of my PF. I plan to increase it up to ~3-5% once I do a little more research. This should be an interesting bet to track.

Additions: I got that additional 30% in Cash and invested in all my existing holdings through the weeks. Some Cash still remains. I largely want to invest this in a liquid fund. This is how my PF looks like now:

Concerns/Updates:

  1. Dhabriya Polywood posted lacklustre results. There is no way to understand the results, except wait for the Annual Report (Which is some ways away). The stock has dropped considerably. Although I am not worried about short term movements, it’s been a good lesson in how illiquid stocks cut both ways. On days when the volume has been <25-50, the stock has dropped the whole ~5% or so. I will continue to wait for updates on the new plants and debt levels. Until then, it will remain as a smaller weight in my PF.

  2. Cera, KMCH and Ion Exchange posted excellent results. I continue to be bullish on these businesses.

  3. Heritage and DHP India posted flattish results. As far as Heritage is concerned, it is the cold season. This leads to procurement of Buffalo milk for the large part, which eats into Margins. So, Q3 really is always a weak quarter for pure-play Dairy companies. DHP India reported flattish results on the back of MTM losses in security holdings and possibly Forex losses, which is fine.

  4. Cupid posted seemingly bad results. But this is because of an Accounting adjustment, which should be normalized next quarter. The company’s order book is already higher than last years’. More orders are likely to appear as the year goes on.

  5. Goodyear India posted bad results as already posted above. However, the costs have increased a large part due to stocking up of CV tyres (For the low Margin trading business line). I don’t know if there’s a strategy behind doing this. But the general trend seems to be that rubber price increase will test the Margins of all Tyre companies for a few upcoming quarters. Still, I have almost doubled down on the stock since it fell below my expected purchase price.

Tracking: Largely interested in studying Gruh/Bandhan, HIL Limited and Indian Energy Exchange. Probably a funny thing to note is that I have been tracking Motherson Sumi Systems since quite some time. Of course, I believe that my expected purchase price was in or around Rs. 100 levels, so I hadn’t shown much interest in it. Recently, the stock dropped all the way to Rs. 129 and then, like clockwork, went back up to Rs. 160. It’s almost like I’m getting punked. In any case, Rs. 100 is my purchase price after applying a 20% MoS. I wouldn’t want to give up any further MoS by purchasing at a higher price point. I will wait for Rs. 100 still or if it doesn’t get there, look for other fish in the sea.

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Came across this article in another thread.

Mukherjea makes an interesting point about having the core of the portfolio in stocks like Asian Paints and HDFC bank. Indian markets are different from western markets, which allows some 1% of the companies to post exceptional return on invested capital, consistently for years to come. This makes them into steady compounders despite quoting at high valuations. It makes sense for every portfolio to have a stable core consisting of such companies, and then consider investing a part in alpha generating value picks. At present, your entire portfolio is designed to chase after alpha, which can give exceptional returns during good times, but may also lead to extreme drawdowns during bad market conditions.

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Another vital point is holding period. I would like to calculate that to see if one can hold any of these stocks (except Cera and good year) for more than 5 years.

Some data I gathered from this thread:
HDFC was held for 3 months (1.5 years before opening this thread as per OP)
Kitex was held for 3 months
Hinduja 4 months
Mirza less than 6 months
DHP India less than 6 months
May be I missed a few

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@dineshssairam

I have been following your portfolio thread for quite some time now. I think you have a great analytical mindset and ways of calculating the intrinsic value with margin of safety thrown in based on models etc.

But the thing I feel is that you are directing your energies at the wrong space. Instead of looking at mediocre companies like Mirza, Cupid, DHP, dhabriya (even goodyear to some extent), it may be much more fruitful to look at great companies and try to apply your methods on them when they correct and then latch on to them. That way you would be landing up with great companies in your portfolio instead of the kind of companies you currently have and you would be much more comfortable in holding the former than the latter.

I think you seriously need to look at the quality of a company before applying all your quantitative and analytical knowledge. I feel you are misdirecting your immense talent.

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I read this article. But I think the problem is in defining a compounder. If you have invested in index companies when Sensex started first (Index funds being the hallmark definition of a “good company”) and continuously SIP-ed in them, you would have made terrible returns. I think a better alternative is to invest in well managed Large Cap funds. It will be like owning a piece of India, which is carefully managed. A chunk of my wealth is already in such funds. Maybe in the future, when I trust myself and my methods to generate good returns, I might resort to picking them out myself completely.

Switching out HDFC Bank for Kitex was a big mistake and I admit to as much. But Hinduja and Mirza were merely tracking positions. They formed a smaller percentage of my PF and I removed when I was no longer comfortable with them during my tracking.

Even ignoring this, as I have already mentioned, I don’t mind selling a stock within 2-3 years if it is starkly overvalued according to my calculations. I understand the follies of churn cost, but I believe Opportunity Cost should be more than that.

