@shreys I have also listened to this podcast of Mr. Divyesh Shah. The Rags to Riches story. His story kind of reminds me of the life of Mr.Kedia.
Dear all, I’m not familiar with people who’ve chosen equity investing as their vocation. When I came across a person, at a social gathering, involved in investing full time I couldn’t be happier. The person is a childhood friend of a very close relative of mine. To simplify the narrative let’s address him as Mr. A.
I requested my relative to facilitate an interaction with him. Mr. A was kind enough to grant an amateur like me a hearing.
I was accompanied by my relative who was the intermediary.
We spoke at length. He was generous enough to share his experience in various fields of life. There were aspects in our conversation that, in my humble opinion, are relevant to investing.
I’ve tried my best to distill the discussion.
If I err my apologies.
About Mr. A-
Mr. A is a person in his early 50s. He, since childhood had been a decent performer at academics. He excelled in his matriculation exams. As a result of that, he was granted admission at a decent engineering college.
Thanks to his impressive graduation scores he was offered a job at a leading electronics technology company. He was 22 then - 30 years ago.
He began saving from the word go. He would invest a major portion of his income in stocks. As time passed, he matured, developed an interest in investing. He had the willingness to learn more on investing. He commenced his equity related knowledge acquisition pursuit. The pursuit began when he was 23 years of age. It’s still on. In the meanwhile he got married. While he was still learning he had been investing small amounts in the well known multinationals of those days.
He worked at the firm for 26 long years. He did well for himself- Earned well, reached a senior managerial position. All in all, he had a cushy job and a desirous life. Everything was great.
Until, one day, he realised that he was nothing but a cog in the massive corporation. He felt that his life lacked meaning. There was a lack of satisfaction, happiness. He thought that investing could provide meaning to his life.
Did it? He answered it in the later portion of our interaction.
I had always thought that materials would bring happiness. But, this conversation changed my thoughts. It changed, to a certain extent, my perspective of life.
Finally, 3 years ago, after consulting with his immediate family members he decided to tender his resignation. Initially, there was resistance from his relatives. But, he assuaged their concerns and took the plunge. Also, it’s pertinent to note, that by the time of his resignation his children were about to complete their education and become independent.
THE INITIAL PHASE OF FULL TIME INVESTING :
He began by saying that it was tough. There was too much time and too little work.
He would read annual reports, books on investing, reports from financial services companies. He read everything that he possibly could. He spent almost the entire day restricting his activity to his study. And, then made some more investments. Investments in addition to his previous investments. For the first 90-100 days his schedule was exhausting.
But, as usually happens, when you start with too much energy, eventually you experience burnout.
After 5 gruelling months he experienced the same problem- Lack of meaning, lack of happiness. He was confused. He was doing what he enjoyed- Full time investing. Yet, he was unhappy. Financially, he was stable. But, plagued by aimlessness.
THE 3 MONTH TRIAL
Now, what could he have done?
He thought of giving this process 3 more months. If he didn’t feel better he would resume his job.
He tweaked his schedule a bit. Now, instead of reading books by himself, he collaborated with people who had already retired. They would meet, discuss stocks and everything under the sun that impacted stocks. The people involved were veterans in the field.
After interaction with experienced investors he would interact with those who were beginners. He would guide them, teach them.
Also, he began practicing Yoga.
He would think for hours together. Just think.
He also expanded his reading to topics as diverse as archaeology and travelling. He began reading everything. He has a tremendous collection of books.
He introduced drastic changes in his lifestyle. Cut down on all unnecessary expenses. Tried to live a frugal life. Initially, it was tough since he was used to conveniences. But, he had resolved to shed his dependence on these objects.
In brief, he began to live a minimalistic life. His expenses went down significantly.
At the conclusion of this 3 month trial period, was he happy? He asked me to hazard a guess. I responded that he must’ve been unhappy and craving the luxurious life he lived some time ago.
He told me that I was wrong. He had never been happier. He experienced true joy. Bliss that his fat paychecks could never give him.
By helping others he found meaning. By practising Yoga he found peace. By becoming a minimalist he found freedom.
The words he shared now had a lasting impression on me -
We believe we are constantly in the pursuit of money. But, we don’t want money per se. We want the power to acquire materials. When you minimise the need for materials you simplify life.
Often, luxury becomes a necessity. Once that happens, we become subservient to the job.
The more we get the more we want.
He explicitly mentions that a lifestyle devoid of materials is tough- It isn’t for all.
He tried it and he embraced it.
