@gautham1
Re: what will you do when a growth stock becomes highly overvalued
We do a BQ Category slotting and the Stable PE range for every business we invest in. Please see the ART of Valuation thread for more on that.
Let’s say a Category A business (Stable PE 20-25) starts getting overvalued. Let’s say the next 3 years the business growth visibiity is 25% CAGR, but Mr Market starts pricing in 2 years forward. We are okay with that in this phase of a market where demand for sustainable quality growth stocks far exceed supply. But when Mr Market start’s pricing in 3-4 years of forward earnings, then we start booking profits, typically 20% at a go.
In such a scenario, we feel we will surely be able to buy that business within the next 3 years at prices lower than current, as business performance will not be able to keep pace with expectations built in.
For me it was never about Financial Independence.
It was more about the passion - I fell in love with the process of investing - understanding businesses - and why one is superior over another - why ITC was ruling unchallenged - separating the wheat from the chaff was very challenging & inspiring. Despite having a 9-9 tiring job, I was surprised to see every night i was sitting up till 2.30 am trying to make my excels and finding someone to share my excitement with :). Weekends I encouraged family to go out with others, so I could get more solitary, exciting time !
I think the most important factor is to be able to pursue your passion untroubled/unencumbered.
Running the Household should have a separate cash flow source - ideally not come from the investment kitty - I have seen many who do that and fall prey to short-term attractions much more than they would like to and decision-making strays from remaining true to long-term value creation.
Family must be solidly supportive behind your madness - I was lucky to have someone who trusted my passion & determination. It helped that I had a convincing Plan B
Knowing that you have mastered the craft reasonably well is more important than your financial kitty at the time of quitting. How do you know that you will not make a mess of that splendid kitty in 2-3 years?
One needs to have sailed through reasonably well during atleast 1 Bull-Bear complete cycle to be able to judge oneself on the luck vs skill quotient
In addition to having the moolah, enjoying the investing process/learning, enjoying spotting special businesses with special managements, enjoying the growth of people we closely work with - perhaps are more important criteria to consider
Thanks donald for the views. Just a follow up on your response to Santosh. You wrote that one should have seen at least 1 bull-bear cycle. if you look at it, between 2010 to 2013 December, the broader market didn’t go anywhere. its only the high quality names that did well. ( both business and stock price wise). Do you consider this a bear cycle?.
Everyone, VP Culture is to address everyone at VP on first-name basis. No one here has earned any titles here. No one brings in any reputation to the table. We are all as good as our next year performance/next stumble (past track has no bearing). so no Sirring
When did i say that .
Defensives (slower growers than our small cap beauties) together constitute 25% of Portfolio. Contra bets together is on the way to constitute 25% of Portfolio. Rest 50% in quality small players - where we feel there is a long runway ahead, very difficult to dislodge that business (sustainability), less no of variables to monitor in business (predictability), and there is large gap between how Mr Market is pricing this business versus actual business performance.
Yes. 2009-2013 were certainly bearish markets. Retail participation was totally absent. Best track records 5Yr CAGR among all Mutual funds till 2013 was a mere 10% (SBI Emerging Companies Fund or some siliar named Fund like that. HDFC stable funds and Templeton stable funds were all in low single digit 5 Yr CAGR. All my friends were scared to allocate any meaningful portion of their networth in Equities. Today you ask anyone
So I think we at VP have seen off a Bear market successfully - did the right things, more importantly stayed away from FEAR and GREED successfully, concentrated on finding Business/Management with X-factor appeal
Now the challenge is to see of the Bull Market successfully - stay away again from GREED and FEAR. Can we keep doing the rational things…when its easy to make money by riding anything - will we be able to take the right calls, or will we be swept away by complacency first and then inevitably greed. Will we recover in time - have the GUTS to invest back in quality businesses that are performing …irrespective of Mr Markets complete aversion !!
If I can do that successfully, I can then justify to myself about knowing something about this craft.