Thank you, @hitesh2710. I do track traditionally ‘quality’ companies like MSSL, OCCL, MRF, Maruti Suzuki, CDSL and so on. But Opportunity Cost is always an issue. Even after this big drawdown, these stocks are not trading at price levels I would be comfortable buying. If they do, I would be more than happy to go shift a majority of my PF to them. Maybe if I had started at the bottom of 2009, my PF would have consisted entirely of blue chips. :slight_smile:

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Will recommend reading about Quality investing. This book does a good job at listing out patterns which identify these steady compounders.

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No, you’re not getting the point. Why waste my time in identifying Compounders for sidecar investments, when Large Cap funds can do it themselves and definitely way better than me? All I’m saying is, there’s very little difference between investing in HDFC/Asian Paints at elevated Valuations and SIP-ing in well managed Large Cap funds. The latter requires less time and energy.

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Yes, there may not be much difference between SIP-ing directly into quality firms or into a well managed large cap fund which will identify and buy them for you. But you still should be able to judge whether the fund is doing what it claims to be doing, and in my opinion, that is equally hard. Verifying the solution to the investing problem is just as hard as solving the problem yourself. And if you are already reading and making effort to understand whether the funds are doing a good job, you might as well save the expense ratio and invest yourself directly.

On the other hand, if you are taking blind leap of faith on some large cap funds, you might do just as well by investing in low cost index funds instead. and I have no arguments against index investing as opposed to putting in extra effort to buy Asian Paints or Hdfc bank at elevated valuation. There is no guarantee that this extra effort will pay any better than index.

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@dineshssairam I completely agree with Hiteshbhai on this one. You have a great method and a good discipline but you are betting on wrong horses. You are taking comfort in your number crunching but quality is also important. I made the same mistake in 2011-2013 period after reading Dhando Investor by Mohnish Pabrai. He talks about buying cheap companies but in Indian context cheap companies have a hole in their balance sheet that is not easy to quantify. These companies only appear cheap until you figure out why they are so cheap. Fortunately market has a way to figure this out in the long run. I don’t know how but such companies stay cheap forever. Its better to err on the side of high quality at high cost rather than low quality at low cost investments in Indian context. Once in a while these high quality companies fall giving you an entry point.

I agree with Hiteshbhai that you can very much apply your number crunching on high quality companies because proper valuation technique will definitely give you an edge.

We are now closer to a bottom so I would suggest you use this opportunity to rejig your portfolio. many quality companies are not as expensive as they were just a year ago. Having one or two low quality cheap companies in your portfolio to test your thesis is OK but having entire portfolio invested in it is risky. If you have previously tested this strategy in an environment like today (which I don’t think existed after 2013), then you are OK but otherwise, you need to consider upping quality of your portfolio.

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Cheapness (The purchase price, I mean) is relative. I still don’t think the proven ‘quality’ businesses I track are cheap in that regard. Sure, some of them have corrected 20-30% from the top, but only from levels that can be considered way overvalued.

I don’t mind backing up the truck on something like, say Maruti Suzuki, if I can purchase them at levels I want to. But just as much, I don’t want to purchase them just for the sake of having a ‘high quality’ stock in my portfolio at a purchase price I won’t be comfortable having.

I understand the implied question here: “If you don’t find Value in quality companies, why are you invested at all? You should have >70% of your PF in Cash.”

Unfortunately, I personally don’t think Opportunity Cost works that way. There’s no difference between buying a stock at 25 P/E + selling at 37.50 P/E and buying at 10 P/E and selling at 15 P/E (Assuming same Profit growth rates). Quality in itself does not command an automatic premium.

If all these ‘quality’ stocks I track dropped 30% overnight, I would churn my entire PF to be more biased towards them. But if they are not going to, I wouldn’t want to invest 75%+ in Debt funds and earn mediocre returns.

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There is one big difference! Mutual funds churn even in a large cap fund and they charge you fees for doing a simple job that you could do in your spare time.

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In terms of returns, there is no difference, but there may be huge difference in terms of risk taken. Usually there is a good reason for market to assign some company 10 PE. But these risks do not materialise as loss in good times which may give a false sense of confidence. Take DHFL as example. It was always relatively cheap because market had doubts in promoters. But in good time, that did not result in any loss. However as soon as liquidity issues came up and market started penalising these risks, their share price fell like anything. Now you have to understand, we are not just dealing with valuation risks. There is serious risk of losing entire investment due to lack of promoter’s integrity in DHFL’s case. On top, we have deteriorating fundamentals as market raised their cost of capital. On the other hand if you had bought Gruh at high valuations and suffered a loss, you can safely average down, as valuations can be regained with time as long as the underlying business is steadily growing and management’s integrity is not in question.

