ValuePickr Forum

VP CHINTAN BAITHAK GOA 2015: Donald Francis: INVESTMENT JOURNEY/PHILOSOPHY

Moving on to perspectives from a trio of avid practitioners/hard workers/thinkers among the VP Community - Gaurav Sud, Abhishek Basumallick, and Yours Truly

Among this trio my active experience is the least - primarily 2009 onwards. However being a very keen student of the Investing ART, always try to make up for the lack of experience by making sure I am in the company of able men - through passion, catalytic teamwork and genuine curiosity - to the point of being blunt and unflinching in posing tough questions to the able men :wink:

My abstracted key practical learnings enclosed - a mix of Mentor Tenets (I just took and started running with from 2009) + my active experimentation with these + some critical reflection. From 2005-2008 I had read up most of the famous Guru Books so I did have the context to be able to choose which mentor tenets felt right (to me), were simple, practical and easily implementable

INVESTMENT JOURNEY - Donald Francis - VP CHINTAN BAITHAK - GOA 2015.pdf (155.9 KB)

Hope some learners will find something useful here in speeding up your learning curves.

29 Likes

Most awaited one !!! :smile:

1 Like

In the VP Chintan Baithak 2015, we agreed to focus mainly on 2 Main aspects - that we felt impacts Investment decision-making the most

  1. On the softer aspect of understanding oneself first - What are my aspirations, What kind of a risk-taker am I, am I a strategic decision maker or am I more tactical/action oriented ??

  2. Secondly on practical aspects of decision-making - What Excites me, What patterns are Must Have, What are Ignorables, and what are not, Buying & Selling Decisions, Mistakes, How not to fall in Love??

This was prompted from the active experience within the VP Extended Team - which had access to practically the same data/analysis, scuttlebutt, Management Q&A and refined discussions - and yet most had very different looking (successful) portfolios. We realised that the way we make investment decisions have a lot to do with a) Our basic Personality Type b) Our Individual Investment Philosophy that keeps getting formed/refined over time

Seeing the Presentations with this context - will help us examine if we know/understand our investing-selves well :wink: . And examining whether we know what to value and look for will tell us how close/far we are from forming an Investment Philosophy for ourselves - which is probably the first concrete step towards investing ART refinements/learning

9 Likes

Good one .keep doing the good work

@Donald Is there a fixed formula that you follow for the broad allocations. i.e.Small cap, Stable and Cash (alternative)?

Smart presentation from a smart guy! Though I liked the whole presentation, my favourite is “Personality Traits”. If we call Hitesh & Ayush our Sachin Tendulkar then you are our Rahul Dravid - Mr. Dependable/Perfectionist.

5 Likes

@akbarkhan

The Quest is for an all-weather market-agnostic portfolio. Can we construct a portfolio that is designed such that at any given phase of market, atleast 2 out of 3 segments will perform decently (20-25% CAGR)??

Portfolio allocations to different styles is evolving with my maturity as an investor. Earlier it was too aggressive being completely small caps heavy and focused on quality small companies with sustainable growth prospects.

At the moment it is 60% small cap heavy. Another 25% in Defensive well-discovered businesses with lower but sustainable growth. I am okay to sacrifice some of the aggressive growth for more stability in the portfolio. 15% is in Contra bets where downsides are limited but sustainable growth visibility is 1-2 years away.

Am struggling to bring down the Small Cap allocation to 50% :slight_smile: and increase allocations to others. Its not proving easy as our small-caps are all super-performers with good visibility ahead for most of them (valuations being rich, but not completely out-of-line).

Somewhere it has to come down to discipline and rigour, as you ask. While intellectually it feels correct to adopt, I am still to develop that kind of conviction. Maybe a few knocks will set me straight :slight_smile:

3 Likes

Hi Donald,
A basic question - How frequently do you visit your own portfolio/monitor stock prices or are able to resist the temptation of not doing so very frequently, more so as you are in a full time venture which is associated with stocks and the market?

Donald,
Liked your presentation. Very honest and candid.

Couple of queries after going through the PPT…

  1. You said you ask if he stock can give you 25% upside on an annual basis…business fundamentals and stock price wise. Curious to know how do you make this judgement regarding stock price. Do you have analytical method or you go by intuition and expert opinions regarding price appreciation?
  2. some where I had seen that you left employment and have become full time investor. if this is true then I am curious to know how this transition influenced your investing process and investing psychology.

