Please share your investment philosophy

My investment theory has evolved over time like most of you. Gone are the days where i was looking for that one hot stock / IPO. I have matured a little more in terms of how i pick my stocks. The theory goes like this

  1. 20 - 30% in cash all the time to ensure that i can take some positions as required in case of a good market condition

  2. 10 % allocated for knee jerk reactions as a very short term play, almost like a trader and not a investor

  3. 20 to 30% allocated to mid to large caps for stability and steady growth

  4. 20% allocated for small cap, growth stories

  5. rest sprinkled across mutual funds, ETF anddebt instruments.

Reading this doesnt feel like a investment philosophy but rather as capital allocation of your portfolio, but i think the two are very interlinked. Maybe i can come back and write up more later.

I am a noob in investments with a limited investible cash… So I dont mind smaller gains initially. It is important for me to survive business cycles rather than chasing illusionary agressive gains in boom/cycles. So my rules are -

  1. Sustainable businesses which I can understand: I will follow the businesses I dont like, no matter how much money these stocks make
  • No cyclical industries (no…no… at this juncture at least)… So that rules out real estates, infrastructure & commodities. They are good weather friends. Besides, I dont like real estate in India. The show is run by the people without integrity. (I may be too blunt. But thatswhat I believe.)

  • No technology…(Idonthave sufficient expertise to analyse them. They haveunpredictable business models dependent heavily on technology. Smart guys in Warburg Pincus can survive massacre in Moser Baer, poor guy like me can not)

  • No pharma or biotech.They arealso the businesses I dont understand. Basically I am a noob in investments. SoI read ‘Intangibles’ as ‘Untouchables’

  • No Banking & Financial Services. I dont know anything about them. Too much regulated businesses.

  • So that leaves very few options for me.Howeveras I save more & more out of what peanuts I earn, I will make a respectable corpusin near future. Also maybe with thehelp of seniors like you, I may expand my circle-of-competance.

  • Businesses with moats reflected in -

    • No negative operating cashflow for past8-10 years…
    • No negative free cashflow for past 4-5 years
    • Pricing power
    • Excellent distribution network
  • Noserial acquirers.Iwas an investment banking analyst myself & I believeserial transactions create agency conflicts - CEO wins &minority shareholders may lose.

  • Debt-Equity ratio less than 0.3. I prefer debt free companies. But if a company has revolver debt for working capital needs, still fine. But that must be within these acceptable norms.

  • Management integrity & capability-

    * No creative accounting shenanigans. If management says 'Sorry. We will not do it again', I stay away because the chances of doing it again are very high. History repeats itself. 
    * High disclosure standards
    * Fair management compensation structure (in terms of variable pay, ESOPs & grants)
    * Good capital allocation record -No unrelated diversification. If business is churning good money, I expect managementto either reinvest it or pay it back to shareholders (dividend or buy-back)
    * It may be a nasty habit, but I check managementquality by comparing what they said in past & what is materialising now. I open up 2006-07 annual report & read MD&A & compare what transpired in 2011-12.
    

I would urgethemembers to give their inputs.These may be too much expectations. But I believe ‘Prevention is better than Cure’.

Gaurav,

You cant be a noob. You have amazing clarity of thought which is far better than many of us here.

Perhaps you may need to develop some affinity towards Financials. Financial companies in India in general have been great compunders. HDFC bank, Indusind etc , Shriram transport and union etc.

But I love your clarity of thought. Super.

cheers

** no make **

  • thatswhat I believe.)No technology…(Idonthave
    haveunpredictable biotech.They arealso SoI me.Howeveras corpusin thehelp past8-10 years…
  • Pricing power
  • Noserial acquirers.Iwas believeserial &minority capability-
    -No managementto managementquality urgethemembers inputs.These

Dear Sunil,

Thanks for the encouragement. It will go a long way in helping learners like me who are relatively inexperienced in this activity.