It’s been 4 years since he left the job. He hasn’t been happier. His investments have done reasonable well. But, it’s not of much use to him now. His needs are few. He has become benevolent. Finally, he has a reason to wake up in the morning with a smile. He ends the day with a smile. His life is simple but there’s satisfaction.
He explicitly mentioned that had he asked a financial planner before leaving his job he would’ve been discouraged to do so. But, it worked out well for him.
He concluded by saying - It’s not always about the money. Ensure that you have enough for your needs. For your luxuries you will never have enough.
He had finally found meaning and satisfaction- Though not in investing.
A truly remarkable personality. He isn’t a celebrated investor. He’s a common man with an incredibly journey of discovery.
Some gyan to get started -
The academic institution I study at conducts a symposium, every year in May, as the academic year approaches conclusion. It’s a time of teary farewells and extending warm welcomes to new students. The symposium features an interaction with an alumnus/alumna who has made remarkable achievements. Basically, it’s an exercise to boost the morale of students,inspire them. My college isn’t a name brand one. It’s a very small regional college. But, there are some students who’ve defied odds and reached the summit. One such alumnus shared an account of his rise. He faced a lot of obstacles. But, overcame them and held his head high. It’s a narrative that’s worthy of dissemination. If it helps even one person feel better the purpose is served. Since, it’d be inappropriate for me to divulge details about the person I’ll use pronouns to address the alumnus.
He( the alumnus) joined the academic institution as an 18 year old . Confused, aimless, driven by the herd. The objective was to attain a bachelor’s degree and then pursue a course in finance. He couldn’t care less about the course being taught. But, there was something he cared about immensely - Playing poker and stock trading. He possessed immense knowledge about exotic financial instruments at the tender age of 19. To his immense pleasure he came across some other students who shared his interests of poker and trading. To his myopic eye, life seemed to be getting better. He would skip classes and ended up spending a substantial portion of the day indulging himself- Playing poker and discussing trading strategies.
The disregard, contempt for academics reflected in his scores. He had failed in his second year of graduation. Astonishingly, he was delighted. He had more time at his disposal to improve his performance in poker and trading. At his parents’ behest he studied and became eligible for the 3rd year of graduation. Yet again, he failed. But this time, it was different. Once, a confident young man, he was now melancholic. He had given up on life. Or maybe, life had given up on him. He couldn’t switch to other graduation courses since he had spent a lot of time and money. It was either abandonment of the course or completion of the course. He tried looking for jobs. But, in vain. He then began contemplating suicide. Life had become devoid of colours. There was just darkness.
He could neither laugh nor cry. He was enveloped by sadness. He was at a stage where he couldn’t experience the spectrum of emotions. Nothing cheered him up. To survive, he resorted to the activities that aroused enthusiasm in him formerly- Trading and poker.
After tremendous encouragement by his parents he graduated at 24 years of age with ordinary scores. It seemed to him that he’d never emerge from this vicious cycle.
Post graduation, he resolved to pursue his dream of studying finance at a premier management college. He appeared for various preliminary examinations. He performed well. But, his dreams were shattered. He wasn’t granted admission thanks to his mediocre graduation performance. Fortunately, he had been granted admission for a finance course at another institution. Not the best but just alright. He studied well from the very beginning of the course. Graduated close to the top of his class.
From a student who failed in graduation to one who excelled in post graduation, it was a transformation that was awe inspiring. But, was it the end of his troubles?
Thanks to a sluggish recruiting season the jobs offered weren’t encouraging. But, he had no alternative. He worked hard, was a top performer and after a couple of years he was able to secure a position at the proprietary trading division of a leading foreign company. It paid him reasonably well. He worked at the firm for 5 years.
THE LEAP OF FAITH
In the 7-8 years of service he saved diligently. Finally, he succumbed to his calling- Trading.
He quit his job. To supplement his income from trading he provides consultancy services from home. He is very comfortably placed.
From contemplating suicide at a point of life to achieving financial freedom, the journey is motivating.
I do realise that this thread is for full time investing and the account is of a full time trader. But, there are some lessons like persistence, resilience, dedication that can be learned from his life. Turbulent times threaten to destroy us. But, it’s the narratives of such heroes that help us survive.
He concluded by saying, " Breathe, Just Breathe. Each one of us is stronger than we imagine."
He doesn’t ask us to be sanguine. He asks us to just pass through the tumult. Eventually, it’ll probably get better.
Withdrawn due to requirement.
Sir, I’d like to begin by expressing my heartfelt gratitude to you for sharing your thoughts.