… Not related to your ppt but…do you have any plans to hold such Baithak in Pune any time? What is VP footprint outside Bangalore?

Cheers.

Hi Neelesh,

I need to re-visit once in 6 months only.

I guess again this boils down to Temperament (Personality type). Do all the work you need before the investment decision - I work the hardest among the Team then. Having made the decision, I like to give the business/Management time to walk the talk, and like to take it easy :). I believe sustained business performance is what will show up in sustainable valuation - anything else will not be sustainable. So no need to get worked up over market gyrations! Peter Lynch has always reminded us - Remember, current stock price has no bearing on the future prospects of the business. Often it moves the other way.

Business challenges keep coming up every now and then. Key think is to know whether we trust the competency of this Management to do the best they can to meet the challenges that will inevitably come their way. I don’t think fortunes of any business/industry changes dramatically in a quarter. If the business is prone to some cyclicality - and a deteriorating trend is seen/expected - we need to sit-up after perhaps 2 quarters, ascertain facts and ask probing questions. If the business is essentially non-cyclical in nature, and if we have built up familiarity with the business/management over a couple of years or more - I will give the business at least 4 quarters - before I start getting concerned.

Keeping away from the Noise is somehow very easy for me - I guess that was your main question - I am not someone who gets excited/panicky very easily. I am very choosy. I want to add at the most a couple of businesses every year to the Portfolio. Folks have to be real persistent and catch my attention with what’s special? If that is articulated well, then the new idea has to have enough substance to knock the sheen from an existing portfolio contender - else why should I bother?

I thought I will give a short answer, but this ended up being a long-winded one - hope this helps add perspective to your query.

6 Likes

Girish,

Thanks. I am aware of my limitations :smile:

Its quite a simple concept actually - and very easy to implement - IF you have done all the hardwork/scuttelbutt, etc. Which means you have some insights into business quality, its sustainability, predictability and longevity (these are not mere words - we take them very seriously and need to have tangible data/insights that can stand up to questioning). Then you would have slotted the business into B+, A, A+ or A++ category. Which means you have a decent hypothesis about a stable fair valuation for the business

  1. If Business performance visibility is strong at 25% CAGR for next 2-3 years, then it all boils down to our call on BQ slotting being right.
  2. So if business performs at 25% CAGR and our BQ slotting is right, Mr Market has no reason not to continue to maintain valuations (if not better it). So 25% stock performance is in the bag, if business performs
  3. If the business continues to perform as expected, but we got our BQ slotting wrong, the 25% CAGR in stock performance may not be there, and that’s how we will learn and refine !
  4. So far we have been very lucky that most of our businesses have continued to perform, and we have been luckier that we were always able to buy at steep discounts to our BQ slotting :wink:

Its getting tougher by the day to buy small quality businesses at discounts to their BQ. But there are always opportunities if we work hard enough, and are patient enough. Mr MArket always gives chances to the prepared !

4 Likes

Re: Leaving Employment and turning Full-Time Investor

It was gradual, calibrated risk-taking

  1. First became part-time consultant, part-time investor - for a year
  2. Ensured there was a Plan B - to finance running the household - by putting up some real-estate on steady rentals
  3. Without additional pressures, I was free to focus on learning and soaking up from all the smart guys around like Ayush & Hitesh
  4. Started small and continued to build up allocations as I grew more convinced that there is a method to the madness after all, and found our method rocks!
  5. Even now, the same philosophy holds - I do not stake it all - As I grow more confident of our investment maturity, I stake more. Eagerly waiting to see how we fare when the next big crash comes around. When I see through a full bull-bear market cycle, I will know where we stand :wink:

I remain a calculated risk-taker who will set stretched goals for myself. As we grew more confident and had the benefit of Mr D’s Capital allocation framework in 2011 - I learnt to cut down from 20+businesses to 8-10 businesses at most - and learnt to put my money where my mouth is :smile: ; learnt to keep faith in our hard work and hard-earned insights into the business and management quality, that is. Capital building for me has always been long-term strategic bets, based on key Insights, where we may have an Edge over Mr Market !

If anything has changed - it is about keeping FAITH after doing all the hard work. Gaining more confidence in ourselves and our methods, working hard to continually test and refine our BQ/MQ insights.