You are right.Financial companies in Indiahave beengreat compounders. However I don’t know how to analyse them. At present I amlearning more about investing psyche rather than specifics of analysis. If I look at the banks & financial services companies, Idont know how to factor several of factors like -

Agressive lending.Correct me if I am wrong. But many times lending is made on the basis of pledging of promoters stake. Now if underlying business is crap, then what is the security in such pledged shares? Then what is the quality of such lending? I believe one bad account can cost lots of money to the shareholders.Take an example ofKingfisher or Deccan Chronical Holdings. Consortium that lent these, not only lost absolute amount of money, but also lost in terms of significant opportunity cost. They could have lent it to any other (money making) enterprise on more favourable terms. Add it to the costs of arbitration, debt restructuring. I will sayspending10 cents to take 50 cents out of 1 dollar lent. Thepoint is still you arespending10 cent sure-shot to gain possibly 50 cents.Againcorrect me if I am wrong.

Government pushes PSU banks to agressive lendings sometimes. Not only the bad loans are made sometimes, but recovery of the NPAs is alsoignoredas populist measures.Do wehave a yardstick to measure the long term implications (on value)of such a recurring populist measures?

Maybe I need to think a lot about the whole business of lending & financial operations. Then only will I be able form a bigger picture in my mind. Thank you for your encouragement and I am looking to learn from you all.

Gaurav,

You cant be a noob. You have amazing clarity of thought which is far better than many of us here.

Perhaps you may need to develop some affinity towards Financials. Financial companies in India in general have been great compunders. HDFC bank, Indusind etc , Shriram transport and union etc.

But I love your clarity of thought. Super.

cheers

** no make **

  • thatswhat I believe.)No technology…(Idonthave
    haveunpredictable biotech.They arealso SoI me.Howeveras corpusin thehelp past8-10 years…
  • Pricing power
  • Noserial acquirers.Iwas believeserial &minority capability-
    -No managementto managementquality

I would urgethemembers inputs.These

I think you would need to analyse Financial services companies from the viewpoint of lending practices. eg. Axis versus HDFC bank. In the quest of growing too fast, Axis seems to me to havegot into higher NPAs versus HDFC bank which is focused towards retail loans. Similarly perhaps we need to shun PSU banks altogether. There are psu banks which may have value but in my view are more of trading bets and not secular bets like HDFC bank. HDFC bank, Indusind seem to be great bets with low risks. I would say Gruh Finance is positioned to tap a huge opportunity though the price needs to be better for an entry.I would also look at an LIC housing and a Canfin homes though surely there is a psu overhang there.

Dear Sunil,

Thanks for the encouragement. It will go a long way in helping learners like me who are relatively inexperienced in this activity.

You are right.Financial companies in Indiahave beengreat compounders. However I don’t know how to analyse them. At present I amlearning more about investing psyche rather than specifics of analysis. If I look at the banks & financial services companies, Idont know how to factor several of factors like -

Agressive lending.Correct me if I am wrong. But many times lending is made on the basis of pledging of promoters stake. Now if underlying business is crap, then what is the security in such pledged shares? Then what is the quality of such lending? I believe one bad account can cost lots of money to the shareholders.Take an example ofKingfisher or Deccan Chronical Holdings. Consortium that lent these, not only lost absolute amount of money, but also lost in terms of significant opportunity cost. They could have lent it to any other (money making) enterprise on more favourable terms. Add it to the costs of arbitration, debt restructuring. I will sayspending10 cents to take 50 cents out of 1 dollar lent. Thepoint is still you arespending10 cent sure-shot to gain possibly 50 cents.Againcorrect me if I am wrong.

Government pushes PSU banks to agressive lendings sometimes. Not only the bad loans are made sometimes, but recovery of the NPAs is alsoignoredas populist measures.Do wehave a yardstick to measure the long term implications (on value)of such a recurring populist measures?

Maybe I need to think a lot about the whole business of lending & financial operations. Then only will I be able form a bigger picture in my mind. Thank you for your encouragement and I am looking to learn from you all.