If I may be so bold as to say that I have my doubts on the validity of the 10000 hour rule.
My humble submission- In investing and in several other disciplines, to excel, a person just needs to be better than most others. Then the question arises- How long will it take to be better than most other traders/investors? I don’t know.
The next question that arises- What’s the contribution of luck in a person’s investing performance?
Sometimes, the lack of skill, knowledge is compensated by favourable chance events.
Then, the question that came to my mind-
Does increased information, data, knowledge necessarily translate into higher returns?
Please excuse me if I’m wrong- But, I feel that quality of spending is very subjective in nature.
At the end of the day, I think that most people are in the pursuit of happiness. For some, small pleasures like books can make a person happy. While for some, even massive achievements won’t be enough to make them happy. It’s a person’s disposition that’ll probably play a crucial role in the spending habits. And, I may be totally wrong, but I feel that disposition is as heritable as any other trait.
Money, is without a doubt crucial for survival. But, the importance of money in a person’s life is again subjective. For a cynic it may mean nothing but for a hedonist it may mean everything.
Attainment of money does lead to the experience of happiness. But, is the happiness experienced an outcome of the achievement of money per se or accomplishment of the task that led to inflow of money? Yet again, I don’t know.
In my limited understanding, to develop a nuanced understanding of such complex topics will take me years. That’s precisely why I share my thoughts on this wonderful forum since collaboration will likely expedite my journey towards clarity.
@The_Confused_Consult Sir, My genuine thanks to you. My apologies if I’ve erred.
Sir, this has been a truly enlightening exchange for me. It’s humbling to know how much I don’t know. It’s only when ignorance is acknowledged that the journey towards enlightenment commences.
There are some points on which I humbly disagree. But, that’s the essence of every healthy discussion.
Yet again, many thanks.
Per your guidance, I will have to reconsider the beliefs dear to me. Anything I cannot substantiate with reason deserves deliberation and if need be, abandonment. After all, each one of us is responsible for the beliefs we hold. We propagate our beliefs through our words and actions. Your thoughts have left me an emotionally richer person.
An on that note, I’ll conclude my message. As always, many thanks.
Today, I’d like to share the summary of an interview conducted 2 years ago. It was conducted by Mr. Puneet Khurana.
The interviewee is the fund manager of a top class mutual fund. The organisation is known for running a single mutual fund. The interviewee is Mr. Thakkar.
I’ve tried my best to be succinct. The following content is an extract, a summary. If I’ve missed some points worthy of mention my apologies.
The interview commences with a brief introduction of the interviewee. Mr. Thakkar shares his education background. He was born and brought up in Mumbai. He was exposed to capital markets literature since he was 7 years old. His father was a long term investor. He didn’t employ sophisticated investment strategies that are prevalent today. But, placed faith in a company’s potential to grow its business. Mr. Thakkar was lured by the markets. His family encouraged him to pursue his studies. On conclusion, he was free to choose his vocation.
He graduated in 1992. He then joined Prime Securities as a trainee. From 1994 to 1999, he worked in the merchant banking and corporate banking division. From 1999 to 2001, Mr. T worked in the fixed income division at another broking house.
In 2001, Mr. Thakkar associated with a legendary investor.
Finally, Mr. Thakkar shifted to the equity asset class.
Journey as a fund manager
As I previously mentioned, the organisation Mr. Thakkar currently works at runs just 1 mutual fund. The interviewer sought a response as to why more schemes weren’t launched and why the company doesn’t offer portfolio management services.
His response was straightforward.
Years ago, it was a hassle to launch a portfolio management services. Client on boarding was an inconvenient task. It was a prolonged process. Mutual funds, on the other hand, we’re scalable.
And, he remarked that companies launch multiple mutual fund schemes to capitalise on the booming sector and increase their assets under management.
Example- In 1999-2000, technology focused schemes were launched.
In 2005-2008, infrastructure, real estate schemes were launched.
He believes that opportunities in the market can be taken benefit of with just 1 scheme without resorting to unethical means.
Often, financial services companies launch too many schemes to take benefit of the law of averages. When too many funds are managed by a company, some are bound to outperform the index. The company will then wax eloquent about the outperformer and bury the underperformers.
believes in ethical wealth generation.
He is happy to be under scrutiny. He, along with his team is invested in the fund. His interest is aligned with the interest of his investors.
He doesn’t desire to be in the top 5 or top 10 mutual funds. He invests for the joy of investing.
