VP Chintan Baithak, Goa 2017: Diversified Investing: Ayush Mittal

Thanks Ayush for your so detailed explanation with examples…

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thanks for the detailed reply. another follow on question - how do you decide which ideas to track and which ones to drop. what is the trigger to even create a small starting position ?

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This approach is kind of diametrically opposite to what I’ve been following - which is what made this so fascinating for me.

I can see some modifications I could make to my approach while keeping the broad outline intact, specifically on the idea generation and pipeline front. Lot of work to do…

Hi Ayush,
Your explanation for this is wonderful. If I can add to this a further question, I would like to understand what should one do in a case where the past of the company is fraught with corporate governance or capital misallocation issues. Now if the evidence is disconfirming the past I could enter into a position and progressively as things get better one could keep increasing to that but the only thing that still bothers is that how do I decide whether the change in performance is temporary or for good. Due to this reason I have failed to buy into many ideas where I have not been able to decide whether the change in performance is temporary or permanent.

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@ ayush

can u pls giive ur view on setco automotive

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@rohitc99 - i think usually the exits are to save from the downside risk - so usually the exits are when story is
not panning out as expected or there is lot of mis-match between what market is expecting and what you feel is happening. In some cases, where we happen to have a very long term view or are excited with some particular things or we feel current problems are short term, in those cases we continue to hold despite the fall in prices. Trigger to create a small position is usually on seeing something exciting - 1. Good results 2. Good report or article 3. recommendation from friend etc etc.

@karu_lamborghi_ - yeah, its a challenge. So often we create a position and try to see if we can figure out the reason for change. In cases of past corporate mis-governance issues - usually changes happen when next generation comes in.

@gauravgzp87 - no idea

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@ayushmit I had a few questions and would love to hear your thoughts

  1. What is the broad criteria to move the stock from the long tail (of 20-30-50) to the core? And when you move it to the core, is it an addition or a replacement. I presume it is the latter unless you have additional capital coming in. If it is a replacement, how do you decide which one / ones to replace?

  2. How do you think of the fair value or the intrinsic value of the firm in relation to its price. At what point does the price becomes so high that you think it is overvalued?

Thank you very much.

Warm regards,

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Hi Krishnaraj,

First of all - we are not process oriented :frowning: we don’t have too many rules and are very flexible.

  1. Usually its due to more insights, confidence due to discussions or additional work done. Or may be due to fall in stock price etc etc. So we have to look up in our list and figure out stocks which are weaker or where we have lesser confidence or insights. It could mean reduction of few small positions or some selling of core stock. It can be anything depending on that particular situation. It has also been that we have bought first and then during the day figured out what to sell :slight_smile:

So its all very random.

  1. Again very tough to say as we are not process oriented. We don’t build any forward excel sheets or projections. But yes, one thing I have seen is that markets will surprise everyone on the upside and hence its important not to put some numbers (intrinsic value or targets) from before. As time passes, story evolves. Often after the surprise upmove is done, one comes to know the reasons for the same. So one has to be very very patient while riding winners.

I hope this helps.

But I must say that our methods are not right and so it shouldn’t be applicable to others. When I have discussions with people who do good work and are process oriented, i feel scared and i know my short-comings. Hence it may be that we have been just lucky with things given the bull market.

Regards,
Ayush

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@ayushmit thank you. I guess there is always a style-temperament combination that cannot be articulated, and to a layman the method may appear random, but not to a seasoned practitioner.

Another question if you don’t mnd - have you ever sold (not trimmed, but practically sold out) a core stock because it was overpriced?

Thanks once again.

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@ayushmit You are so humble man. You said that you may have been lucky given the bull market. Ooh come on man all the investor community know about your talent. You are really amazing. Though I am new to market, I have read a lot about you. I have seen your dalal street blog and was surprised seeing the awesome stocks that you identified so early. Keep guiding us with the vast knowledge and experience you have.

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@diffsoft - lot many times. Some have been right decisions in hindsight and some have been terrible decisions in hindsight.

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Thanks @ayushmit for sharing this. as always a pleasure reading it. I have one small question. When you say diversified, do you mean the 10-15 core stocks or (10-15 core) + (20-50 tail) ?