Wonderful post. Been reading this thread for several times now. Each line carries tons of your experience. Can you please elaborate more on “Manufactured Exports” ? There are variety of quality items that are manufactured in India and exported. Here are few things i can think of …
Pharma
Apparels
Automobiles and its parts
Foods
and few others …
may i please know which of these sectors you were referring to ?
I’ve been a dedicated follower and a silent reader on VP since around the last 6 months. I’ve experienced significant jump in learning about investing, hats off to awesome insights and discussions on this forum - very differentiated from other such forums and highly impressive!!
I had a couple of queries for which I could not get specific answers:
How to go about investing in companies where the market is maturing/addressable size is small but the companies operating in them are shareholder friendly and excellent track record of ROE/ROCE etc.? Some examples are Sugar Free from Zydus (I think the market is not big; ~200 Cr., neither high-growth, so no incentive for competitors to enter): a recent one is HeroMotocorp (motorcycles market is expected to grow at 7-9%, and Hero already has more than 50% market share and is shareholder friendly, with all metrics well in place. What shud be the investing strategy in these cases?
What do you think about companies which have great execution track record but their market cap itself becomes larger than the sector revenues. Eg. Entertainment Network India (brand Radio Mirchi, market share of 33% but market cap of 3100 cr Vs. total market size of 2000 cr.) Of course, the market is expected to grow at around 20%, it may become a 5K cr market in 5-6 years. However, is the pricing reasonable for ENIL, as its market cap has already priced in years of growth? This is just an example for learning, nothing about buy/sell reco.
Thanks Donald for sharing your experience and learning along with your thought process, It helped a lot. Appreciate your grace, humility and wisdom cocktail !
@Donald Dont you think that when you say Gruh was available for a good buy in June this year its lowest price was somewhere around 219 which I can see for the moth of June 2015 . Then also its PE was 37 something. Dont you think there is no margin of safety when the stock was at these PE multiples? The same can be with Page.
Just would like to get your view on the same. As I always shy to add that stock in my PF when the PE crosses above 15 for any stock and I do hesitate to buy the same whatever period I may want to hold that stock.
Donald,
You said
"Now the challenge is to see of the Bull Market successfully - stay away again from GREED and FEAR"…
So right. Many will relate to that. Our real test is gonna be in the coming Bull market. How do we behave? Do we leave the party before midnight or become pumkins because we don’t. Warren Buffet gave nice parable on this in 2000 before dot com bust. I agree that if we come out of this Bull market intact then we may be set for next 30 years. We have done well in bear phase so well. Those who do not try to get last Rupee out of next bull rally will live to tell the story and play another day. This is where community support and guidance from seniors gonna be very very important. Hope they help us all cross to the other side.
I think we should give everyone free space. Let’s follow the SEBI rules not only in word, but also in spirit. With the kind of knowledge, wisdom and fan following some seniors at VP have, and considering the small free floating capitalisation of some stocks they look at, they might as well come up with self-fulfilling prophecies - so far we’ve witnessed some on the upside.
Nice to know on the next step, you are buying heavily into contra bets. esp, now that the markets have heavily rewarded HQ businesses. Would you mind sharing with us a few of your ideas here?
Chintan,
You did not get my point. You missed it completely. I am not asking any one to give Buy and Sell calls to VP members. I think most of us are beyond that stage. We do our own pickings and selling based on our own thinking and research. I was more talking of mentoring on general market conditions/euphoria, extreme investor emotions, controlling greed, giving some sanity check when market making new highs etc. Such conditions may arrive 4-5 years down the line in this Bull market.
Hope that clarifies.
Congratulations donald! Personally, all that i have learnt is through VP and a big thank you to you and all the founders for creating this one of a kind platform. All references to VP would be incomplete without a special mention of @pratyushmittal for creating the worlds best stock picking tool screener.in which when used in conjunction with VP create a lollapalooza effect
@Donald,
A heart felt Thanks to you, Ayush and Pratyush.
Thanks to the moderators, Top contributors.
A sincere request - Please hold a public conference also apart from top contributors conference.
A fantastic job by all concerned.
One day we wish to meet you - Please oblige.
Prasad.
.