Opportunity cost means loss of other alternatives when one alternative is chosen. You chose to stay with DHFL and had to book 50% loss after 10 months. If you would have switched to better managed HDFC , you would have been at 10% gains. That is a loss of 60%.
What i said should be read in full. I said that since the model of valuation is not that effective as seen from the draw down , it is better to apply it on quality companies.
Anyway , after reading the thread , i felt that you are not open to ideas and questioning of your style of investment (focusing more on valuation and less on business potentials) and that is good in someway as you have good conviction in your holdings and strategy. Hope it delivers well.
Thatâs what Iâve been trying to tell you. Applying Opportunity Cost for short time periods is an exercise at futility. During 2016-17, I did a bunch of Cigar Butt trades in Raymond, SBI and a few others. I made 100% on these investments more or less. If I had invested in HDFC Bank at the time, I would have made 30-34% only. Howâs that for Opportunity Cost? Clearly, I cannot use that concept here because it was just a matter of one year.
Apart from this, Iâm not going to argue that my investment in DHFL was sound. It proved to be otherwise and I have admitted my mistake by selling out.
Thatâs not how models work. They donât tell whether you can time the stock or not. They give you a price which will deliver your expected returns over the long term. If you are going to criticize it for short term drawdowns, then thatâs not the intended use of models.
Iâm sorry you feel that way. I personally think I read the business in an attempt to understand it via numbers. If it comes across as me ignoring the underlying business, I can assure you I donât.
I simply post a lot about numbers because Iâm interested in them. Everyone has their niche, and this is mine. Maybe if I post more notes about businesses and avoid mentioning any numbers, this perception would change. But I donât see myself doing that honestly. I think numbers and stories should be read in unison, neither being more important than the other.
I just saw this note and you are saying you too hold liquid fundsâŚi am not able to understand what was mentioned in this articleâŚwould you be kind enough to let me know in simpler termsâŚif it is still good to hold leftover cash in liquid funds? i have almost 40% in liquid funds
While I donât feel qualified enough to contribute to the discussion, I came across a talk by Anshul Khare of SafalNiveshak which I think might be relevant.
While going through the thread, my sense is that you are not open to ideas or other proven investment approaches i.e. buy quality names sit for extremely long time while the power of compounding kicks in.
As said above, you have investment in large-cap mutual fund that is proxy to Indiaâs growth story and do cigar butt trades, not clear about the weight of above portfolio in your total asset (debt+equity+MFs+RealEstate+Gold). If it is small portion then investing in companies like Cupid may not harm you.
Being new to investment, I had invested in Cupid in 2015 @120 levels and exited at 350 levels last year.
The bad story started when it was suspended on BSE which they later rectified. Do you think with sales of below 80 crores, company will generate massive weath? Do you think other condom brands (like Durex, Moods, Manforce, apollo, Skore etc) do not know the technology of FC. Did they at-least get contract manufacturing from big boys ? Can they compete with above brands in retail space? Itâs just a tender based sales. If it canât win African tenders ? In the meanwhile promoters sold 4 to 5% odd stake for some personal investments. They are not able to find a CEO for few years.
It has more to do with Accounting policies for Liquid MFs. They now have to Account for MTM losses for 30 day instruments (Earlier it was 60 days instruments). While this is bad news for the MFs themselves, itâs actually better news for the investors. The MFs will now be more careful in picking their investments.
If I was closed to new ideas, I would outright deny them. But here, to my knowledge, I have only provided an explanation of why I do the way I do things. If I really felt that the best way to invest in equities is to buy only the proven and well known names, I would invest entirely in well run Mutual Funds, never bothering about active management myself.
I am open to dialogue and criticism. I have admitted to my mistakes in Kitex and DHFL. I will continue to do this without mucking around. I am not open, however, to accepting ideas just because they are widely practiced. I would need solid reason and convincing to do so. I cannot agree to an idea without having a constructive dialogue first. Unfortunately, the dialogue stops at my end of explanation and I come across as âclosed to new ideasâ. So, I understand what you are trying to say.
Roughly 25-30% of my overall investments in equities is in such funds. I suppose it will continue this way in the coming years too.
