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Monday 27 August 2018

Stock Review - WPIL

Sunday 26 August 2018

Weekend podcast in ET Markets titled "How you can spot multibagger stocks"

You can listen to my latest weekend podcast in ET Markets titled "How you can spot multibagger stocks"

According to you, what is the definition of multibagger?

I think the term multibagger was made famous by Peter Lynch in his book One Up On Wall Street. He called stocks which doubled as 2-baggers and those that went up say 10 times as 10-baggers. To me, a multibagger is a misnomer. People assume multibagger with quick gains in the market, which is not really the case. People ignore the time element. Even a bank FD is a 2-bagger in 8-10 years! So, an absolute return value is meaningless without the element of time. To me, multibaggers are those which generate very good compounded returns for long periods of time. For example, stocks like Asian Paints, HDFC Bank, which have delivered superb returns over 20+ years to people who have held on to them over the entire duration.

How one can spot big compounders on D-Street?

There is no magic formula. Otherwise, everyone would be able to identify them. But if you think about it, what are the key ingredients required. For generating good revenue and profit growth over a long period of time, you need a stable industry, very large opportunity size, large profit pool and companies with a differentiated product or service which are able to take market share from its competitors. 

The second aspect you need to think about is the price you pay while buying. You will need the valuation, for example, the PE multiple to be at the same level or higher when you want to exit as compared to when you are buying. So, it makes sense to buy when the PE is low. That way you have a buffer for the possibility of you being wrong, what we call a margin of safety.

You also need to ensure the basic hygiene factors like low debt, high ROCE, good management are in place. Management needs to be a minority shareholder friendly. Remember the quality of management matters the most when the investment horizon is very long. 

Another misconception which I see a lot of people have is that only unknown and obscure small caps can be multibaggers. Like the examples of Asian Paints or HDFC Bank that I gave earlier, they were known stories even twenty years back. But importantly, they have been able to continue to execute well and outperform. So for good compounders, you need not look only at small caps and unknown names.

What kind of study one needs to spot such stocks?

As I mentioned earlier, to spot good compounders, you need to understand the industry in operates in quite well. You need to have a view on the longevity of the business and the absolute level of profit the company can generate. For example, ask yourself if the company can grow to 10 times its current profits? What is required to happen for it to grow that much? Who are the major competitors? Is the company able to take market share from its competitors? Is there any global example in another country that can be used as a reference point for this kind of growth? 

An interesting approach is to make a list of some great businesses. Then study them thoroughly. Make notes. Do a valuation. Then wait for the time when the overall market corrects, to buy the company, if it gets close to your valuation. My experience is that the market gives an opportunity at least once a year or once every other year when there is a steep correction. That is the time to load up on the stocks which are part of your Great Companies list.

As a value investors, where do you see opportunities right now?

It continues to be a struggle to find good compounders in the market today. Valuations for most good companies are still quite elevated, even after the fall in the broader markets. Having said that, I believe that there are still pockets of opportunity, especially in sectors like Pharma, Chemicals, Real Estate and IT. I think as an investor you need to spend time in understanding individual businesses and industries and always be on the lookout for great companies available at reasonable prices. As Peter Lynch said, "The person that turns over the most rocks wins the game." And finally, be patient till you find the right business to invest in, at the valuation where you are comfortable holding for the long term.

Friday 24 August 2018

ET Markets Article - The value investor’s checklist: What does it really contain?

You can read my latest article in ET Markets titled "The value investor’s checklist: What does it really contain?"

Preventing mistakes has always been more important to me than getting a stock pick right. I had limited capital when I started investing, so preventing a permanent capital loss has always been of paramount importance to me. When I sat back and realized that I had the propensity of making the same mistakes repeatedly, I stumbled upon the idea of having checklists, to prevent myself from self-destruction.

My first brush with something like a checklist came from Phil Fisher’s classic Common Stocks and Uncommon Profits. In the book, the appendix covers Fisher’s thoughts on the Key Factors in Evaluating Promising Firms – which is akin to a checklist. Fisher categorizes the key factors into
i)                    Functional Factors like lowest-cost producer, customer orientation and focus on R&D amongst others,
ii)                   People Factors like growth mindset, entrepreneurial spirit and treatment of staff and
iii)                 Business Characteristics like margins, efficiency of operations, competitive positioning and industry leadership.

Then I came across Atul Gawande’s The Checklist Manifesto. Here the author talks mainly about using checklists for minimizing errors, which reinforced my view of using a checklist.

Then I chanced upon a very nice book written by Micheal Shearn called The Investment Checklist. This book delves systematically into how to build a checklist and comes up with a fairly good one at the end. It covers business quality, management quality and competence, financial health of the company and growth opportunities. Any investor wanting to start building their own checklist could use this book as a starting point.

I have two main types of questions in my own checklist relating mainly to
i)                    adherence to process steps and
ii)                   delving deeper into the company or industry.
Process adherence type of questions could be as simple as have I read the last 10 years annual report or conference call transcripts. Delving deeper questions could be like if I know how many times independent directors have resigned from the board in the past or the quality of independent directors on the board.

What I have personally realized, beyond what is written in books is that an investment checklist should try and capture all aspects of investing – qualitative, quantitative and, most importantly, behavioral. It should also capture my own past mistakes to ensure they are not repeated. The behavioral and past mistakes is not addressed in most investment literature but is the most crucial in my opinion.

