Full Day Highlights of Value Investing Pioneers Summit(VIPS), New Delhi-2019

Contributed By: Dr. Udai Cheema

Star-studded event with a high impact factor!

Last year, I had attended the 2nd Value Investing Pioneers Summit, highlights of which I had shared in the blog post [Here]. That event was quite a learning experience for me, so when the opportunity presented itself again this November, I was there. After all, who can resist this line up of speakers, take a look;

We are talking about 100+ years of cumulative market experience along with assets under management worth billions of dollars. So, not wanting to miss out on such a golden opportunity, hundreds of participants thronged the halls of Hotel Pullman, Delhi Aerocity on the 8th of  November 2019 for the 3rd Value Investing Pioneers Summit.

Here are some of  the key takeaways from the conference;

 

• Regardless of many gloom and doom scenarios locally or globally over the last four decades, India has maintained a nearly constant nominal GDP growth. He gave a great analogy to explain the importance of that fact;

We are sitting in a boat that is in a river flowing at a steady speed and if we don’t mess up then the river itself will create significant wealth for us.

 

• First time in the history of India, the inflation rates have stayed at the level of 4-5% over a prolonged period of nearly 5 years. If this is an indicator of things to come then we might have to lower our expectations of market returns going ahead.

 

• Most of the economic parameters are currently in India’s favor such as inflation, current account deficit, foreign exchange reserves, interest rates but ironically the growth has slowed down sharply due to lower discretionary consumption.

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• The main reason for the consumption slowdown in his opinion is that the white-collar wages in India have de-grown in real terms and over the years there has been a convergence in the average wage of white-collar and blue-collar jobs in India. As a result, the financial savings rate in India has also fallen for the first time in the last ten years. A big chunk of the consumption that has happened in the last couple of years has actually been debt-fueled consumption on the back of EMIs. There is a limit to how much borrowing a society can do, that limit might have been reached in India causing the overall slowdown in the economy.

 

• In fact, in the 80s India’s per capita income was higher than China but now it is 5 times more than ours. Same is true for wages, wages in China are much higher than those in India. On the other hand, this along with factors such as US-China trade wars and environmental concerns in China have also led to the shifting of global manufacturing base from China to other Southeast Asian countries such as Vietnam, Thailand, Indonesia whereas India was missing out due to higher corporate tax rates but going forward that is no longer a worry as the government has cut corporate tax rates bringing them at par with global averages. A massive domestic market and ample workforce give India an added advantage over these countries.

 

• In his view, the next capex cycle in India will not be led by the local companies rather it’ll be the global companies that will start the next capex cycle in India. Considering they will enjoy further concessions on corporate tax rate if they commence operations in the next 3 years, it is highly likely that revival in capex is not far. This will lead to the growth rates in India coming back over time.

 

• India’s market cap to GDP ratio indicates that there is good value in the market at present. When earning yields converge with bond yields, it means one is paying very little for growth which is the present scenario. With the cost of capital/interest rates moving lower, it will have a positive impact on the earnings going ahead improving yields.

 

• Simply if we remove some of the consumption-oriented stocks from the equation, there is a lot of value in the markets currently. The forward PE of the index which is roughly 15 times can fall anywhere between 20-30% if we are to remove these names. Consumer staples being traded at 50-100 times is unheard of and more so abroad. Even though the markets continue to defy the logic of value but in the past, all excesses, be it 1992, 2000, 2008 or 2017 were curtailed eventually. Also, remember that whenever the markets are overfocused on one area it creates lots of opportunities (value) in other areas, it’s just that long term thinking is required along with patience.

Keep things simple, one doesn’t always have to write a 100-page report to come to a conclusion. Simply apply the right logic and if you find no flaw in your logic then just stay put till the market eventually corrects itself.

 

• Instant gratification and desire to avoid pain are the two factors that contribute to the emergence of value buying opportunities in the markets. To illustrate this he used the famous example of the Marshmellow test. Here is [Link 1] & [Link 2] to the videos that illustrate the test.

