By the concept of dis-conforming evidence I was sharing my thoughts that it often happens that one is not confident about a story or one is negative or concerned about something…but when one sees contra data for the same, one should change his hypothesis and jump in…for eg: in the case of Ajanta, in the starting I was very skeptical as the past was poor…in the market there were lots of stories about the poor past track record of management and business…the balance sheet was bad - debtors used to be about 25-30% of turnover, so used to be inventory…so I was not ready to accept the idea. However, the company kept performing and in one of the balance sheet I noticed that all these concerns were going away - debt was reducing, along with reduction in working capital. That was the time to change the past view (dis-conforming evidence) and jump into the story and try to find the reasons for change.
Same thing was there for Chamanlal - everyone used to reject the idea as the income was majorly by way of trading so people thought its un-sustainable. But when the better margins sustained for 2-3 qtrs, I thought, there would be reasons for such better margins and we should try to find the same. Since then the margins have further improved along with surplus cash generation in balance sheet. This company has a very different business model as compared to any of the peers (most of the companies have lot of inventory and debt while it was reverse in the case of Chamanlal). So even without knowing much, I started investing and kept making efforts to find more.
By Premco example I shared that - initially when the company came out with fantastic numbers and the stock was very cheap, it could have been easy to discard the idea thinking its one-off and profit increase may be due to fall in rubber prices. But we made some entry. And as the company kept performing and posting better results with sustained margin expansion, we invested more. We feel that in today’s competitive times, superiors margins don’t sustain for too long (more than 2-3 qtr) until n unless there is some fundamental change. So its better to adopt the change and try finding more about it rather than keeping previous theory stuck in mind and missing on the idea (especially when valuations are cheap)