Today, I present the summary of a dialogue conducted by Mr. Khurana with a full time value investor. I’m not certain if it’s acceptable to disclose the investor’s details. Hence, I’ll address him as Mr. A.
Mr. A now manages money for himself and his clients. He has established himself as the source of coherent opinions on investing. His guidance is pure and does possess the potential to dramatically improve our process of investing.
The beginning of his investment journey is nothing but fascinating.
In his childhood, he witnessed his parent investing in companies, applying for stocks in initial public offerings. The process sure piqued his curiosity.
A monumental moment in his journey was the launch of a mutual fund by a major American company in 1994 . He witnessed delirium among applicants.
His desire to participate in capital markets continued to develop over the years.
Finally, in the years 1997-98, as a student of textile engineering, he made a foray in the bizarre yet enchanting world of capital markets.
He commenced with a capital of Rs. 10000.
Being a student of textile engineering, he had a reasonable understanding of the company Bombay Dyeing. It was in his circle of competence. This investment appreciated his corpus by 30%. Mr. A was delighted, exuberant.
In the meanwhile, he had established a habit of reading newspapers, magazines concerning the world of finance. However, he admits candidly, that he couldn’t comprehend a major portion of the content in these sources of information.
But, its precisely this inability to understand that stimulated him to persist. Also, on a lighter note, he shares that having reading as a hobby could prove to be entrancing to recruiters.
He graduated in the year 2000. Prior to graduation, in the run up to the IT boom, unprecedented recruiting activities were initiated by IT firms. As a result of that, he was offered a job by one of India’s leading information technology firms. But, in those days, he wasn’t very comfortable with technology.
Mr. A was pleased to get a job. But, there was a tinge of unhappiness since it wasn’t his calling. However, not to his displeasure, the IT bubble burst and the job offer was rescinded.
Post graduation, he was granted admission to a leading management institute in 2002. Mr. A was simultaneously investing in shares. He then went on to work with a leading professor as well as investor.
In the initial days, scanning BSE announcements, was a major source of investment ideas. He practised various investing styles and strategies- Deep value investing, cyclical investing, debt restructuring investing, etc.
Just 10 years ago, his portfolio comprised of 40-50 companies. Over the years, amends have been made and now, Mr. A’s portfolio now comprises 7-8 companies. A major source of investment ideas is screens, interactions with fellow investors, literature.
His recipe for investing success is good business, good management and a realistic expectation from investments
Mr. A desires a 17% IRR.
Mr. A lightens his holdings when market prices overshoot the intrinsic value. Booking profits is contingent on company quality and alternate opportunities. His selling decision isn’t dependent at all on the index levels. He takes a company specific view.
Determination of intrinsic value
He employs a discounted cash flow model after introducing very conservative numbers to estimate the fair value range. For further safety he takes a 25% margin of safety. He assumes a 10% discount rate.
Mr. A places great importance in the moat possessed by a business.
He considers selling when market price is 1.75-2 times the calculated intrinsic value
He initiates a fresh assessment, evaluation of the company once valuations exceed intrinsic value and become lofty. But, if investment thesis is wrong, have no hesitation in booking losses.
But, for Mr. A, it must be mentioned that valuation is just 20% of the investing process. 80% is contingent on business quality and management.
Business thesis is important but valuation is more important
How long to hold stocks?
Mr. A believes in having no timelines. He allows the market to take its own time to discover the
stock and accord fair valuations.
More often than not, if evaluation is correctly performed, returns will be delivered. Market may delay reward but not deny it.
Spend a lot of time before investing. But, once invested, be patient
Risk management strategies
Risk is the loss of capital and/or purchasing power.
Mr. A believes in developing a tremendous grasp of the business before investing. Also, diversification is crucial for him. He doesn’t invest more than 20% of portfolio in any stock at cost.
In depth understanding + Diversification = Risk Management
Are triggers required for stock to appreciate in price?
For investing styles like asset plays, triggers are requisite. But, when an investment is based on the mispricing of a excellent earnings generating company, business performance in itself will trigger price appreciation. But, patience is critical.
No investor is immune to mistakes.
Mr. A succinctly summarises his mistakes-
Investing in ideas with half baked conviction
Resist the Fear of Missing Out.
Calm mind is a prerequisite in investing
Derive nectar out of the investing process
Don’t aim after shooting. Understand and only then act
Is meeting management advisable?
Mr. A believes that management meets are unwarranted. Often, they may prove to be counterproductive. We may be entranced by the top manager and investing based on such superficial evaluation is often disastrous.
All the requisite information is available in public domain.
It isn’t value additive to meet top leadership. It often leads to wastage of time.
Try to understand the business, not management
Suggestions for overall development
To be a successful investor, it’s imperative to participate in non investing activities.
Excess of anything is detrimental.
Mr. A is an avid sportsperson. He reads extensively, interacts with friends and also spends time in other leisure activities.
Some leisure is absolutely necessary for high productivity
I’ve tried my best to restrict errors. If any, my apologies.