18 Likes

Donald,

Thank you so much for sharing the presentation with us. As you have mentioned, there is a lot to learn from every slide and the PPT is worth going through a number of times.

From all that I had been reading on this esteemed forum, I was under the impression that senior folks here look to buy quality business at undervalued levels (As mentioned in your presentation - gap between performance & perception). Your presentation, however, also talks about buying companies like Page and Gruh - which clearly look overvalued by “traditional metrics”. Can you throw some light on the thought process behind buying “expensive” (albeit high quality) businesses also? How do you decide which business you would buy and which you will pass when it comes to these companies?

Sorry for being slightly obscure with my query; I hope you get the gist of it.

Thanks

2 Likes

@Donald Curious to know what strategy can be planned when a crash like 2008 comes and suddenly all your mutibagger stocks or portfolio started to weep with 60-80% downside. This feeling some times gives me nightmares that all your hard earned money just wiping out not because of internal factors but external factors.

Donald what are the nos of scrips you have in your portfolio? Are you believer in a concentrated portfolio approach or did you follow it when the PF size was small ?Once the PF became big did you increased the no of scrips in PF to preserve the gains?does 3 diff scrips in HFC segment count as 1 scrip or 3 scrips?

Shudnt we be on the look out for a quality small cap that has the potential to multiply thus boosting the returns ala Avanti,PFS etc besides 80% stocks comprising of compounders in our PF?

Do you think one should invest with a minimum ticket size otherwise returns will not be substantial?

Whats your take on loss by omission?

How do you find if the growth mindset is present in promoter or not?

All in all you and VP have done to a yeoman service to lacs of Indian investors who visit here.I am a live example of it.I never imagined VP to reach such height of popularity.Yet you are so humble n down to earth.Hats off.Keep up the good work.God Bless you.

1 Like

As always, Awesome post Donald. I too have been doing something similar. (except for the contra bet idea) ie allocate about 20% to defensive high quality businesses like the gsk consumers, maricos of the world.

I have 1 question for you. what would do when a growth stock becomes highly overvalued? Are you ok with giving up 1 or 2 years returns? (price correction/time correction till earnings catch up).

@karanmaroo & @nityanandparab

Your questions are in a way linked - joined at the hip, so to say. Thanks for asking a key question - that I have grappled with for almost whole of 2014, talked to a lot of market practitioners and seniors I respect (shared somewhere at VP in market-agnostic Portfolio construction I think) , and came up with a Portfolio Strategy which looked (to me) a good enough risk-adjusted strategy.

There is no Holy Grail. We keep searching for Refinements. I was a novice during the last bull market build-up, so take these comments with big pinch of salt

It has been drilled into me by my Mentors that Portfolio Returns cannot be seen in isolation. How much Risk have we taken to achieve the Returns - is what Fund Managers are measured by !!

  1. I have no doubt that VP Portfolio strategy as enunciated - was ideal risk-adjusted strategy for pursuing superior returns through Bear Markets leading to a Bull phase (which is what we have witnessed 2010-2015)
  2. I am equally sure this will be a sub-optimal strategy to follow through for the Bull Market leading to the Crash phase
  3. It’s an educated guess (don’t kill me for it) that different sections of the economy will lead markets at different phases of the ongoing bull market. At the moment Manufactured Exports is India’s only real pillar of growth. At some stage when credit cycle/interest rate eases, some other sections will take over
  4. We cannot predict the Timing - therefore I wanted a portfolio TODAY that is structured in a way to continue to do well - by being positioned (read balanced) in a way - that atleast 2/3rds of the portfolio continues to perform at the desired clip, while the 3rd helps stabilise with hopefully almost zero downsides (and not matching but decent upsides)

This obviously meant sacrificing some of the aggressive growth. Introduce more stability by accepting slower growth than we are used to but with much higher predictability/ sustainability/ longevity. Contra bets am still working on as mentioned.

So why choose PAGE and GRUH over other safe Compounders (which may be equally over-stretched) - like Karan asks?

