ValuePickr - Chintan Baithak 2019

VP 2019 was super amazing. Sharing my notes:

Concept of Trust (Exponential results) - "Accumulated Karma"

People and companies go a long long way by building trust.

There are companies which try to squeeze their customers, suppliers, bankers or even investors. Then their are companies which let their suppliers make profits, which let all their investors make money, which earn the trust of their customers. These get exponential results.

Concept of Yeh-ho-gaya-top / yeh-ho-gaya-bottom

There is no such as as “Yeh hogaya top” or “Yeh ho gaya bottom”. Even greatest investors made mistakes of thinking ki “ye ho gaya bottom” and valuations fell another 50%. Understanding macros is helpful. Stop-losses are important. Self-introspection is most important as to why something happened.

Concept of fighting the markets / accepting realities

“Market cuts everyone to the size” - when the stock falls to 20-30% from top, we book the stop losses and re-evaluate. We redo the homework - check everything again - and then re-invest if needed.

Power of Reflection

Keep asking and evaluating that why did I make money or why did I lose money in any idea?

Understanding what stocks made money for someone and why didn’t I look at those ideas?

Self improvement and reflection is most important for evolution.

We must have a clarity as to why we are holding something.

Analogy of Investing and Hiring

Investing is very much like hiring. We look at CV, do interviews, do background checks and ask for referrals. We develop trust overtime. We are willing to pay higher because we are surer.

“Foot in the door” is a very good approach. Go and experience it. If you believe it is expensive or don’t know if I am at top of the cycle - then put a stop loss.

Managing losses

Be ruthless to cut losses. No emotions.

Don’t try to rationalise when cutting losses.

You cannot carry too much dead-weight. Force yourself to rethink and re-evaluate to cut the laggards in optimum way.

In India, Growth with Quality works

Market is willing to pay very high for quality growth.

Graham’s “value-unlocking” method is not-very efficient in India. No bankruptcy code and the long legal process makes value-unlocking hard.

India has a very huge market. There is a customer at every price and at every quality. There can be shifts happening between these different markets.

As long as you keep surprising, the PE multiples can keep rising. PEG is a good metric.

Doing lots of company visits and ground work

Hiren visits 150 plants and companies a year. Every alternate week, he is travelling and visiting. They have hired a person who just stays on ground and visits stores.

Visiting lots of plants repeatedly gives you a sense about the qualitative differences.

Seeing how inventories are handled, the cleanliness, the controls and procedures tells a lot. To hold a stock, you need to be aware about the things. You should keep visiting.

“Hunting in pairs” - go on visits with someone.

How to Measure the Management

Evaluate management on their Capital Allocations and Leverage

What has the company done with money over the years. How has debt moved over the years.

These two will tell more about the management than many other things.

Focus on ROCEs, Cash Flows and Capital allocations.

Talking to management can be deceptive. It should be competitors who should appreciate.

Importance of Capex

We see capex and then expect the company to immediately put it to full utilisation.

Chances of growth from capex is 50:50. Put up your guards when you see capex. Observe the ROCEs.

Concept of ONE

High quality companies are very very unique. They are formed at a right time by a set of people and circumstances all played together. Thus there is only one HDFC Bank, one Pidilite, one Bajaj Finance, one Titan. There is only one Aishwarya, there can be a Deepika, but only one Aishwarya. We should not look for another HDFC Bank [i.e. not compare another bank with HDFC and invest based on comparative valuations].

"If we don’t disrupt ourselves, someone else will"

Alchemy has a quant team just to disrupt themselves. It is interesting to get their insights:

  • When Stocks fall by a third, their long term trend is broken
  • All great companies gave chances even after posting numbers

Investing is an open card game - you can play seen and still win

There is always a good business available that will become great. They always give chances to invest in. We are usually blinded by our own biases - eg not even looking at companies with high multiples. They are unique and can’t be recreated - “HDFC ek hi hai”. Great companies keep surprising and they are re-rated for that.

High multiples are risky because growth can get disrupted for various reasons. How many circumstances can hit and snowball is not knowable.

There are always first clear signs of stress - the first chink in the armour (keep materiality in mind).

When the company has done well then markets are willing to give them a benefit of doubt. They also give you a time to de-board.

RJ’s Framework

  1. Large external opportunity: “Ganga wahin se behati hai”

  2. Competitive edge to exploit it

  3. Scalable: Can it be scaled to 500 Cr - 5000 Cr - 25000 Cr

  4. Quality and Governance

    a. Quantitative aspects: did investors make money at each dilution

    b. Softer aspects:

  5. Valuation

On how to do experts pay high multiples

Valuations are given to the best. Look at the sizes of the bigger companies. Look at the scale and the best PE multiples in comparative industries.

Concept of V1 and V2

Most new industries go through an initial phase where there is a huge boom. Wild-west everywhere - everyone makes money.

Since the industry is new with few listed peers, there is no known way to value it.

There there is destruction and deep correction.

Very few survive the destruction and then they grow with durability in V2.

Handling Success - Killing our Egos

It is very easy to become complacent in wealth industry.

After a great year, take deep breath and look at everything.

Keep whipping your mind.

Be at your highest alert after great picks. You will often try to out-smart yourself.

Others

  • Investors can’t add value to the business. They are meant for thinking. They cannot grow or drive the businesses. That needs to be done by the entrepreneur running the business.
  • We are mostly running after the “new” companies - “Navu Su”. This often makes us blind to old understood stories or obvious mis-pricing in well-known businesses.
  • Understanding macros provides the context as to why a certain thing is happening.
  • Quality of capital put the the industry determines the outcome of the industry
  • The top person is even more important in service industries especially banks and finance as these are levered businesses. The top guy sets the overall culture.
  • Financing is easy to scale. You can also do wholesale lending with high growth. Retail lending is harder and slower and built over years.

Concept of Winning Losers Game

While 1% of the players are experts, most others lose most of their points in trying to hit shots and smashes. Most of the points are lost in doing smart things.

We can do very well by just getting the ball to other side.

In investing or business too, we can do very well by just avoiding mistakes and doing right things.

Trying to outsmart ourselves - timing markets - taking leveraged positions - is often injurious.

Keep doing RIGHT things and the markets will reward you.

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