He encourages investors to invest with a time horizon of at least 5 years. To prevent short term thinking, there’s an exit load of a couple percentage points, which flows into the corpus and rewards long term holders.
He is a proponent of diversifying into foreign markets,especially the USA. Almost 25% of the AUM is invested in USA. They don’t invest in niche US business. But, business that are mainstream, well discovered. Hedging is done by investing in exchange traded future contracts. It provides almost 90% protection from currency fluctuations.
STYLE OF INVESTING
Mr. Thakkar responded in an epigrammatic fashion.
He likes to invest in quality businesses at reasonable prices. He refrains from cigar butt investing. Reason being the failure of activist investing in India. Minority shareholders aren’t able to influence decisions of management in India. Whereas, in the US, investors like Carl Icahn exercise their rights as shareholders and ensure management acts in the interest of minority shareholders.
What prevents activist investing in India?
A simple answer- High promoter shareholding.
When the promoter holds 60% of the outstanding shares, it’s difficult for other shareholders to collaborate and object. But, changes are being made. The right steps are being taken.
Value unlocking takes place when the promoter desires
**Stock Selection **
There are multiple strategies Mr. Thakkar adopts for stock selection.
- Run stock screeners
- Track activities of investors he admires
- Read voraciously
PARAMETERS FOR STOCK SELECTION
a) Promoter quality
b) Treatment of minority shareholders
c) Past actions of top leadership
a) Return on Capital
b) Low debt
c) Decent sales growth
Along with various other parameters in public domain
But, he mentioned that companies with aforementioned characteristics are often expensive. Hence, the right time to buy such quality businesses is during corrections. Or when the market ignores the sector.
Mr. Thakkar, in an unequivocal manner explains that it’s imprudent to buy companies at ridiculous valuations citing quality. Quality has a price but don’t overpay.
Mr. Thakkar believes that the decision to sell is tougher and more important than the decision to buy.
Sell, when the price incorporates even the most optimistic scenario.
Sell, when the thesis to buy isn’t valid anymore.
He guides that if a mistake in buying was made, exit. Even if it means booking a loss.
There’s no right or wrong approach here. To each his own.
a) GOVERNMENT INTERFERENCE
Mr. Thakkar believes that it’d be a mistake to invest in sectors with heavy government interference. He says this from the bitter lesson he learned form his investment in oil marketing PSUs.
Also, government interference destroyed his investment thesis in Noida Toll Bridge.
Mr. Thakkar regretted his investment in a cyclical investment management company. He invested at the peak. Despite 10 years having elapsed, the price hasn’t surpassed it’s previous high.
Cyclicality, if made use of correctly, can be a massive wealth creator.
Mr. Thakkar shared some hilarious quotes which deserve to be known by a wider audience.
DCF is like the Hubble telescope. Move it 1 inch and you’re in a different galaxy
The best software for fiction is an Excel spreadsheet and not Microsoft Word.
He believes that the intrinsic value of a company isn’t a precise number. It’s a spectrum and the value could lie anywhere in between.
Trying to project intrinsic value to the decimal is a futile task.
We often tend to be delusional while projecting earnings years down the line.
Mr. Thakkar believes in the following equation:
Current price = True fundamental value + Speculative value.
True fundamental value incorporates what’s on the books of the company. Also, cash flows expected over the next few years.
The art is in evaluating the speculative value.
He advises us to be conservative in our projections. It’s unwise to pay top dollar for hypothesis.
He adopts a stock specific approach. He doesn’t pay too much attention to index levels.
If opportunities are available deploy cash, else stay in cash.
He generously shares his wisdom in this interaction.
And, encourages us to be in the pursuit of knowledge. He himself is a regular reader.
If I’ve erred please excuse me.
In my initial draft, I had utilised a pseudonym. But, I’ve edited the content and mentioned the name of the veteran investor. Also, I’ve put up a disclosure mentioning the possibility of misinterpretation by me.
I’ve tried to the best of my ability to ensure that my interpretation of Mr. Thakkar’s comments is appropriate. If I’ve flawed, my apologies.
If there is any factual error by me, it’s unintentional. Yet again, apologies if I’ve erred.
A couple of months ago Mr. Niraj Shah conducted an interaction one of India’s preeminent full time investors - Mr. Vijay Kedia.
His story is one that’s unlike any other. Truly awe inspiring and motivating.
There were so many nuggets of wisdom in the interaction. I’m fairly certain that it’ll help me mature as an investor. I’ve tried to summarise the session. If the transcript has errors, it’s inadvertent, please excuse me.