Why does every investment need to generate âmassive wealthâ? I personally go into an investment hoping I could earn 18-19% over the long term if right or at least 15% if not entirely right (But as mentioned, I will not hesitate to sell in between if overvaluation occurs). When I invest, I never think I am investing in the next Eicher or Symphony.
Regarding Cupidâs business model, there are two things. The market itself is niche and the Condom companies you mentioned arenât interested in that market (Kind of like how Amrutanjan had very little competitors in its space, despite India having a number of pharma companies). Second, it takes 4-5 years of clinical trials, application and approval to get worldwide license to distribute Condoms for government usage (Including FCs). That is why, even after all these years, only 4-5 notable players exist. Cupid is one of them, and likely the second most prominent (Lagging behind FC2). They have currently started doing wholesale distribution in the India market (Retail market) with the help of a 10-15 marketing agencies.
You can basically ask this about ANY contract based business model. Notwithstanding this, Cupid has also entered Brazil (Cupid Angel line of Condoms) and USA very recently (Just got license). They are also exploring a JV with an African firm to permanently cement their relationship with Africa, but it is unsure if they will go ahead with this settlement. Ultimately, there is always some stickiness with these type of businesses. Buyers do not want to stick to a single seller and risk giving them complete authority over the supply situation. Thatâs why they go for multiple tenders and will continue to do this for the foreseeable future.
True. Mr. Garg said he wanted to sell the stake to buy Real Estate in the US (Or something along this line). He is very open about these things. Cupid con-calls are very shareholder friendly.
Yes. This is indeed one of my key concern areas in Cupid. But again, this is also always updated in the concalls. Mr. Garg wants a Sales/Marketing focused Retail guy to take over the post of CEO. So far, he is not able to find one.
I see same story from last two years but numbers arenât speaking in same language. If it takes lower single digit allocation of your portfolio, in worst cases you wonât lose much else it sounds like a speculation.
These type of businesses based on news may give quick returns but one or two bad quarters trigger 50 to 60 % market cap erosion. If one averages while stock price is raising, margin of safety narrows.
I prefer promoter holding 75% for micro cap companies as one of the parameter, that means promoterâs confidence. 44% of 160 Cr promoter holding doesnt give me confidence.
Cupidâs business model changed only 2-3 years back. They entered new segments in Brazil, USA and India only about a year or so back. I am not sure I understand what you mean by âI see same story from last two yearsâ.
Isnât every stock investment a speculation? Of course, if you mean that Cupid is a riskier business, then I agree. I wouldnât buy Cupid at higher levels for sure. But I think the current levels offer enough MoS. Unless I see new developments going against the company, I do not think there is any serious threat to their business model (Except for the concern about the new CEO).
Once again, can you please explain this? If you like a stock at Rs. 100, you should like it more at Rs. 90, rather than Rs. 110. If there are new developments in the business, then yes, it changes things. But during a normal period, I fail to understand how Margin of Safety increases as a stockâs price increases too. If you are coming from a Technical point of view, I can tell you that I am a dud as far as Technical Analysis is concerned (Apart from the basic resistance/support analysis).
Thatâs a good checklist item to have. All the best.
Just finished watching this video and I have to agree completely.
Investing is definitely a game of probabilities. Iâm sure I have used a similar phrase several times in this very thread.
I always look at businesses and consequently, their values across a range of probabilities (If you follow my blog, you may know that I do this for almost every company I value). Buying a company at a more commensurate probability of undervaluation gives you the edge you need (I personally buy at the 90-95% level), but it does not prevent you from being wrong. I think I posted this video somewhere else in VP, but take a look at this:
I have also read Prof. Bakshiâs article. First off, I think everyone should read the book âA Field Guide to Lies and Statisticsâ. Prof. Bakshi also suggests we read âThe Signal and the Noiseâ, which I am yet to read. I am sure it is good too. Statistics is something everyone should know, especially an investor.
But my key takeway from the Profâs article was that new evidence impacts probabilities more than weâd like to admit. âBuy and holdâ just for the heck of it is a bad idea. You should continuously (Although not obsessively) seek new information to ensure that your ideas and assumptions are well founded. If they are not, you should either reduce your holdings or sell out completely, regardless of when they happen (After a long time period of holding or short).