  1. In my mind the two are still young horses - but match every characteristic you may want from stabilisers in Portfolio - very long runway, very very difficult to dislodge, very predictable. Management Competency we have come to trust that they will execute their best in adverse environments.
  2. Its a safe bet probably that these have enough stamina and youth to run faster than many others
  3. Most importantly in Team VP (surprise, surprise) we have enough Jockeys who have been riding these horses successfully, who can share their insights, and can guide you well when opportunities present themselves. Page offered many opportunities for decently long time in late 2013 and early 2014 where it was available within a fair range. Gruh gave enough opportunities around June this year to the discerning. If you are patient enough, every year you do get a few opportunities.
  4. But for that You must be prepared, you must know you are looking for that opportunity. be willing to take the Bite??? At worst what will happen, your bets in these will consolidate for a year, right. I will anyday take those ODDS.

[Dhwanil will identify well with these statements of mine :wink:] No Risk, No Gain.

7 Likes

@nityanandparab

Re: Portfolio impact when everything crashes - can you withstand 60-80% impact

  1. The classic/purist answer that you will get - is stay with your long term winners they will recover. If your business continues to grow you need not bother much about valuations - cos you cant time the market - get in and get out at the right time
  2. I like to think of myself a s a Fund Manager - who sees (has seen in 2008) enormous Opporunity Cost of Capital
  3. I belong to the Camp (not many there) who will draw the line and make gradual exits on a stock specific basis when Valuations start factoring in 3 years+ earnings today.
  4. When Markets overall (not pockets) start seeing frenzy - I will start shifting Portfolio to safer horses.
  5. At Nifty Median + 2 Sigma or thereabouts valuations I will start moving significantly to CASH

Disc: Many purist Seniors have cautioned me saying this approach may be fool-hardy to attempt so all readers, be cautioned suitably. It is akin to saying I can time the Market. Most Folks don’t have it in them to leave something on the Table and exit (read, absolute Greed takes over). But I have been fortunate to also meet atleast 3-4 well regarded Seniors who say they have been able to exit decently leaving something on the Table at every Secular crash last 2-3 times !! So it’s my personal challenge to see if I have it in me - the Discipline and the Guts to effect the above.

I reserve the right to change my views abruptly/totally if I get wiser to some other strategy that may work better :slight_smile:

14 Likes

Hi Donlad,

Thanks for sharing a wonderful wisdom document. Need to read , reread and learn.

One may be a personal question, as we know every bull market many investor become full time investor only to regret later when tide turns. So to be financially independent ( new buzz word this time), what are the thumb rules and what are things you considered before quitting your highly paid job ?

I have read, if one have financial savings of 30 times of hisannual expenses, zero debt and 1 own house for living, then one can say he is financial independent.
But there is a catch here, if someone considers his PF size in bull market peak and leaves his job just before a crash, he may be in for a big trouble of financial and family stress. I think many here are also full time investors.

So what has been your thumb rule, thought process and any learning for many who wish to become full time investor ! :yum:

Thanks

Vivek,

If you read through the presentation shared, some of your queries are already answered there, so I will skip those specifically

  1. 3 Scrips in HFC
    I think your underlying question is do I worry about High allocation to 1 Sector? The answer is NO, I do not. It is always a bottoms-up stock specific undervaluation/conviction multiple. But I do try to take care as possible that they have different a) Competency spread b) Product/Market spread c) Geography spread a la Ajanta, Shilpa, Alembic

  2. Lookout for quality small cap like Avanti / with 80% Compounders
    Segment allocation preferences for me are covered in the presentation.
    Yes, we are always on the lookout for small quality business with good growth, niche domination, and some X-Factor. None of us has a crystal ball. Its only 2-3 years down the line we find out how well the business actually performs/in-line or beating our hypothesis way out like Avanti has done e.g. It is relatively easier to scale up to first 500-1000 Cr Sales. The challenges and Management Bandwith, Operational excellence needed for the next level are usually tougher - the Men get separated from the Boys at this stage.
    The good part in investing is we can up the stakes progressively as we understand more, and have more confidence in BQ/MQ, or re-assess and take corrective actions, if we signs of losing that edge or superiority in business and/or decline in Industry/Environment

  3. Minimum Ticket Size
    Depends on personal financial situation, Temperament, Knowing what one is doing, Aspiration
    For me the third aspect was a problem so I started very small - proof of the pudding is always in the eating - I had beginners luck all the way - and great mentors around - so I don’t think it matters

  4. Growth Mindset is present or not
    We have explained this in the MQ presentation

All your other queries are addressed in this presentation I would think. Feel free to revert if you have a finer-grained question on those

2 Likes