The interview begins with a brief introduction by Mr. Shah on Mr. Kedia’s illustrious investing career.
For Mr. Kedia, investing is love, sweat, tears and joy. Many are tremendously passionate about equity investments. But, not many are able to mirror Mr. Kedia’s success.
To this, he humbly responds that he hasn’t achieved anything great. He says that he’s still a work in progress. Per him, failure is a teacher like none other.
Mr. Kedia is a firm believer of this success formula-
Mr. Shah asks if courage is the ability to survive a period of lull in the market?
Mr. Kedia responds with an emphatic yes. In the stock market, money is made in long term investments. He says that he says this from his personal experience.
A major criterion to assess investment worthiness is a clean management.
Mr. Kedia says that as a person managing his own money, he has the liberty to restrict his investments to companies with top quality management. It’s the luxury of being an investor of one’s own money.
A mutual fund manager, on the other hand, is subject to various rules and regulations which often may impede the journey of wealth creation.
For an investor, lack of pressure is a luxury.
Mr. Kedia then talks about his strategy of generating alpha. It’s a simple acronym with potential to generate wealth.
S- Small size
Now, Mr. Kedia clarifies that by small, he doesn’t necessarily mean small capitalisation. By small, he refers to the small size of the overall market share occupied by a company.
For example- A company has 200 crores sales. But, the market size is 5000 crores. This would definitely qualify the filtration process. Since, there’s ample scope for expansion of market share.
A small sized company( per the slice of the total market occupied) graduating to a larger company generates enormous wealth.
Not many large caps can deliver such returns. There definitely are some exceptions. Maruti Suzuki being a glorious example.
Mr. Niraj remarks that for small companies, return ratios won’t be appealing.
Mr. Kedia responds that he doesn’t pay too much heed to return ratios. He states that management quality, fire in the belly and potential for growth are much more important for him.
He then shares an interesting case study featuring Dettol and Savlon. Despite being similar products, Dettol has almost 6 times the market share of Savlon. This could be attributed to the fact that consumers think that Dettol works better because of the stinging sensation on application. We think that it must work better because it hurts.
On similar lines, we often think that, returns must be better when we employ complex strategies to evaluate companies, preparing overwhelming Excel models, etc.
But, Mr. Kedia disagrees.
He states that investing is simple but not easy.
He then shares other portions of the SMILE acronym.
Medium in experience
It may not be wise to invest in companies having promoters with little experience. The reason being lack of exposure to market cycles. Like stock markets, businesses also have cycles. Passing through these cycles helps a business promoter emerge stronger and with a nuanced understanding of the sector. As previously mentioned, failure is a teacher like none other.
It’s the business promoter who needs to possess a desire to grow the business. Complacency should anathema to a business owner.
The next abbreviation is CHNGE.
Ch stands for Chamcha- Sycophants.
When a business promoter is surrounded by sycophants, it often leads to poor decision making and dissipation of ambitions. It leads to saturation with the success achieved.
He stands for Health. Often, promoters may have best intentions for the company. They may possess a tremendous desire to take the enterprise to an elevated position.
In growing the company from small to moderate size, businesspersons may reach the age of 50-60 years of age, when health doesn’t lend as much support. This may prove to be a roadblock to further growth.
NG stands for Next Generation
In case of the key manager growing old, it’s important for family managed businesses to plan succession. More often than not, it so happens that the next generation has no desire whatsoever to run the business. They may not be motivated enough to manage a blooming corporate. In such cases, growth may plateau.
Estands for Ego.
The foe of any sort of growth - Ego
When ego grows, anything else ceases to grow.
He politely states that it was a favourable time that gave him the opportunity to invest. He also appreciates the contribution of luck to his success.
He then observes that there are hardly any hidden gems left. Most stocks are discovered in this age of abundant information.
Mr. Shah then asks him the recipe for generating alpha.
Mr. Kedia gives a one word answer- PATIENCE
Believe in the story. Stick to the story. And, sail through.
He then, without any hesitation, acknowledges that he hasn’t been an entrepreneur as successful as he is an investor.
As an investor, not a lot of emphasis should be placed on price targets and price targets.
A jovial disposition, humility and willingness to share his vast treasure knowledge differentiate him from others.
I reiterate, I’ve tried my best to curb errors in interpretation. If any, please excuse me.
Market titan Mohnish Pabrai, in a dialogue, held not too long ago, generously disseminated his extensive knowledge on investing. His words are profound and possess the ability to improve the investing process of an investor.