 

• Momentum is easy to participate in and difficult to stay away from because if one doesn’t then people appear to be earning today whereas you might not be which can be painful. Another tendency that supports momentum is that people simply extrapolate the present into the future which might not be the case. Instead one needs to understand why the business is doing well or badly over the last couple of years and where the business is headed from here on in.  So, buy cheap, increase your understanding of the business over time, keep modifying your views and in the long run, markets are likely to agree with you as they are quite efficient in the long term.

 

• An interesting hack he mentioned to understand where the exuberance and pessimism stand at the moment is to look at the long term charts of the sectoral indices. On a yearly basis, they will clearly tell you which are the most loved and hated segments of the market. Understand that one cant simply extrapolate the peak earnings of a sector into the future, more so when the earnings have had a boost in recent times due to external ‘one-time’ factors.

Mean reversion is true in life and in the markets. Both good and bad times shall pass.

 

• The discount of PSUs to the market as a whole has deepened quite sharply in recent times as there are some preconceived notions in the market for these public companies. PSUs are very predictable businesses and fairly easy to understand. PSUs are run under strict guidelines and investments in unrelated areas are quite infrequent. The mortality in the PSU space is much lower than in the private sector. In fact, PSUs in their particular sector are quite dominant franchises.

Not all public sector is bad and not all private sector is good

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• In fact, PSUs are a better paymaster than the private sector as on date which might not have been the case 15 years back.

A major flaw in our thinking is that we tend to generalize by exceptions

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• The media always highlights the outliers and not the averages. Rather than looking at the average salary of Virat Kohli, one should try to find out the average salary of an average cricketer for the purpose of generalization. The more people start working with averages, they are more likely to reach the right conclusions.

 

• Amongst the PSUs, service-based companies like the ones in the telecom sector or the airlines’ sector are at a significant disadvantage but the resource-based, asset-based, trust-based companies have significant advantages and value. Simply the dividends in some of these companies are at par or even two times the bond yields at present. Also, the announcement of strategic divestments bodes well for this segment of companies.

 

• Efforts must be made to try and seek out people who have contrary views on a particular idea. It helps challenge the confirmation bias. Documentation, presenting ideas to peers is a great exercise for building a strong investment thesis. One must listen to everyone, evaluate the merits of each argument but in the end make your own decisions as your money is your responsibility.

 

• Information overload is a problem in modern times. Sifting through all that to reach the info/data that truly adds value has become increasingly difficult. So, work only on your high conviction ideas which according to you have the best chance of delivering superior returns rather than looking at everything.

 

• Investing at an institutional level can never become fully process driven because in the same institution there will always be a duality of opinion that should be encouraged.

Processes can lead to average outcomes with more certainty but great outcomes in this industry won’t be possible without great individuals.

 

• One doesn’t always have to be a contrarian while investing. It is all about understanding the business well, figuring out its fair value and how it will move i.e the key drivers and the risks associated with the business. If you prudently invest after figuring out all of that and it happens to be a contrarian call then so be it.

There is a thin line between being early and being wrong.

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• In such a scenario, simply go back and see why things have not played out the way you had anticipated. If you find a flaw in your assumptions/thesis then exit regardless of the price but if you still believe that buying the stock was the right call then have patience and simply wait it out before the market realizes its true value.

If your conclusions are right then it has been frequently observed that the longer the pain period, higher are the rewards.

 

• There are very few companies that are exceptional in perpetuity. The companies’ termed as exceptional today weren’t viewed the same way 20-30 years back. So there should be a threshold below which investors must not go but one cant stay restricted to buying only exceptional companies. So one must take an objective and pragmatic view on quality and price.

We are in the business of investment and not in the business of buying the best companies, we should aim to make good returns on our capital.

 

• How to identify a bubble;

1.When everyone wants to buy the same stock. Consensus trades after a while tend to become a bubble both on the upside and downside but sometimes on the downside, they can turn into value bets.

2.Strong divergence from the past.

