Just watched quite a relevant video on this.
This channel trading seems to be too much hassles. What I prefer isā¦Finding a good company and sit with it for maximum time, till something horrible happens with the company. Jumping like this is not in my temperamentā¦i thinkā¦But who knows, I may be wrong or too old-fashionedā¦
I guess psychology plays a part in choosing a particular style of investing. Each person has natural qualities, behavioral traits which are unique to that person, and as such they are more inclined towards a particular way of doing things, even in the market. Not that these cannot be changed, they can be, if there is a reality check without any biases and opinions. And I guess investors change with experience, become better with time. No one can keep on making losses, if they cannot control what they are doing, I guess they will get out of the market and donāt come back. As our Dr. Hitesh once said that he can cure the itch but not the urge.
I donāt know if behavioral aspects are linked to brain, but they can be overcome, it may take time, but we can do that, if there is a need.
My journey started as an investor, and I have gravitated some toward trading, with mixed results, learning, evolving.
#321 ā Rajiv Jain, GQG Partners - āEverything Is Temporary And The Only Way To Survive Long-Term Is To Be Adaptiveā This is a podcast of Rajiv Jain of GQG, he talks about his selling decisions like trimming and adding. Moreover, he uses little bit of macro as a switch-off point. Yes, we donāt incorporate macro at all, but he sees little bit of macro in terms of his selling decisions when it comes to valuations. Similar to āmastering the market cycle of Howard Marksā Exactly how and when did you pull the trigger to get off from the train?
Typically good podcast, it is really worth listening.
If someone did able to get more insight from this podcast, please share!
Mr. Vivek,
If possible can you please elaborate more about massive overvaluation? I am a novice one. Like I understand, we should not sell quality growth when it becomes overvalued, but what is overvalued? Is there any data point you incorporate? Like, discounting 10 years high mid-teen growth in present value? Like if we look at Infy, MS, Cisco around 2000, they still had great runway, great management, and great competitive position, so exactly at what valuation levels you could have pulled the trigger in hindsight?* And why? How exactly you would convince that, yes, it is time to get off the train?
Please elaborate, I might sound dumb, but I am really not able to get my head to the conclusion.
I personally try to estimate the potential return from that point on, and the risk-reward profile of continuing to stay invested.
For instance, there is a niche tech company with market cap at 7660 crores and topline of 254 crores and PAT of 109 crores. EBIDTA is over 40%. They have the ambition of reaching topline of 1000 crores over the next 5 years. The street believes the earning potential of this company, and thus it is trading at PE of over 70.
Five years down the line, let us assume a blue skies scenario where they have reached their target of 1000 crore top line and have a bottom line of 400 crores. It is reasonable to assume that the PE wonāt expand further. If they continue to get the same valuation, they will 4x in 5 years. But valuations are based on future returns, not past. I think it is also safe to assume that the growth will slow down a little. When that happens, the PE will contract. Even if we assume a PE of 50 (which is still high for tech companies) returns are around 2.5x, which is about a 20% CAGR. So blue skies scenario return is 20% CAGR. But the risk in such an investment is much higher, in my opinion. There is a good chance that they may have a few bad quarters along the way. The correction in such a scenario will be severe. Thatās not a favourable risk-reward ratio in my opinion. Hence if I owned it, I would probably sell.
Like I said, it is not possible to get it right all the time. Thereās a good chance Iāll miss a multibagger because I underestimated earning potential. But for me, this sort of sell decision is about risk management. I feel uncomfortable owning companies that are trading at 2 or 3 times the average sector valuation.
It is as if I am talking to my cousin, and many others who think that 30% is enough. Reason is fear, based on the adage, āone in hand is worth two in the bushā. It is based on the fear that if you do not cook the bird in hand immediately, it may also fly away. But if you stop to consider, the stock investing is about two in the bush.
I am not saying you should forget the one in the hand, but how do you grow if you are satisfied with one in hand?
Of course, you do not quit if the one in the bush is a hen, laying golden all the time.
While it is right that every share is not Pidilite, but when you sell Pidilite, you donāt sell it just because it has made you 30%, but because either it has ceased to make you 30%, or you have found another one that makes 50%.
Of course, this theory also has its flaws. The stock that you may sell may be sleeping like Kumbhakarn, but the moment you sell it, it starts slaying the market. That is where the supporters of the theory that you stay with a good company through thick and thin, come in.
The main problem we ābuy and stay with itā theorists face is of FOMO, when the sector which we were patronising goes into a slump, and suddenly (often not so suddenly, it only seems so to us) another sector starts racing ahead.
One example is of the somnambulating companies in defence, Public sector banks, and the infra companies that woke up and made 20 to 100% for the investors.
Honestly I never believed in the public sector sloths. You just see how the PSU banks function, and you will appreciate the point. I have seen the corruption in the public sector close hand. And the infra companies? They function on black economy.
But one has seen them racing ahead.
Another conundrum one faces is of mismatch between the financials and the growth of a company. The company with a PE of 8.5 and ROE/ROCE of 56% stagnates, while the company with PE of 56 and ROE/ROCE of 8.5% keeps making profits for its investors.
Feeling defeated by the failure of our theories, I have decided to buy some companies which are getting lots of orders. Also, I have tried to buy some company which is not doing so well, but its sector is thriving. The tyre shares rose fast, but PCBL the company that makes carbon black for them was languishing.