I do realise that these summaries may not be directly relevant to this thread. But, I feel, that inculcating some suggestions offered by these veteran investors can definitely enhance returns. If there’s a thread where the summaries would be better suited please guide me.
Mr. Pabrai begins by remarking that buying stocks is far more complicated than most people might think.
He makes an observation that a lot of investors invest in stocks without knowing even the market capitalisation of the company. He states that it truly amazes him.
He then says that the concept of Circle of Competence precedes even something as important as stock price.
Even a market veteran like Warren Buffet considers 95% stocks beyond his circle of competence. 97-98% of the proposals on Mr. Buffett’s desk end up in the 'too hard pile.
For rest of the investors, 99% of the stocks are beyond the circle of competence, observes Mr. Pabrai.
For most investors, indexing is worth considering.
Buying stocks should be an exception, not the norm.
Auction driven markets, more often than not, undershoot and overshoot. It’s this inefficiency that creates pockets of opportunity.
Mr. Pabrai shares that for a long term investor stop losses may not be such a good idea.
Recipe for investing success
a) Stock in circle of competence
b) It should be worth a lot more than what it’s currently valued at.
If the aforementioned 2 ingredients are present, a stop loss is unnecessary.
For Mr. Pabrai, a stock has to scream undervaluation. It has to be a screaming buy.
If for valuing a company Excel models have to be accessed it’s a rejection.
If the business can’t be explained easily to a child it’s a rejection.
He emphatically states that buying a growing company is way better than buying a cheap low growth company.
It definitely is a good strategy to invest in sectors with long term tailwinds.
When to sell compounders?
We think buying is complicated. Selling is way more complicated.
If it’s a great company, great price, great management allow the company some leeway.
Golden advice on selling compounder stocks:
Don’t sell when the compounder is fully priced, don’t sell when the stock is overpriced but sell when the stock is obscenely overpriced.
Now, the adjectives are subject to each person’s interpretation. To each his own.
He then, without reluctance, confesses that he’s often sells too early.
An investor may perform detailed analyses on a company before investment. But, real and nuanced understanding of the business develops post buying.
Equity markets often do nothing for prolonged durations and then indulge in frenetic activity in a relatively short period. Patience is key to success
In all aspects of life, it’s trust that’s crucial.
He describes himself as a ’ Gentleman of Leisure.
Absorbs data, continues to learn and in the process if he finds an anomaly in pricing the business, invests.
As always, I may have erred in interpreting Mr. Pabrai’s remarks. Please excuse me for erroneous information and interpretation.
Sumeet Nagar, the managing director of Malabar Investments is an investor par excellence. He is known for his incredible understanding of the small and mid cap space. Like in all spheres of life, there’s always something to learn from others. Learning, without an iota of doubt, enables growth. I’d like to share some pointers kindly shared by Mr. Nagar which, I’m inclined to believe can help refine our investing strategies.
After the financial crisis, almost a decade ago, unprecedented liquidity boosted the economy.
It’s likely that quantitative easing could be concluding.
There’s a healthy chance that 2018 will see reduced liquidity.
There’s a straightforward relationship between liquidity and asset prices.
Increased liquidity leads to more money chasing assets. Demand goes up and hence prices appreciate.
By inversion, its obvious that a liquidity crunch leads to lower demand and hence lower prices.
However, rising earnings could cushion the fall.
Prices are a function of demand and supply.
Investing in general and investing in small and mid caps in particular should be for the long term. But, we should definitely keep an eye on short term risks.
Over 5-10 year periods, small companies typically outperform larger companies. The straightforward reason being their ability to grow faster.
During times of irrational exuberance, it may be a good strategy to reduce exposure.
During periods of immense pessimism, increase exposure.
Easier said than done.
A good, investible business is one which has the ability to compound sales over the long term. But, without needing to raise much outside capital. Growth, ideally, should be fuelled by internal accruals.
Why would competitors let the company grow sales? Wouldn’t they try their best to snatch market share
Here comes in to consideration the most around a business. There are varieties of moats. Even the ability to be the lowest cost producer is a moat. It varies from company to company.
The company should be a cash generator. And, generated cash should be utilised for growing. Its a virtuous cycle.
Also, there should be a runway for growth.
As most veteran investors would say- For any investment thesis to fructify, of supreme importance is management quality.
a) Strong Operational Capability
Management should know the business inside out. There should be a drive for expanding the enterprise.
b) Capital Allocation Skill
d) Quality Lower Level Management
Industry provides a tailwind to the business. But, it’s a good management that is able to harness it.