The Pari-Mutuel example cited by him from Munger is also an excellent mental model to have. If I had to summarize it, it would go like this:
1. The best horse in the race has the highest probability of winning.
2. You get the most gains when you bet against the consensus.
3. So, the sweet spot is not in betting with the best horse, nor in the bet where the most players are against you, it is in the bet where the probability of winning-per-players-against-you is maximum.
In the investing world then, this would translate to:
1. The best business model has the highest probability of creating the largest wealth.
2. You get the most gains when you buy stocks cheap.
3. So, the sweet spot is not in investing with the best business model, nor in the cheapest stocks, it is in the investment where the business-quality-per-value is the maximum.
I hope I summarized it well. This article offers a better explanation. Prof. Bakshiâs articles are often enlightening and he mostly quotes WB and CM. All of us should learn to think in mental models of this sort.
It is a good analogy, but unlike horse race betting where you know the payout on winning, in investing the payout is directly proportional to wealth created and is not known accurately. The best business models are best not just because they create the greatest wealth, but also because the wealth created by them can be predicted more reliably. This reliability reduces the risk of loss when things donât go as expected.
True, the exact payout is not known. But the market functions exactly like a Parimutuel system. FMCG companies have among the longest visible revenue lines, but they are also among the most richly valued industries. Real Estate, for instance, isnât known for visibility of revenues, but they are usually valued on the lower side compared to FMCG companies.
However, itâs not as easy as picking up the largest FMCG firm or the cheapest Real Estate firm. Itâs about finding the balance between revenue visibility (Risk) and Valuation. Thatâs how a Parimutuel system works, doesnât it?
Yes, we should try to find the right balance between revenue visibility (Risk) and valuation, but because we do not have means to quantify this risk, investing becomes more of an art than science. Now coming to your methods, wonât they work better if the visibility and reliability of assumptions is high, as opposed to cases like DHFL where all assumptions become drastically wrong overnight with change in market perceptions?
Yes, nobody could have predicted that DHFL will go down like it did, but with a little thought anybody can see that more things can go wrong (drastically wrong) with DHFL than with say, Dmart. Ofcourse how much you should overpay for this absence of risk, or how high a PE is justified because it will always remain a low risk investment, is a question for which I donât have an answer (again because I cannot quantify this risk to develop a model) For now, letâs just say I prefer to err with Dmart than DHFL, mainly because I can average down Dmart if the fundamentals remain intact (and they are more likely to remain intact). I cannot do the same with DHFL with serious questions on itâs survival.
This is true about any highly leveraged company aka Banking and NBFC firms. God knows how many banks and NBFCs succumbed to leverage. Even a large player like ICICI Bank was almost wiped out during their Bank Run (Again, a perception issue).
I certainly did not expect that the second largest HFC in the country would succumb to perceptions too this way. DHFL is the exception, not the rule. So clearly, I had found the wrong balance. I paid little by way of valuations, but with spiking yields in the secondary market for their bonds, the Risk kept on increasing and I tapped out at some point.
The same applies to my investment in Mirza too. I did not expect the management to risk so much for the price I paid. I posted this just days before unwinding my entire position in Mirza:
Of course, your idea of Risk may be very different from mine. If you are only comfortable with extremely stable revenues, well-proven business models and a well-known promoter, then you wouldnât find Value in 99% of the listed universe. This is completely fine. We should maximize our returns for the Risk we plan to take. Thatâs about it.
This goes beyond Equity investing. Several of my relatives arenât interested in equities altogether. To them, it is as good as gambling. So in their eyes, Equities are extremely Risky. They invest largely in Land and Gold. They should maximize their returns in those parcels, although in your eyes it may seem like they are missing out on good returns in Equities. Risk is very personal and we havenât really scratched the surface of understanding it. âAnomalies: Risk Aversionâ by Matthew Rabin and Richard Thaler is a good place to start though.
Itâs very easy to say/raise doubts for a firm when people have started dumping the shares/bond on lower prices.
Tomorrow if someone start dumping D Mart shares⌠Same people will say it never deserved such high PE, it was highly valued etc etc.
And moreover people invest in equity as they have a risk appetite greater than debt or other safe investments. If in equity we are looking for safe heaven than we are doing no different than Mutual Funds. Their portfolios are out in open and anyone can see and decide their investments considering they are experts.
