ValuePickr Forum

VP CHINTAN BAITHAK GOA 2015: Gaurav Sud: INVESTMENT JOURNEY/PHILOSOPHY

Moving on to perspectives from a trio of avid practitioners/hard workers/thinkers among the VP Community - Gaurav Sud, Abhishek Basumallick, and Yours Truly

Gaurav brings a huge wealth of active experience in Markets - he is someone who has probably tried it all. He has seen the Heights and the Lows, and has kept re-inventing himself every time with some spectacular results to show. When we have a complex puzzle to solve - Gaurav, is the first guy that comes to our mind !!

INVESTMENT JOURNEY - Gaurav Sud - VP CHINTAN BAITHAK - GOA 2015.pdf (498.1 KB)

Extremely handy to have someone like Gaurav to fall back upon :smile:
Take advantage folks - get him to open up, and share more of him at VP !!

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Gaurav, great presentation. I could visualize the great wisdom in the thought process which has been generated over the years. I liked the risk part the most particularly “As an asset declines in price, people view it as riskier but it actually becomes less risky”.

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Gaurav isn’t the mean PE value for SENSEX and other values a bit off? And also can you also let us know what is the time range for that data when you say its historical data for SENSEX.

Note: There are lot of people with id Gaurav so I didn’t know whom to tag.

@Neerav,

My data on sensex is slightly dated as it was updated till only Jan 2014.

I have taken the data from the following link and it tracks the historical nos, not the forward looking one.

http://www.bseindia.com/markets/keystatics/Keystat_index.aspx?expandable=2

The data set should change somewhat if updated, but not dramatically. The important aspect is to track the mean values and how much SD away, the current valuation are. It is a tool that I personally use to decide how much cash I want to move into my portfolio.

If you have a more specific query then let me know.

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Thanks Donald for the superlatives…

But frankly you are the star here, to have diligently built this platform and allowed individual investors like us to interact and learn from each other.

What Ayush, Hitesh and you and other top contributors to the forum have achieved is really unique and path breaking. The forum now is a storehouse of knowledge and we all can gain from it. I personally have benefited and appreciate the quality of discussions and wealth of ideas that are here.

Thanks for building the platform and taking the lead on so many other things.

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Heyy Gaurav,
Really enjoyed reading through your presentation and your thought process. I liked your aspects on

  1. Risk arbitrage - This could be an ideal way to utilize the extra cash borne out expensive markets.
  2. Valuations - my strategy - This slide of asset allocation in equity based on mean + 1 or 2 sigma is perfect for somebody who is looking to conserve his money in stock markets and not get carried away in the hype. I will definitely be looking to implement this. Just a question, why are in 30% cash if the Sensex pe is less than mean + 1 sigma right now?
  3. Also liked your idea of forming basic outlook of the company even if not investing right now. It helps to act quickly when the correct price comes along
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@sharedil Thanks for the reply. I specifically asked that question because to my knowledge mean SENSEX PE was around 17 with a SD of 4. So mean + 2 sigma would be around 25. But you have mentioned much higher values for mean+1 and mean+2 sigma, hence I asked the question. Also as @neointown asked, if SENSEX PE is less than mean +1 sigma is there any specific reason for being in 30% cash?

Thanks Vikas,

The presentation is a distillation of my thought process over time.

My views on the markets are colored by the huge drawdown on my networth that happened in 2008. That entire period shook my investment philosophy. So I tend to err more on the side of conservativism.

Post 2009 I have observed that I have never been 100% invested. I have always been 10% cash. So to move from 10% to 30% cash was not a big decision point. Being on 30% cash happened because I ended up selling some of the stocks that exceeded my price targets, and did not find anything that I could buy. I suffer big time from price anchoring and so have missed out on many opportunities in this amazing bull run for small and midcaps.

So while this 30% may work for me, but may not hold true for others. One has to sit down and think through this aspect.

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Mean Reversion and Capital protection are two concepts from your presentation that resonate very strongly with me and are two topics that I am working hard in recent times to come to incorporate them into my investing behavior. Both these ideas influence the Sell action.

Mean reversion:

Naseem Taleb touches upon this topic of Ergodicity in stock prices and is something that he discusses in the context of trading. I am not quite sure if this is a concept that can be extended to investing as opposed to trading. Naseem argues that the path of a stock price is but one possible “route” or outcome path and the higher and larger is the deviation from the mean, higher is the probability of it reverting to mean.

So the question now is, how is the reversion considered? Is it with respect to the overall market mean of 18%, or is it with respect to an sectorial mean ( for example IT industry mean was about 25-30% a few years back). If one onsiders an investment in a company like SUN pharma, or Lupin, the returns have been in excess of 30% CAGR for over 15 years! When does one decide that the run has gone too long and it’s time to Preserve the capital, i.e. take the profit off the table?

Assuming that one had started out equal weighted portfolio 15 years back and also assuming that the rest of the stocks grew at market rate of 18%, then by 7th year, the single stock of Lupin which started out with 1/10th weighting would be now 25% of the portfolio value, and thus as per the Investment Thumb rules would trigger the sell. This would miss the next 8 years of growth in Sun. But as you say, you’re ready to forgo gains for sake of risk aversion.

Question: What is the “mean” around which you expect stock to revert? Overall market, or sectorial? How is the length of the run decided before you decide it would start the reversion?

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Preservation of Capital.

One trigger is inward looking, i.e the value of a single holding as a percentage of overall portfolio. The trigger quoted in this slide deck is 25%. If however, one considers the company performance rather than stock performance & the company is doing well, why would one want to sell it?