If sectoral tailwinds and good management are complimented by moat and hunger for growth, it could be the recipe for a blockbuster stock pick.
As always, if I’ve erred in my interpretation, it’s unintentional. My apologies if there are errors.
I have been regularly reading this thread in valuepickr -excellent contributions by all -I have recently quit my job and now full time into investing ,thanks to all members in this group for all the quantitative and qualitative insights …today i just came across a brilliant article ,please go thru if you haven’t yet -while all are covered earlier here but nice to refresh at one place
Today, I present the summary of a dialogue conducted by Mr. Khurana with a full time value investor. I’m not certain if it’s acceptable to disclose the investor’s details. Hence, I’ll address him as Mr. A.
Mr. A now manages money for himself and his clients. He has established himself as the source of coherent opinions on investing. His guidance is pure and does possess the potential to dramatically improve our process of investing.
The beginning of his investment journey is nothing but fascinating.
In his childhood, he witnessed his parent investing in companies, applying for stocks in initial public offerings. The process sure piqued his curiosity.
A monumental moment in his journey was the launch of a mutual fund by a major American company in 1994 . He witnessed delirium among applicants.
His desire to participate in capital markets continued to develop over the years.
Finally, in the years 1997-98, as a student of textile engineering, he made a foray in the bizarre yet enchanting world of capital markets.
He commenced with a capital of Rs. 10000.
Being a student of textile engineering, he had a reasonable understanding of the company Bombay Dyeing. It was in his circle of competence. This investment appreciated his corpus by 30%. Mr. A was delighted, exuberant.
In the meanwhile, he had established a habit of reading newspapers, magazines concerning the world of finance. However, he admits candidly, that he couldn’t comprehend a major portion of the content in these sources of information.
But, its precisely this inability to understand that stimulated him to persist. Also, on a lighter note, he shares that having reading as a hobby could prove to be entrancing to recruiters.
He graduated in the year 2000. Prior to graduation, in the run up to the IT boom, unprecedented recruiting activities were initiated by IT firms. As a result of that, he was offered a job by one of India’s leading information technology firms. But, in those days, he wasn’t very comfortable with technology.
Mr. A was pleased to get a job. But, there was a tinge of unhappiness since it wasn’t his calling. However, not to his displeasure, the IT bubble burst and the job offer was rescinded.
Post graduation, he was granted admission to a leading management institute in 2002. Mr. A was simultaneously investing in shares. He then went on to work with a leading professor as well as investor.
In the initial days, scanning BSE announcements, was a major source of investment ideas. He practised various investing styles and strategies- Deep value investing, cyclical investing, debt restructuring investing, etc.
Just 10 years ago, his portfolio comprised of 40-50 companies. Over the years, amends have been made and now, Mr. A’s portfolio now comprises 7-8 companies. A major source of investment ideas is screens, interactions with fellow investors, literature.
His recipe for investing success is good business, good management and a realistic expectation from investments
Mr. A desires a 17% IRR.
Mr. A lightens his holdings when market prices overshoot the intrinsic value. Booking profits is contingent on company quality and alternate opportunities. His selling decision isn’t dependent at all on the index levels. He takes a company specific view.
Determination of intrinsic value
He employs a discounted cash flow model after introducing very conservative numbers to estimate the fair value range. For further safety he takes a 25% margin of safety. He assumes a 10% discount rate.
Mr. A places great importance in the moat possessed by a business.
He considers selling when market price is 1.75-2 times the calculated intrinsic value
He initiates a fresh assessment, evaluation of the company once valuations exceed intrinsic value and become lofty. But, if investment thesis is wrong, have no hesitation in booking losses.
But, for Mr. A, it must be mentioned that valuation is just 20% of the investing process. 80% is contingent on business quality and management.
Business thesis is important but valuation is more important
How long to hold stocks?
Mr. A believes in having no timelines. He allows the market to take its own time to discover the
stock and accord fair valuations.
More often than not, if evaluation is correctly performed, returns will be delivered. Market may delay reward but not deny it.
Spend a lot of time before investing. But, once invested, be patient
Risk management strategies
Risk is the loss of capital and/or purchasing power.
Mr. A believes in developing a tremendous grasp of the business before investing. Also, diversification is crucial for him. He doesn’t invest more than 20% of portfolio in any stock at cost.
In depth understanding + Diversification = Risk Management
Are triggers required for stock to appreciate in price?