When Dmart falls 50% or 60%, you would not say this! When a company sells at such high valuation and if growth does not match, it will fall as steep as a dirty company selling at low valuation
Risk has many dimensions, of those Dmart only has valuation risk and not business quality or management integrity risk like DHFL. I am mentally prepared for valuation risk, if Dmart falls by 50% due to high PE, I am prepared to average down. What I am not prepared for is if there are rumors of promoters diverting funds. if that situation arise with Dmart, I will have to take a huge loss, but that is what I believe is more unlikely for Dmart than DHFL.
I do not have a document for this or a very structured method but to me there are five risks which I know of and one risk of the unknown.
The topmost risk to be managed is - Management Integrity Risk. This to me is the most important. While I do not consider any management to be fully ethical (Infosys comes very close), I want to invest my money with managements which will not skim me from time to time. I do not like managements which have a lot of subsidiaries owned by related parties. I do not like managements which carry lot of cash on books unless it is Infosys or TCS. Whatever may be the valuation comfort, the cash on books and sectoral tailwinds, investing in that stock is a NO-NO if the management does not want to share their money with the minority investors. LEEL is an example. What happened to the 1000+ crores? Dividend distribution is a good indicator.
The second important risk is - Management Competency Risk. While managements might be very honest, are they need to be competent. This is very difficult to measure except by judging from a long history of decisions which pay off. All managements will make mistakes. But over a long period of time we want them to take more right decisions than wrong ones. Many times we can go wrong here. For example when Infosys lost their way during Shibulalâs tenure. He was I think not upto the job. But if the company has a reputation for integrity they will bounce back. But also note Shibulal got replaced by someone who brought the first risk into the picture.
The third is Business/Sectoral Risks - Does the sector/business face any immediate headwinds? Is the business viable in the long run? Is the business profitable? Does it have some runway for growth? The free cashflows, dividend distribution etc comes into play. This is where I will not touch Future Retail. They are simply not there yet.
Valuation Risk - Unfortunately in the Indian context valuation does not seem to be anything. Companies going at 100+. Behemoths like HUL at 60+. Though I do not want to invest in FMCGs at more than 30PE, it looks like 30 PE is given for the lowest quality FMCGs. I would never have bought any stock at 50PE leave alone 100 PE for DMart. But I am holding it. This is where Indian equities as a whole is so expensive. I still am not able to decide on this. One way of playing this risk temporarily is by writing call options. But not very efficient for long periods of time.
Macro/Global headwind Risks - None of us can determine this with certainty. But the good thing is we can from time to time use the available hedging instruments. For example I hedged the BREXIT vote scenario by buying PUT options. If things had gone really bad I would have made enough money to do SIP for 1 year. Otherwise I do not have any way to really preempt global risks. If any of you have any methods to understand and mitigate this please share.
So in summary. i want to be in control of 1, 2 and 3. Not 100% but to a large extend. I want to understand 4 but within context. I do not want to assign a valuation number and then be rigid about it. Since most of the highly valued companies are exceptionally well managed we do get time to limit our losses or so I think. As for 5 I donât have any objective method to understand and take decisions.
Macro risks are too difficult to tame. I have tested various technical indicators for the same, but no simple strategy gives an edge in present day markets, so I have given up this quest for now and decided to bear it.
Now if a company has no management integrity or competence risks, and the business has sustainable competitive advantage with long growth runway, and if in addition it is available at reasonable valuations, it will be a perfect investment opportunity. It is my belief that unless it is a repeat of 2008, market will not give such an obvious opportunity, and we will have to compromise on atleast one parameters. Of those, I will choose valuation risk, because valuation risk reduces when the price falls, making averaging down a sound proposition. The same cannot be said of other kind of risks, infact they seem to gain more credibility as price falls, making it difficult to average. The best we can hope for is to reduce the valuation risk as much as possible, without adding any other kind of risk.
Hi Dinesh,
I donât have anything to say about your stock picking process as you seem to be a person who thoroughly believes in your process even though there are strong and very valid points about itâŚ
I am more interested in your mental model to see how flexible you are and how much you are willing to defer from you are investing philosophy(for e.g. Overpaying for quality above your calculated intrinsic value)when market doesnât reward your businesses in the long runâŚ
