Dinesh,
I refrain posting this for a long time but I couldn’t this time. I have been following your portfolio for a while and understand your investing style of looking for value but often it seems like you are compromising on business quality or I feel you are waiting on too long to make an exit when things go south .In the long run, betting on the wrong horses in name of whatever we want to call it, can have a bigger impact in wealth creation. Just my two cents.
5 Likes
I believe they have a lot of Private / Unlisted companies in the same business (Check in Tofler). There’s no saying how much business goes to them instead of the listed entity.
Just as you are not comfortable / uneasy with my watchlist, I will most likely not be comfortable with the stocks you have in your mind. Conviction is your rock in investing - and it cannot be borrowed. My conviction needs a lot of Margin of Safety, regardless of the type of company behind it. If you have some companies in mind, I’m always up for a good discussion on them.
Besides, it’s like I’ve already mentioned somewhere else in this thread. It’s difficult for me to even follow the 15-20 businesses that I already do. It’s beyond me how people can keep track of 25-50 businesses and understand them very well.
I look for a high Margin of Safety is most of my stocks. But if this question is general, then you cannot value a company if you do not trust the management. It’s simply outside your Circle of Competence.
Thank you for your two cents.
The way I look at it is: I go looking for stocks whose companies are in some sort of mini-crisis or some difficulty. This way, I can get them at a price where most Risks are captured. But of course, when you go looking for trouble, you eventually find it too. Especially in the case of BFSI, troubles can multiply faster than one can blink. So, it’s not very surprising that my two most terrible Investments have been BFSI stocks (DHFL and IndusInd Bank).
But this is exactly why we diversify too. I don’t think I can bring myself up to invest more than 10-12% in a leveraged stock (Of course, the stock price movement itself can take it higher sometimes). So although I lost 55% in IndusInd Bank, the loss at Portfolio level was “only” 6% or so.
Diversification into at least 7-8 other stocks is critical in “Value” Investing.
7 Likes
What would be the best time to exit a BFSI company according to your experience?
Stop loss will most probably be hit due to high volatility and fundamental detorriation remains hidden for a long time.
Thank you
Yes, that has been my experience as well. The only way would be to track what the management has been saying and whether they’re actually delivering on it. Even Warren Buffett admitted that he doesn’t know what’s actually in a Bank’s book. He trusts the management to deliver what they speak. The moment that trust is broken, it’s difficult to stay invested (This goes for most businesses, I guess - but more so for BFSI).
On a more technical side, you can track metrics like PCR, Change SMA1/2 Assets, Gross/Net NPAs and so on. If you find something unusual, look for answers from the management. If you don’t, then again you should ask yourself if you need to stay invested.
I may not be the best person to advice about how to invest in a Banking stock. But I’m sure I’m qualified enough to answer how NOT to invest in one. 
7 Likes
I think it’s very clear cut… The bottles/lunchboxes businesses is owned by private…
Chairs - Furniture - Cooler etc remains with Wimplast.
Hi Dinesh,
Can you please share how you decide the % allocation to each stock?
I had earlier followed a simple 5/7/10 % based mostly on conviction and also something based on mean-variance optimization. Now when I look back into my performance, I feel it could be much improved with better allocation strategy. I have been researching this since last few months.
I tried to do it based on a Mathematical Model:
Clearly, there’s no single formula that I can give you. It differs from person to person. But consider these sub-components
- Expected loss in Value / Expected Drawdown if Risks materialize (Lower the loss, higher the allocation)
- Probability of Risks materializing (Lower the Probability, higher the allocation)
- Expected Returns if Risks don’t materialize (Lower the Returns, lower the allocation)
Some combination / weight to these points based on your personal experiences / opinions should determine the allocation to each stock.
Then, as an additional step, you can have thumb rules. Ex: Not more than 10% in BFSI, not more than 20% in a single stock / sector and so on. By definition, there’s no defined logic behind thumb rules. They’re mostly safety measures.
1 Like
Not to get into any argument, but surely it’s more nuanced than that. Surely it’s more a question of HOW MUCH you trust the management than WHETHER you do.
2 Likes
Where do we get these numbers? I tried searching the annual reports of a couple of banks but unable to get the numbers. Or these will be mentioned only in concalls? What other parameters do you use for analyzing the risk of Banks?
