I have sold out of Repco more than a year back about 15% below all time highs. Since I’m an ultra concentrated and full time investor, my mindset and approach is a bit different. This is more to save myself from grave mistakes.
Sorry for longish reply and being preachy.
I’m writing my lessons so you may take it as you would like. This worked for me so far and I’m not ready to fix it if it ain’t broken.
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I cannot excuse even an iota of doubt in corporate governance. Even a whiff of it and I’m out of it forever. This I learned from Repco and this turned out good for me as the price more than halved after my exit. So be ruthless and I would sell it even at a huge loss. I prefer the mistake of omission rather than commission. In fact after the CBI raids on the management, I’m very careful about choosing managements.
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When the integrity of the management is in question, the culture down the line in the organisation cannot be relied upon which is what separates a great company from the good/bad ones. The culture plays an important role in getting that predictable and consistent growth. The employees should feel that oneness. Only a great leader at top can drive that. All this involves a lot of subjectivity and it depends from person to person on how to judge management.
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The benchmark of management for me are HDFCs, Harsh Mariwala, Sunder Genomal, Radhakishan Damani, Sid Lal, Sudhin Choksey etc. I need not find the next Sid Lal as long as I let the current one compound for me with the right portfolio allocation. But, If I were starting now with small amount, I would allocate a certain portion of my PF in the next Sid Lal’s after learning the ropes of investing and not certainly on hope/tips/rumours and I will evaluate the story as it keeps playing and then decide to exit or pile on.
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When the management is unable to drive business performance for over a year I would err on the side of caution instead of quoting “WB” long term holding theory unless the management is of point 3 and growth slowed from 25% to 20%, the company is a leader and the slow down is temporary in my judgement, in which case I will hold. If the growth slowed from sustainable 25% to unpredictable 10% a quarter, 5% the next and 15% the next and de-grow the next I will definitely sell and market will not give high valuations at all. It will take really a long time to earn the trust of market for high valuations. 8-10 years or a couple of business cycles of predictable growth.
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Inverted thinking helped me: I thought Repco which was being accorded such high valuation only next to Gruh and what incentive did the market have to again accord such high multiples? None. So, I exited.
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PE de-rating and growth slow down when happens together - the stock falls real hard and sometime real fast too. When the inverse happens the stock rallies real fast and hard.
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My investment in MPS is one such big lesson for me where I have exited at loss after holding for more than a year of being gung ho about it. After implementing the low hanging fruits the management is unable to scale it further. They missed guidance after guidance after guidance and I held on to it on hope after hope after hope and in the process I have incurred huge opportunity costs and loss as well. Double stabbing. I’m not tracking this company now so I’m not sure if things have changed.
7a. EDIT: I have written in my earlier posts that it is better to be humble and exit at a loss rather than stay put in an investment on unfounded belief on ones own analysis comes from this experience of point 7. After I have exited the stock at a loss holding for more than a year and it is 1.5 years as of date that I have exited and the stock fell 30% from my exit price and the company where I have invested the MPS money gave me 45%. If this is not a life changing learning experience for me then what else is (personally at least)? This learning will do greater good for me than reading 5 more books. Of course, you must have valid reasons for the exit and not exit just for the heck of it or because you have an itch to trade!
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In fact that’s how I get around paying premium to great managements, consistent, predictable and sustainable growth companies and it is doing wonders to my PF so far.
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I’m fine with 15-20% CAGR with impeccable managements rather than risk for 25-30% CAGR with corporate governance issues and you know what my experience taught me the chances of latter working are far more slim as the former approach may give 15% CAGR or even 25% CAGR while the latter (-10 CAGR)!
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Willing to change my opinions on an investment and quick to exit has helped me. This is so underrated quality in stock market success.
If I’m successful, there is a lot of luck involved but if I have lost big then being unlucky has no role whatsoever for me. It is my unpreparedness and not being honest with self evaluation, not learning form my past mistakes and not working hard enough.
Disclosure: Companies listed in the post are not recommendations and I may have investments in some and I may exit at my will.