For investing styles like asset plays, triggers are requisite. But, when an investment is based on the mispricing of a excellent earnings generating company, business performance in itself will trigger price appreciation. But, patience is critical.
No investor is immune to mistakes.
Mr. A succinctly summarises his mistakes-
Investing in ideas with half baked conviction
Resist the Fear of Missing Out.
Calm mind is a prerequisite in investing
Derive nectar out of the investing process
Don’t aim after shooting. Understand and only then act
Is meeting management advisable?
Mr. A believes that management meets are unwarranted. Often, they may prove to be counterproductive. We may be entranced by the top manager and investing based on such superficial evaluation is often disastrous.
All the requisite information is available in public domain.
It isn’t value additive to meet top leadership. It often leads to wastage of time.
Try to understand the business, not management
Suggestions for overall development
To be a successful investor, it’s imperative to participate in non investing activities.
Excess of anything is detrimental.
Mr. A is an avid sportsperson. He reads extensively, interacts with friends and also spends time in other leisure activities.
Some leisure is absolutely necessary for high productivity
I’ve tried my best to restrict errors. If any, my apologies.
Very interesting. I have the a lot of the same philosophies this mysterious investor does.
Things I also do:
- Focused portfolio (I am currently invested in just 5 stocks. Out of that, 3 stocks make up 75% of my portfolio).
- I expect only a 15% CAGR throughout my investing career.
- I use a DCF to arrive at intrinsic values for stocks.
- I’m in no hurry to sell. I sell only if the price is at least 1.75x-2x my calculated intrinsic value, my story for arriving at the value changes or I find some better investments (Or in the process of tracking some).
- I rarely track my portfolio on a daily basis. I check in on it maybe once a week. I intend to stay invested in the companies I hold for a long time.
- I hardly give into FOMO. I’m dead calm most of the time.
Things I don’t do:
- I tend to give more weight to Valuation and Financial Analysis. Numbers don’t lie.
- My largest holding is almost 40% of my portfolio. But I agree with the fact that Risk is a protection against the unknown (WB’s “Risk comes from not knowing what you’re doing”). Nobody should invest 40% in something they don’t know.
- I don’t believe participating in non investing activities has anything to do with being successful at it. Or maybe I’m understanding this wrong. I read a lot of books and articles, but I believe that they indirectly contribute to my investing skills.
Pardon me if I sound too appreciative of myself, but this really surprises me. I would love to meet this person. I’ll get him a beer to boot.
Thanks for your views - interesting…Is it okay for you to disclose the holdings?
Would it be OK to add a lump sum amount into selected stocks at this elevated value of Nifty PE or should I be waiting for a lower PE on the Nifty.
Since we have discussed the desire of many to become full time investors, I must add. As a lot of senior and experienced members here have been saying - one should really test their desire to leave alternative careers and join markets only during the bear markets and not during the bull markets. A lot of my friends who were contemplating such a move - as they were all primarily small cap investors who made 3-5x in many stocks in the last 3-5 years - have now decided to continue with their respective careers (and rightly so) given the sharp fall in such stocks - many of them are now staring at losses of over 30-50% in their portfolios of small caps - an exhibit of bad skill during tough times while good luck during good times.
For a full time investor, the prospects of no income and steep fall in net-worth is a big double whammy. Such a whammy can only be taken by a very few whose hearts and minds are made up of a bit different metal. And this is what is proven in each of such bearish markets.
So one of my friends who was planning to become a full time investor has now joined the food industry in a senior position while another has opted for a stable BFSI career. I think both of them have taken the right decisions. They were just lured by the market and now that they have been smacked hard - they have understood that the reality over many years can’t be understood by extrapolating the good times into future.
To many who are still swayed by such lures, they should definitely try to meet up such people who thought about it and still didn’t go ahead with it for all the right reasons.
@8sarveshg Good to know this. I might also fall into one of those who started few years back and was contemplating on equity investing as a full time career after last years run up. But times like this are important as a test of the desire. But while my desire is still strong, I have realised that it is definitely not a one way path ahead. The numbers, fluctuations and underlying business strategies are always exciting to me.
What I would also like to know from you, other fellow members and senior members who have become full time investors is following:
- Initially when you had a separate career and were investing for wealth building or financial freedom and that might be pure investing, but as you turned to equity full time, did you also take up trading or F&O derivatives?
- During testing times like the current ones, where the midcaps, smallcaps and overall the majority of the markets are struggling, will the trading strategies help you maintain the cashflow needed?
Pardon me if my questions are naive.