1 Like
What’s your view on companies like CRISIL, CARE and ICRA? If I understand right, you have lots of insights into those. Thanks
Since you have invested a good chunk into goodyear, whats your take on tyre industry as whole? Auto Industry was already in a mess pre covid and now things are just going down south for them, how long do you estimate the demand coming back? Also, are you positive on anti dumping duty on tyre would take place? This has been in the news for quite some years.
Hi Dinesh
I understand from your posts that you have a process and you tend to stick to that process. I completely agree that having a margin of safety is the cornerstone of a good investment. Having said that arent you concerned that in cos like GoodYear - the growth in topline and bottomline is relatively poor. I understand that having a very liquid balance sheet as is the case with goodyear is a good thing but unless there is a trigger or a declared intent by management the margin of safety given by the cash balance remains theoretical.
Take the case of JB chemicals, which again has a liquid balance sheet and through a repurchase program has unlocked the inherent intrinsic value of the co. While goodyear does that in the parent not sure why no such program in india ( It has a good repurchase program internationally). Goodyear India in the past has tried to delist but has not received shareholder approval and remains listed.
Rajeev Anand who is the current MD and has been there for a while is already looking for a career transition.
An excerpt from his linked in page
“Over the next several months, I plan to transition from my current career and leadership role to the next phase of life. I would like to be proactive and pre-emptive about this phase of transition. I believe in a 100 YEAR LIFE (Reference - Book by Lynda Gratton) and would like to have several more years of active professional contribution without being constrained by misleading cut-offs such as retirement age”
Lastly, have you looked at the stock price chart of the parent i.e Goodyear tire and rubber co? Even for those who dont believe in technical analysis - looking at the chart gives you a discomforting sense that something is not right with the co.
Just my two cents.
19 Likes
Hi Dinesh,
Nilkamal has been very prominent in your watchlist. You must have done its competitor analysis vis-a-vis Supreme Industries. So, I have 2 questions for you:-
- What made you chose Nilkamal over Supreme?
- Considering present circumstances, don’t you think Supreme’s competitive positioning has strengthened against competitors like Nilkamal, Jain Irrigation etc.
P.S. I observe your watchlist has many competitors of my watchlist, hence find your viewpoints useful 
Fyi, these are stocks on my watchlist :- ITC, Balkrishna Inds, Supreme, HDFC Bank, ICRA
Sure, to be completely thorough, it is not about how much you trust the management, Rather, it depends on the magnitude of what you doubt about the management.
If you think the management is not being shifty about why they’re doing unnecessary transactions in some Mutual Funds, you can choose to ignore it because the impact on Value is likely to be limited (Assuming Cash is not a massive portion of the B/S). But if you doubt the management is not being honest about, say, why their Capex is abnormally higher than the competition, then it begs the question of whether you will be able to Value the company at all because you have no understanding of why it is higher. These are random examples, but you get the idea.
True, not all banks reveal them completely. You may have to look at concalls/interviews/articles to find them (or) calculate them yourself if the components are available.
The CAMLES system is the golden standard for analyzing a bank:
Capital Adequacy = Capital Adequacy Ratio, Compare historical P/B with Equity Raising patters (If more Equity is raised at high P/B, it is better), Look at Risk Weight Vs Loans Outstanding details if present
Asset Quality = Net NPA, Gross NPA, PCR, Slippages and so on.
Management Quality: Very subjective. Easiest thing to look for is experience and relevance of experience to the type of institution/role (Entire top/middle management).
Earnings: RoA, RoE, NIM, Other Income-related analysis, Fixed Assets/Real Estate held.
Liquidity Management: ALM. Several types of mismatches are possible. The most prominent ones are:
-
Liquidity Risk: Maturity Mismatch, where a bank is liable to pay a large amount of money in X years/months, but the maturity of its Assets is less than X years/months.
-
Interest Rate Risk: Track how much the bank’s bonds are trading in the secondary market, because that’s their likely Cost of Borrowing (More or less). For instance, if a bank is very close to needing more funds, and second market yields for their papers shoot up, it is not a very good scenario.
Sensitivity: Almost impossible to assess single-handedly by individual shareholders. Look out for management’s comments on whether they are continuously doing Sensitivity Analysis for their business and acting based on that analysis.
I cannot talk about them in public. If you have specific doubts, please feel free to DM me.
I am unable to determine where PVs and most CVs will go. So I am avoiding almost every Auto / Auto Ancillary companies as of now.