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@ayushmit Thanks for sharing the presentation. A lot to learn for me.
One question out of curiosity, what is the maximum allocation you have allowed for a single stock ?
Regards,
Raj

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Hi Ayush, Great to see support for diversification strategy. I seem to miss out in attempt to reduce number of stock, and worst thing is to retain wrong one. Even allocating some capital right away seems good strategy, as by the time i find time to look at stock it has already moved out my comfort zone, or just i miss to follow up. Could you share some insight on how do you manage cash component at portfolio level?

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Hello Ayush,
Great reading your presentation, I found it very insightful and honest… I too am not very methodical / process oriented in picking stocks but am beginning to learn a structure. I have a few questions and would appreciate your response on the same.

  1. How do you differentiate between a great business undergoing some lean phase vs a not so great business experiencing tail winds…e.g. pharma biz which has been far superior and less cyclical compared to speciality chemicals which is experiencing tail winds due to falling crude prices and China shutdown.?
  2. Since you said numbers mean more to you, how much importance should be given to result momentum vs great businesses…e.g. Bhansali engineering (super results, may be not so great biz) vs MPS / Ajanta Pharma / Wonderla (great biz lacking result momentum). My experience has been that market fancies result momentum more than just great biz. As is reflected by fast price appreciation in such companies. If you pay more thrust to numbers, How do you respond to your core positions undergoing few bad qtrs…
  3. Does price momentum have any role to play in your selection…let’s say you like 2 companies with similar fundamentals and growth prospects…but one has appreciated faster than the other… Would you decide higher allocation to the momentum stock vs other.
    Regards
    Ronak
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@ayushmit ,

Thanks for sharing. While going through the presentation, you quote " Success requires little conviction and failure requires lots of conviction." I’m afraid I didnt fully understand. Would you be kind enough to elaborate please.

Thanks,
Sanjay

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Hi Ayush,

Not sure if you’d be comfortable sharing story of 3 friends who were very bright but couldn’t stay long enough in markets on the forum. If yes, then please share what exactly happened…

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Hi @gautham1 - Core stocks could be 15-20. Tail could be a much higher number.

@raj1968 - usually in past we used to trim our positions whenever a stock used to rise rapidly and started getting expensive and hence allocations didn’t used to be high. However, in recent years, we have been more patient and don’t do much on selling. At the time of buying it has been 7-8%

@atulj - Usually we don’t have much cash. We feel the ideas we keep seeding are like cash and we look to convert from them if we find something more convincing.

@ronak - 1. I don’t think i’m very good at distinguishing this. I have missed this whole specialty chemical boom just because of this reservation that the change is temporary.
2. Everything depends on a price. For eg - Bhansali - before the whole run-up (when the co just started posting good results) the risk reward was very favorable. And an early entry into such things help.
If one knows that the company is good and its just 1 or 2 quarter of slow down then it shouldn’t matter and one should continue to remain invested or buy more on correction…but usually it doesn’t happens so. The 1 or 2 qtr problem gets extended :slight_smile: Personally, as I’m trying to be more patient, i continue to remain invested in cos like MPS, Ajanta where I feel the underlying business is very strong and unique…the nos are rare to see and valuations are not expensive.
3. It works the other way…i’m usually not able to jump into a story which has already appreciated sharply or quite a lot in recent times.

@SUNRAY - This quote is applicable when we are wrong. For eg - If someone had done lot of work on Satyam and was invested for few years and strongly believed in the positive side of the story…then he would have done a lot of damage had he been a strong believer in the story and concentration. He might have averaged on the way down given his belief. So the message was that failures happen when we are convinced on something but our understanding is wrong.

@barathmukhi - sorry can’t share the same. The message was that I have met some extra-ordinary people and have learnt a lot from them…these people have been ones with extra-ordinary knowledge and IQ but they exited market very early because of some rough patches or wrong outcomes or some wrong decisions. The message was that its more important to remain invested or survive in markets over long term and keep going.

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Hi ayush

What you want to say in your 20th slide which is about paid subscription services.

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Just shared some of the some of the paid subscription services we like and use.

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