Just for illustrative puposes, some of the behavioral or mistakes related questions that I have on my checklist are
i)                    Am I price anchoring to a previous price at which I had either bought or sold,
ii)                  Am I being unduly optimistic (optimistic bias) and not looking at disconfirming evidence? and
iii)                Does the company have a large foreign currency borrowing in a overseas subsidiary?

The most important aspect to remember is that a checklist is a living document. One that needs to be updated with new or better questions and newer mistakes!

Monday 20 August 2018

ValuePickr 2018 - Annual Meet Takeaways

This was the 4th year we had the VP Annual Meet. The standard keeps going up each year. Personally, for me, I missed Donald during the meet. Hope he is there next year. His enthusiasm and prodding on working harder on a stock story have always egged me on in the last 8-10 years.

This year Prof Bakshi and Sumeet Nagar (Malabar Investments) were the special guests. Special thanks to them for spending so much time with us and sharing their experiences.

Every year, we have some new faces who make the cut. And every year, when I hear their presentations, I feel that I need to work harder to keep pace with them. This year was no different!

I personally was very impressed by Sumeet Nagar’s deliberate and thoughtful process of business evaluation and stock selection. It has encouraged me to do a lot deeper work than I used to do earlier.

As usual, learning from the fellow VP members has always been the greatest. When you have stalwarts like Hitesh Patel, Ayush Mittal, Anant Jain, Dhwanil Desai, Sandeep Kapadia and others all in one place, talking about businesses all the time, then it is par for the course that you will absorb a lot of different styles of investing. 

All the new entrants are great in their respective areas and helped me explore completely new facets of investing. Vivek Mashrani, Kumar Saurabh with their ability to look at numbers at a big scale, Jiten Parmar with his on the ground feel for cyclicals and overall market sense, Deepak Venkatesh with his domain knowledge on fintech and Rupesh Tatiya with his uncanny skill of adhering to his process to generate alpha in an overall down year for most.

I try to learn something new every year. This year, I spent some time exploring technical analysis and quantitative investing to increase my breadth of knowledge. My presentation is attached.

Sunday 15 July 2018

What to look for in quarterly results - ET Markets Special Podcast

My thoughts on quarterly numbers on ETMarkets Special Weekend Podcast: Do quarterly results hide more than what they reveal?


Wednesday 30 May 2018

ET Markets Article - How to dig for gems of ideas in companies’ annual reports

You can read my latest article in ET Markets titled "How to dig for gems of ideas in companies’ annual reports" 

This is the time of the year when we as investors start getting emails of annual reports from companies where we are invested in. We start going through them one by one. I want to share some of the tips and tricks I have learnt over the years – some from my own experiences and some picked up from other senior investors - on how to read annual reports.

1.    Maintain a list of companies: Having a list of companies which I am interested in reading annual report for even when I am not a shareholder means that I get notified when it is published. I use screener.in and keep all such companies in the watchlist. I get an automated message which informs me when the company makes a BSE/NSE announcement regarding publishing its annual report.

2.    Cluster annual reports from the same industry: I make a folder on my computer and keep saving all the annual reports based on their respective industries. Reading annual reports of companies from an industry as a group gives a lot of insight into the competitive landscape, new developments, and differentiators for any one company. For example, when I am reading banking annual reports, I will read HDFC Bank, Kotak Mahindra Bank, SBI, Indusind Bank, Yes Bank, PNB (!!) one after the other covering both the private and PSU banks. Sometimes just looking at reports from the same industry helps in identifying the good and bad companies. Comparing management compensation, board composition across companies in the same industry also provides better insights than reading reports across multiple industries.

3.    Read reports of global leaders: While I am at it, I usually pick one or two global leaders and read through their annual reports. So, for the banking sector, reading Jamie Dimon’s letter in JP Morgan Chase or following the Wells Fargo annual report to understand how they are progressing to root out their mis-selling problems. In some industries, global reports can provide a glimpse of things to come. Google and Amazon annual reports are a must read for anyone who is interested in technology its impact on our day to day lives.

4.    Opening last 3-5 years annual reports together: With annual reports coming as pdf files, it makes it easier to reference the previous years’ reports. I tend to open the last 3 and sometimes 5 years reports in different tabs. Then when I am reading through say the management discussion and analysis, I will glance at what was written in the same passage last year or two years back. This helps me in understanding how the management commentary has changed over time. Is the same passage being copy-pasted every year? Are there same spelling mistakes every year? Has the management said something 3 years back and then not mentioned it ever again? Is the management in the habit of over promising and under-delivering or vice versa?

5.    Focus of Director’s report and MD&A: My main intention of reading an annual report is mainly to understand the developments and management view of the business climate. Secondary focus is on the financials, which I glance through at a high level. The director’s report and the management discussion and analysis help the most in this respect.

6.    Know what to look for: This is more important for companies in the portfolio and which I have been invested in for a long time. I am aware of the “story” in those stocks and know what to look for in terms of management commentary. For those where I am looking to invest, I take a more skeptical approach and try to drill holes in my investment thesis.

Annual reports are the primary source of investor information and reading them in a disciplined way gives a lot of information and insight on the workings of a company and industry.