But Tractors are among the heaviest of CVs and are unlikely to face any issues. I don’t know whether ADD will come or not, but Indian agriculture is in dire need of automation. You can read more about it in my Goodyear India thread.
7 Likes
Agreed on your comments about the sedentary approach of Goodyear India. I would only like to add a few points:
-
It is not Growth or Value for me, it is always Growth and Value. Growth is a component of Value. So while Goodyear India’s Growth isn’t extraordinary, it simply means that I will not be willing to pay an extraordinary amount to own it. Regarding whether it will continue to grow slowly, well, that is my investment thesis. Indian agriculture needs a lot of automation and Goodyear India is an integral part of that value chain. Any ramp up of automation in this area (Which I personally think is inevitable) should help Goodyear India to grow further - maybe not immediately, but eventually.
-
Goodyear India’s management is very professional and leave almost nothing to doubt. They do pay hefty dividends. But yes, Buybacks would be a nice bonus. I think I said somewhere in this thread that if Goodyear USA buys out Goodyear India, I will be happy to not sell and hold the shares for good.
Most Auto industries have matured and died in the USA. Therefore, Goodyear USA is essentially a cyclical company. You can look at any “old school” Auto stock in the USA and they will also look cyclical (Ex: Ford, GM, FCA), with a few exceptions I’m sure. It does not mean there is something wrong with all these companies.
Goodyear India, at the cusp of a growing need for agricultural automation in India, is not directly comparable to Goodyear USA at all. It is a bit like comparing Coal India to Petronet LNG.
I wouldn’t really say Nilkamal is a ‘prominent’ part of my watchlist. Most of my watchlist is not ‘prominent’.
I believe I skipped on Supreme Industries a year or so back based on Valuation. I haven’t looked at it now. But definitely, Supreme Industries is a far better business with better cashflow profile.
1 Like
Dinesh,
Market gives more value to quality, moat, capacity of businesses to survive in odd conditions. You did not see bargain in HDFC Bank and sold, switched your money to Indusind for more return. In hindsight, decision was wrong.
Now again you dont see bargain in Supreme and focus on Nilkamal. Dont you think that you should review your policy of not paying more for quality. This way, at least you are always with quality. I know you have some top quality bargains too but here question is specific to Nilkamal vs Supreme. I think it does not violate your policy too as you dont mind if growth is slow, also you cansider growth as component of value too.
3 Likes
Hi Dinesh - many thanks for your continuous and balanced feedback. I would be greatly interested in understanding your logic for choosing Heritage Foods - assuming you looked at other value added dairy companies. I am already convinced the industry seems interesting - although extremely fragmented and subject to milk availability constraints - as is the case now. I am personally looking at Parag Milk Foods (which has a similar size but a higher margin - which I attribute to a higher share of value added milk products) - and although it has had some bad news in the past (share pledge, loss of a marquee FII), it seems to be solving at least the pledge issue. Appreciate any thoughts you may have.
I second your thought. I always thought there should be balance between valuation and business quality, moat, management quality etc.
Dinesh style of investing looks for deep value first with lot of MoS and then look for quality. Every one has different style but I feel even if Iyou pay 15% more I would look for quality then valuation but its very subjective
In general, What I have observed is that every investor has his/her own journey to finding success in the market.
We may have suggestions for the same but fact of the matter is some lessons are only taught by the market itself and there is no other way around it.
Dinesh would never be able to build conviction around your/our suggestions because he is process driven and he is not currently focusing on changing his mental setup of how he views value. He is focused on charting his path in a way which is comfortable to him and he surely puts money where his mouth is.
If you were to take my example, I have focused last 5,6 years trying to understand the investing cycles, but I am extremely weak in analysing Balance sheets and PL. I have tried to learn all things but fact of the matter is there are only so many hours in the day and one day I will get to a point when I learn valuations in earnest.
If Dinesh wants a 15 cagr on his portfolio and has an appetite for high volatility, even 2 bets in a portfolio of 7 can help him get there.
There is no single path to success and various paths can lead to success. I respect his journey a lot and track this thread closely.
11 Likes
I agree with all points. In fact, his portfolio thread is highly educative. It is awesome to see Dinesh defending his decisions with full conviction, rationale. We ask our questions to draw more from him to understand more. He has good sense of time management too like Hitesh, otherwise it is not easy to reply everyone daily with lot of logics.
4 Likes