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I too agree with @hitesh2710 Sir views. Even you have this valuation models for picking good entry points but ever since you shared your portfolio in January 2018 , the following initial portfolio stocks have corrected from Jan 2018 levels:
Cupid: 50% , DHFL : 70% , Goodyear : 25% , Ion Ex : 35%

Your purchase price may be lower but these draw down in Portfolio stocks is definitely the opportunity cost. May be the exit valuations failed. May be it indicate that the valuation method is not foolproof and chances of making mistakes is very much.
While if someone who had just invested in Sensex/Index during the duration , he may be in minor profits today. FD would have given 7-8% profitable returns over same time.

Ultimately you have to book out from DHFL. The stock remained cheap from long and now the markets after long time came to know that why was it so cheap. An HDFC would have been more profitable bet. Though , it is not appropriate to conclude anything from that but it is very much certain that great businesses will always remain expensive in comparison to mediocre & great business will give more sound sleep and will require less energy and efforts.

I too believe that instead of focusing more on Valuations , the underlying company should be given more emphasis. Even if we pay some premium for quality companies , there is a fair amount of surety of principle coming back to us while mistakes like DHFL can wipe out the capital and damage the entire portfolio. It is difficult to value the future potential of business in excel sheets. There are Business like M&M or Greaves Cotton which have corrected to some extent and several developments are undergoing which provides good outlook for future. There are business like PI Ind or Syngene which have great visibility of earnings for next few years and i don’t think these developments are captured by excel sheet. They may remain expensive if the valuation metric is so strict but markets surely provide decent entry prices from time to time if one relax the valuation model. More importantly , when the market bounces after the correction , quality companies bounce faster. Majority of stocks corrects in a correction and it is always better to accumulate best bets during such times.

There are people out who still buy Sintex , RCom , R Power , JP or Unitech. Some gets very lucky who bought R Com at Rs 10 and few days later it was in 40. They too made returns but there are some who bought R Com at 10 few days back thinking of bounce (Looking at the pattern) and now struck at 40% loss in few days with sleepless nights. It is more of a luck.

Quality companies may undergo price correction or time correction and no one knows when it will make bottom. The best way to buy them is over a period of 1-2 Years and sit for long.

These are at best good companies. Quality companies may be AP , Pidilite , HDFC etc.
It is sometimes better to sit in cash than deploying it in uncertain businesses.

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These are some of the best managed Large Cap funds in the country:

This is UTI’s Index Fund, one of the best Index Funds in India:

There is clearly a difference. Of course, you may not always invest in the best funds in India. This is why, instead of the high ~18% returns, you may end up making ~15% or so in mediocre funds, which is still way higher than Index Fund returns post the expense ratio.

That’s why diversification is a good practice in passive investments like MFs. I SIP in 3 different Mutual Funds and I believe that’s a good practice.

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Pardon me, but that statement is redundant. If I purchased at lower prices, why would I suffer the Opportunity Cost? In fact, I purchased at a lower price precisely to avoid an Opportunity Cost. My actual MTM losses in Cupid is ~25%, Goodyear is ~2% and Ion Exchange is ~10%.

Of course, if you are talking about Opportunity Cost in terms of 1-2 years, then I think that’s hardly reasonable. Markets are volatile and we just witnessed huge volatility in the Indian markets. Picking this period alone to justify Opportunity lost is not reasonable.

I have already booked out of DHFL about a month back. I have posted about it in this same thread. I took a ~50% loss on the investments and about 3% at the PF level. I had also mentioned the lessons I learned. Here’s the post FYI:

What do you suggest then, during periods of market downturn, everyone should cash out of equities completely and invest in FD/Index instead? Before the recent downturn, did any of us know which stocks will drop and which won’t? I have had this conversation in several places at VP. I don’t want to start one again.

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Let me put myself across clearly.

  1. I think every stock has a price. If a stock is mediocre, it will trade at mediocre valuations. If a stock is good, it will trade a premium valuations. I make the same profits by buying mediocre valuations and selling at decent valuations, as I would with buying at premium valuations and selling at ridiculously high levels.

  2. I do not, however, think that ‘quality’ stocks automatically warrant overpaying. They already trade at premium valuations because they are proven. An investor should not delude himself into thinking that they can be bought an any price.

  3. Most importantly: I am currently invested in ‘good’ or ‘mediocre’ companies. But this is only because I see Value in them. If I see Value in DMart or Page, I will not hesitate to churn my PF. There are some companies like Bata, where I feel if they are available at a good discount to my calculated value, I would be even willing to put 40-50% of my PF there. However, I do not currently find anything of the sort. I will not compel myself to invest in them because ‘it is a good practice’.

  4. Of course, I do not want to come across as condescending. Maybe there are indeed quality stocks out there and I fail to see the value in them. This is always a possibility and I accept that. If someone could give me an example of a quality stock that’s also trading at a discount to value, I would definitely look at it. But the ones I consider good are certainly not available at a discount to value. So, I simply continue to monitor them for opportunities.

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