Love to have the seniors comment on the lessons from my first year of investing. It’s important not to learn the wrong things, hence it would be invaluable to hear your inline comments and reasoning.
http://littleinvestor.tumblr.com/post/88462603095/lessons-from-my-first-doubling
Lessons from my first doubling
So how good was I in my buying and selling decisions? As a responsible quant, hereâs what I tested. I took all my past orders and removed all the buy orders. Changed the sell orders to buy. i.e., Iâm creating a hypothetical portfolio that just buys everything I sell. Here are the returns for that portfolio:
It had almost similar returns of 135% (vs 160% in the original pf); It came with slightly less volatility - but almost similar. To put things in perspective, the difference in returns between the two strategies was: (260/235) = 10%; Not much of a difference at all.
Good stocks; Bad Seller
This tells me Iâm a bad seller. I could have easily avoided a ton of taxes had i just invested and held on. On the other hand, one can hardly complain with these kinds of returns. Most of the credits go to the investment community who has been a constant source of ideas. I merely chose the high conviction ones and took a concentrated portfolio of 6-8 stocks that I thought had the best inflection points playing out.
Specifically shout out to Ayush Mittal, Hitesh Patel, Donald and several others who have been very altruistic in sharing ideas with me.
Let us analyze the biggest winners post sale (i.e, my misses.) to see how much I can improve in the selling department.
Kaveri Seeds - 2x since sale
This was a big miss, because it was also one of the big concentrated positions. I sold it because at that time, there were farmer suicides and accusations of fake seeds sold by Kaveri. The price I sold it was the lowest in itâs charts. In retrospect it proved to be such a bad sale with the timing of it, since everyone wanted to sell. Point of maximum pessimism - it turned out to be.
OTOH, could farmer suicides have been a big issue? Could it have possibly impacted sales down the line? Was there a chance of govt intervention and fines being levied? These are unanswered questions in my mind.
Astral Polytechnik - 3x since sale.
This was another big miss, and I feel most of the investors missed the full run here almost certainly. The reason for the sale was, the company was trading at PE of 20 and I was worried it was a commodity business. The company manufactures plastics, and the management repeatedly said it was a capacity driven play with almost fixed margins. The more one adds capacity the more money one makes. If new capacity comes up, I thought, the business might start becoming seasonal, and the pricing power of the company in the long run is minimal.There were some signs of monopoly I dinât miss - The company had unique sourcing agreements with Berkshire Hathaway, and it was the only one who could manufacture that quality. But I felt it was a temporary arrangement and could not be depended upon over a long period of time.
The company has continued to deliver good growth and PE is now at 40.Market so far has clearly rewarded monopoly status.
Iâm interested in the lessons to be learnt here. As always the world is not black and white, as one might wish.
Cera Sanitaryware - 2.5x since sale
I sold it when the quarterly report told me the margins were compressing. The company was growing handsomely for a long time, but was entering into a highly competitive territory. The management had clearly guided margin compression and said unlike previous expectations is not able to maintain pricing power as a new entrant.
The fundamentals have played out as expected - it easily underperformed the median profit growth in my portfolio. But the PE is currently sitting at 32, and it was 14 when I sold. Again my point of sales was the lowest price point the company touched after. Clearly a bad timing in retrospect.
If I do not sell in this case, when do I sell ever? 
Regardless of justifications, markets have a way of proving you wrong.
Fluidomat - 2x since sale
This was my first success story - I entirely discovered this gem on my own. I also did a lot of ground work, calling the management and putting the story together. Great company I thought. I bought it at 50 and sold it near 75-85. Itâs now at 150.
I sold it when the profit growth was active but the sales growth was absent. They were making things more efficient internally and creating profits but without sales growth a small company may not catch market fancy for several years. The fundamentals played out justifying my sale. The profit growth for the year was merely 10% and the sales growth was -ve, severely underperforming my median holding.
But it caught market fancy, when the bull market began. It re-rated from 6 to 12 PE. This PE it has not attained in the past bull markets, and I canât see how i could have expected it. Well, well.
Atul Auto - 60% up since sale
Bought around 180 (8 PE), sold around 300 (12 PE) when the auto sector had heavily slowed down. The stock today is around 460 (18 PE). The company had very limited sales growth back then, and as I expected, it was slow for the remainder of the year. The sales growth for the year was 18% and profit growth merely 15%; This was poor compared to median growth of 50% in my portfolio.
The company was going through a temporary rough patch. It had the ability to create a lot of wealth with very little additional investments. OTOH, it had also reached high market penetration and people expected the growth to permanently slow down at some level. There were also risks that the company was trying to get into 4 wheeler space and it was super competitive.
Would i opt for the above risk reward? Only if I knew the results.
Conclusion
In each of the individual cases, it has been a hard surprise. Knowing myself, I feel like, I would do the same thing if the situation presented itself again.
Itâs easy to say the above, but itâs also hard to just settle for that. Being self-critical with an open mind is what we all strive for, isnât it?
A few learinings
(1) I could avoid selling at the worst possible time better. I canât be perfect here, but I can second guess what the whole market is going to be doing. Sensing fire sale in the market and not selling is a fix thatâs reasonable to expect from me in the future.
(2) I could give tangible value to momentum. Being a value investor this is one of the hardest lessons. Stocks donât move for a long time and when they choose to move, they do it in incredibly short periods of time. We can easily assess the discount to fair value but we are anchored not to participate in momentum. We have seen lower prices before and we feel the stock price might just correct back. Although we very well know over the longer term this story deserves a better PE ratio.
A current scenario - VST Tillers
‘VST Tillers & Tractors’ did a 4X this year. Market suddenly fell in love with the stock and it got rewarded with very good PE ratios. The company has just completed a large capacity expansion and we are yet to see its full benefits.
OTOH, The company does have an El Nino risk in my mind, related to uneven monsoon rain, and hence people hesitating to invest in tractors. So should I sell my large holdings or at-least a part of it?
The first question should be - how much does an average farmer contemplating a tiller investment foresee/fear the El Nino. The second question, probably the more important one - as I must be learning from this whole post - is how much is the market usually willing to tolerate out this near term pain - if it so happens.
It is a complex complex world out there.