My own sells have been triggered by my view of a stock being overvalued, only to watch with dismay as the stock touched new highs and multiplied – guess familiar experience for early-sellers! Do you think that the inward looking Sell decisions can be one factor in overall decision, but not the only one.

Question: What factors do you consider in addition to Portfolio %age to make the sell decision?

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@arunsg,

In my case the concept of mean reversion is driven by the fact, that if a market or asset class has outperformed, then over time it will tend to revert. This is more applicable to the index than an a stock & as Taleb pointed out purely driven by probability scenarios.

For stocks there may be a case of serious rerating because the business qualities are discovered and the market identifies it as an above average business with a good management eg Ajanta Pharma, Eicher Motors. Now as you suggested that if a stock like Lupin has grown at 30% over the years, it could also be that the earning may also have compounded 25-30% over the years. Then there is no reason to be alarmed and sell. However over a period of time if a stock you bought at 1 times P/B is now say 10 times P/B, eventhough the PE has increased from say 5 to 25 now, I would tend to be cautious.

The rule I follow of a stock not being allowed to be more than 25% of portfolio is driven by my past experience, where one stock which had hit more than 50% of my portfolio crashed 92% from the peak in 2008 Lehman Crises. Its an event I never want to experience again and hence the rule :smiley:

So to answer you question the mean reversion analysis is more driven by the overall values in the market, rather then the sector or a stock. Also I tend to take money of the table when times are good and tend to invest in the safer categories like Debt, bonds.

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@manish962,

Thanks for nice words. All the so called wisdom I have got is by loosing money than earning it

We all really appreciate your yeoman service as the key moderator who has managed the quality of discussions on the forum. Its a thankless job but critical to the success of the forum. Thanks for all your effort.

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Thank you Gaurav !

There is no denying that Mr. Market discovers the Eichers, Ajantas and the companies have indeed grown at the same clip. Though as we know, no tree grows to the sky, so at what point do we decide that the growth will slow down henceforth and the high valuations is not justified any longer. Eicher for example is now valued at 20 times book, and 75 times earnings, which is a whopping 1500 PEXBV !! Would you say that this is now a candidate for reversion? The problem as many VPers have experienced is that this is seen for last several quarters when the valuation seemed high, but Mr. Market is still euphoric.

Once again, thank you for a very thoughtful and insightful presentation.

Arun/Gaurav,

I calculate portfolio % for individual stocks based on buy value and not based on CMP. So these percentages don’t change (daily) unless I move in more cash or do any actual buying/selling. Is there any good reason to compute portfolio based on CMP?

Also, one trick that has worked for me more than 50% of the times is - sell on bad results (and flat results are not bad if you know the story). The bad results can be measured either quarterly, half-yearly or yearly based on seasonality, sector etc.

Thanks,
Rupesh

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Hi Gaurav,
Liked your presentation. Very high quality stuff. I am grappling with Quality at fair price Vs Deep Value dilemma myself. At the moment I am doing both with good results (but preference for mostly buffet type stocks) but constantly evaluating possibility of sticking to one approach if that makes sense. I have seen that many top investors migrated from deep value to GARP investing over years. On the other hand Buffet made a comment few years ago that if he was managing only $1M to10M then he would clock 50% return on it, guaranteed, using his previous methods employed in 1950s and 60s. So the debate is not at all settled in my opinion at least for small, nimble but informed investors who are dealing with smaller asset size. You have voted for quality at fair price approach. I am not asking for exact portfolio details but is it possible for you to give us some sense in terms of what kind of returns you got out of deep value Vs quality investing over the span of many years? I am assuming you gave fair chance to both methods before zeroing on one.

If other members of VP have any viewpoints then I solicit those also in this thread.

I do not do any arbitrage or special situations. Your description of your methods made me curious. Which sources you use to source your ideas? Can you recommend any book or good sources where one can educate oneself more on event driven investing? I have read Joel Greenblatt’s book on special situations some time ago and that was good. Any other book?

Thanks again for sharing your experience with us.

Thanks to Donald also.

Regards,
Girish

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Gaurav, Thanks for the appreciation. This job is thankless and nostalgic for others who are crossing the lines of discipline. My efforts are very little compared to Donald, Hitesh, Ayush and other contributors. Also these efforts are for the noble cause to benefit fellow valuepickrs.

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Thank you very much Gaurav for sharing your thoughts. It clearly shows your experience in the markets and your learnings are of immense value.

I wanted to get better perspective on your thought process for evaluating risk arbitrage opportunities. It seems that a lot of success from risk arbitrage in the past year came from demerger opportunities, which was something Peter Lynch also said threw significant value unlocking possibilities such as the Baby Bells example he discussed…

Could you please share a couple of success examples such as Marico Kaya/ Arvind Mills on how you went about evaluating the opportuntiy, and how did it play out compared to the original thesis that you developed…any key trends that you can draw from all these success stories that we can use for future analysis…

Also any learnings from United Spirits and Manaksia that we should keep in mind while analysing such opportunities…any red flags of what could go wrong would be extremely useful…

Thank you very much and look forward to interacting more with you!

Revisiting this thread to see the lessons learnt.

Since the time this post was written, Lupin has gone down 54% while the sensex has gone up 24%, so a differential of 78%! Talk about Mean reversion with a vengeance. Ajanta seems to have just started its reversion, and Eicher not yet. FDA, buyer’s power, market fancy may all be the singly or together be the cause(s), but the end result has been a massive reversion to mean.

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