So, to sum up, I would sell a share only if there is an identifiable better opportunity, not just because it has made me 30%.
That is amazing! Thanks for that
One measure I found, which is used by most hedge funds is, earnings yield, actually bill miller and michael moubossin uses that at their fund. It is like lets say a company has EV/EBITDA of 40x (EBITDA is EBITDA less maint. capex) and is growing at 15% which is quite sustainable lets say.
Now what they do is, by EV we are yielding 2.5%, and we are getting growth component of 15%. Total return would be 17.5% which is good post mid-teens, I got this concept.
But for instance, now lets assume that EV/EBITDA is 100, yielding just 1% + 15% growth, it is still 16% right, quite okay-ish. Now according to that yielding theory perspective, wonāt it be delusional? I mean, 100 times EV to EBITDA, that is unsustainable at all, and expecting 16% on top of that.
What we see that, almost all investors uses this yielding theory as a compliment too.
What I want to ask is, did I get that theory wrong? Wonāt it be like paying anything for growth? I feel so, I am fooling myself. At 100 times levels. Can you please help a bit here? I am getting this yield perspective wrong here, in what way? Please fix it if possible.
Example given by Bill Miller
Sorry to say Iām not familiar with this way of calculation. I prefer to keep things simple. I look at it this way- finally what matters to the investor is the appreciation in stock price (and to some extent dividend yield), not the growth in earnings or free cash or anything else. Stock price is decided by 2 factors - earnings and perception.
Stock price = PE x EPS
Like I demonstrated in the earlier example, earnings can grow at 30% CAGR but stock returns can be 20%CAGR or less if the starting valuation is too high. PE is decided by the demand for the stock. Demand depends on the perception of the company in the market. It is impossible to accurately project this at a distant point in time. All we can do is bake in some sort of margin of safety in our estimates and hope for the best.
Just trying to understand the above example. By EV yield, do you mean increase in cash and cash equivalent over time? Also, maybe they are calculating the possible returns assuming valuation remains the same. In my opinion, thatās a dangerous assumption to make if starting valuation is very high compared to historical and sectoral average.
The 2nd para make sense, they really are assuming the same multiple. EV at 20, might be, depending upon prospects is reasonable multiple. But yes, starting at 100, and assuming that multiple to stay, is pure delusional. And, some modifications to that, we can figure out the delusional valuations too, and a good measure against our required rate of return.
They are not assuming any increase in cash. It is simple measure like a bond. Now, the coupon of bond does not increase, but the coupons you get from investing into business are increasing. And, by investing into business now, at its takeover price, is current yield.
So the current income is current yield + growth we will get. I find this relatively easy too, the total return concept.
This one is widely used by investors such as pabrai, joel, einhorn, moubossin etc.
It isnāt exactly that per se but you can also look at it differently. The total return you can expect from your stock investment is from three components. This is from Value Investing and Beyond by Bruce Greenwald. He talks it through in Value investing lecture Bruce Greenwald briefly. I have adapted some stuff to this as well. Accordingly, the Total return you can expect from your stock is the sum of:
- Shareholderās Yield - (Cash returned to shareholder by dividend + buyback + bonus)/ Market Cap
- Growth in Earnings - Historical EPS growth/ FCF growth or ROCE * (1- (Cash returned to shareholder by dividend + buyback + bonus))/ Total Earnings
- PE rerating - Seeing how low or how high can go to your terminal PE multiple (based on historical average or your estimated multiple)
An example to walk you through this is:
Letās take the case of Pidilite as of today.
- Shareholder return - 0.43%
- Growth in Earnings - 12.2%
- PE rerating - Letās say I hold the investment for 10 years and the PE will half, the PE rerating if you see by the rule of 72 will be about -7.2%. Of course, the longer you go, the lower its effect will be on the total return i.e for 20 years it will be - 3.6%, for 30 years it will be - 2.4%, etc.
So the total return of the stock can be estimated as 0.43% + 12.2% -7.2% = 5.43%. Of course, this is conservative, and assuming there is no PE rerating it will be the total return will be 12.63% per annum. If this is more than your required rate of return then it would be a good investment for you. But the assumptions for this to work out are that the stock will not have a significant rerating, and the stock will grow its earnings at 12.2% or more throughout your investment period.
Hi Sachin - I try to keep things simple
If you are a focused dividend growth investor like me, then the answer is ideally never (provided the dividends keep growing over a period + the company is fundamentally growing and sound i.e. good governance)
The capital appreciation while very important to track, is a by product (i guess i am in a minority here, however anticipating stock price appreciation is a wild guess at best. I am not great at chasing the next fad and have lost money trying to do it in my early investing years)
To give an analogy. If you have a house that is on rent, you keep holding the house as long as the rents keep increasing and the yield on invested capital increases. Once there is a better house offering a more attractive cash flow yield and growth potential you sell. Well governed companies that are battle tested over a period are hard to find so one holds on to them
Not sure if it helps, hope it provides an alternate view
I keep things simple.I sell when I see more than 30% dip in operating profit yoy or qoq.I do not invest in cyclical sector.
Two long write ups which throw light on this topic, in case it helps anyone.