Hi Piyush, thanks for following the thread.
This thread captures my journey in arriving at better ways to think about businesses. The first time I owned Caplin at the start of the thread, my investing process was to sit on Screener, find a high growth/high RoCE/high quality business and invest. Some of the posts from the first year of the thread are unrecognisable to me.
The second time I owned Caplin, the process had become following business updates on concalls, reading every inch of an annual report and I thought I was on top of the business by doing this.
In hindsight, the problem with both of these approaches is obvious. With high RoCEs / margins it’s more likely to be the result of a favourable cycle than a consistently superior business model. I now work a lot harder for all of my companies to find out how much is being driven by realisation trends and map out the supply landscape with as much granularity as possible.
I now think my equating concalls to staying on top of the business was a large error, and gives one an illusion that a thesis is intact. The market knows a whole lot more between quarters. For export facing companies for example, the market knows exactly when a large shipment has been made, when realisations are falling, when companies are going to have a poor quarter, and in most cases, this is reflected in the price.
Now, on the third time owning Caplin, my investing process is a lot more scuttlebutt based - I try to talk to 1-2 industry experts a week, talk to many different stakeholders in the value chain and try to nail down the industry landscape, competitive advantages and map out supply. My investing is a lot more collaborative now, and a lot of this work is not mine alone, but has come out of working with fellow investor friends.
It depends on the business. There are some I’d like to hold across cycles, and those I’d prefer not to. If I had to place companies I’d like to own for a longer term into brackets based on my understanding of the business, it would look like this (non exhaustive):
| Tier 1 | Tier 2 | Tier 3 |
|---|---|---|
| Krsnaa Diagnostics | Punjab Chemicals | Caplin Point |
| Ugro Capital | Shivalik Bimetals | Fluorochem |
| PDS Limited |
Here, I am confident I have a very differentiated understanding of the companies in the first bracket.
Krsnaa and Ugro I’d like to own across multiple cycles and are examples where the answer to your question is no. With Krsnaa, I have a higher confidence that we’ll see a good cycle for 5-6 years. I sold Punjab when it looked like market was pricing in a little more than what would come in the next two quarters. I have recently bought back in. With PDS, the earnings still look good, price action doesn’t indicate anything is wrong, but I think there will be pain reflected in the next couple of quarters.
Aren’t you afraid that at some point the combination of churn and a bad investment will take down a significant part of your portfolio?
The current process has come from my mistake in Strides. From here, if I make a bad investment in my core holdings, it shouldn’t come from unknown supply risks, a sudden turn of the cycle, etc. My hope is that it’ll be from a new gap in my understanding. So I’m not scared.
I’m however going through a phase of buying junk businesses when valuations in the companies I follow aren’t attractive enough, and then going back up the quality curve in broader corrections like we’re seeing now.
Lets see. The goal is to become better every quarter, and to add more companies into the tier 1 bracket with time.