Gaurav,

You cant be a noob. You have amazing clarity of thought which is far better than many of us here.

Perhaps you may need to develop some affinity towards Financials. Financial companies in India in general have been great compunders. HDFC bank, Indusind etc , Shriram transport and union etc.

But I love your clarity of thought. Super.

cheers

** no make **

  • thatswhat I believe.)No technology…(Idonthave
    haveunpredictable biotech.They arealso SoI me.Howeveras corpusin thehelp past8-10 years…
  • Pricing power
  • Noserial acquirers.Iwas believeserial &minority capability-
    -No managementto managementquality

I would urgethemembers inputs.These

Well I have not read any books, but learning from classic websites like this.

From last 5 years generally follow buy and hold theoryâ.very limited trading in stocksâ

In 2008 I have bought Apple stock around $60 and sold it around $80, by thinking its time to book profit :slight_smile:

My core investment ( All in US) is something like thisâ

)–> Maintain Assets Allocation Planâ80/20

)–> Once in a year Re-Balance

)–> Core equity should be large cap

)–> Core equity investment via Top MFâ

)–> Use individual stock to give some boost to your returnâ

Individual stock investment criteriaâ.

)–> First minimum to zero debtâ

)–> Pick simple business which you can understand

For e.g Never bought any bank stock bc I cant understand them (In US)

)–> Look for growth hookâ

)–> Exit only if business scenario changesâelse keep adding them at better value pointâ

)–> Avoid small capâ

)–> No high flyer and story stockâ

For India nothing specialâ

Holding 20-30 stocksâ. Some are doing really good like sun pharma âtitan, yes in some I have lost everything like Punj and Pantaloonsâ

Bottom line for service class DCA(SIP) in good Diversified Mid to Large cap will help them to fight hyperinflation and may help them to secure their retirement.

I believe in investing in microcaps in sectors which align with India’s long term growth story for 70% of the portfolio(like consumer goods, auto/auto-ancillaries, pharma, hfc, plastic, agrochemical, e-commerce and internet, internet of things) and experiment 20% of my portfolio on cyclicals(like textile, agriculture, sugar, cement, chemical) and 10% cash.

I generally have a diversified portfolio ie 40-50 stocks . I am ok with 50% of my stocks not performing but I am not ok to loose out on multibaggers.

Here is why:

1 Like

I have been into market since 2007. After a lot of ups and down i simplified my approach as below:

  1. Management quality - Wealth creation is possible and “easier” if one finds the owner honest and driven by values and has an astute business sense. If you spotted Azim Premji of Wipro, NR Murthy of INFY, Biyani of Pantaloon, S Lal of Eicher, Parekh of HDFC and so on then 50% of your research is already done. Its not that these leaders were not facing any competition, it was there since beginning but their sheer vison and dogged determination has made their business stronger. Intelligent fanatics drives the organization vision and stock price follows it later accordingly. Its very simple and powerful insight i learned. I also pay small attention to the age of promoter, younger it is better the prospects.

  2. Business opportunity - #1 alone is not enough, an intelligent fanatics should also be in the sector which has a long tailwind. A new NR Murthy or a gen next Mittal of Airtel etc cant create the same kind of wealth as of past because sectors are saturated so it makes sense to always look for new sector whcih is evolving. I derived a great insight to spot a new sector after reading a book from Peter Theil’s Zero To one. To be in scalabale business is more important than with a solid company in a saturated sector.

  3. Valuation, financials - Needless to say one shouldnt buy stock at any price, i dont care much about PE but resist buying 50+ PE kind of stories. My limit is max 40 PE if above #1 and #2 are covered. I also look for companies which has decent or even superb RoE/RoCE, FCF and gorwing Div payout.

Above is to identify the wealth creation stories but i do indulge in small other stories from time to time purely based on price-value gap.

3 Likes

Manish - Do you sell a stock if it crosses 50 PE?