3. Think about what has led to the current situation.

For example, in the consumption stocks, the earnings growth has not been superior compared to the past. The growth stands out because other sectors have hardly shown growth in comparison but on a standalone basis these consumption names have not grown earnings much but the margins have grown sharply. Most of these companies are sitting at lifetime high margins. So, if one was to break up the returns from topline growth and margin expansion, one will get the answer to the future as the margins can only grow so much and what are we paying at present for that.

Simply try and understand what brought us here and is it sustainable.

• On the Auto Sector – not sure if the growth is coming back because cars face a challenge of affordability and the two-wheelers market in India has matured. Great value in the sector is not apparent.

 

• High-interest rates are not the reason for the slowdown in growth. The mortgage rates today are much lower than what they were earlier, so the EMIs have dropped 20-30% but home sales and car sales which should have gone up aren’t doing so. This clearly suggests the issue of affordability as the gap between rental yields and mortgage yields is high in India making the EMI outgo much higher than the collectible rent. As there is a de-growth in the white-collar wages, the real estate has become unaffordable for many which has put the entire real estate sector in jeopardy.

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Megatrends and Leadership

 

• Megatrends and Leadership are the two most under-appreciated yet the most important drivers of value and wealth creation in the markets. These are usually overlooked because they aren’t too obvious.

 

• There are some sectors like private banks that have consistently outperformed the broader indices over the long-term due to some structural (none mean-reverting) changes which we call the ‘Megatrends’ and within these sectors, the top three players have taken up 70% of the market cap of the whole sector establishing their ‘Leadership’. This implies that not only were they large in market cap a decade ago but they have incrementally gained market cap over the proceeding ten years.

The leaders within the megatrend create most value across sectors over many cycles.

• Megatrends;

– Structural shifts that are long term (30-40 years) and have irreversible consequences for the world around us.

– Picking them requires a broad perspective and narrow focus. One needs to see the big picture but a narrow focus as there are very few true megatrends.

– They reset the rules, throw up opportunities and threats along with new winners and losers.

– They transcend geographies, generations, and governments.

– Some of the Megatrends include –

1. IT Revolution
2. Urbanization
3. Demographic evolution
4. Consumption boom
5. Women in the workforce
6. Financial deepening
7. Digital transformation
8. Unorganized to organized shift
9. Culling of ‘Dwarfs’ i.e the companies that have not grown due to ‘n’ number of factors despite being in business for the last ten years or more.

• IT  Megatrend – A case Study : 

– The IT megatrend had a confluence of factors driving opportunity size and longevity such as benign supply-side conditions, fall in the data storage and transit cost, changing demand dynamics with more focus of the west on outsourcing and evolution of innovative business models like global delivery models, offshore dedicated centers, master service agreements, infrastructure management service, etc. This evolution of the business model was necessary to sustain the megatrend. All the three components were necessary to have an IT megatrend in India.

– Once the megatrend is in place, two things are needed to sustain it;

1. Scalability
2. Granularity – Eg: Addition of more and more verticals in the IT services offered by top Indian companies. It gives the businesses inherent strength to develop different revenue streams which reduce client dependence and helps in de-risking the business.

– The Concept of Displacement – for any megatrend to reach it’s potential, a lot of displacement is needed. For example, in the early 90s, the IT outsourcing spend by global IT companies was almost zero but now it is consistently 30% of their global spend. It is this displacement from 0 to 30% that has created this opportunity. Within the outsourcing, it’s the offshoring that has driven the profits higher.

– For megatrends to sustain, the sector also needs to show resilience. The IT megatrend persisted through the dotcom crash, through the financial crisis and demonstrated adaptability and innovation with people discussing things like AI, analytics, cloud computing, etc. This has helped sustain and elongate the megatrend.

– The concept of resilient value creation: It is difficult for any company to deliver a ROCE more than the cost of capital for a prolonged period of time along with growth that’s higher than the GDP growth over the long term. These two factors are critical for the sustenance of the megatrend and the success of the companies within that sector. The Indian IT sector and its top companies have been able to demonstrate this consistently over a long period of time. Factors such as the size of the opportunity, quality of leadership and scalability have made sure that the outperformance in the industry has continued over the years.

• Leadership;

– Leadership attributes are more intangible than tangible as they are not always quantifiable. These include;

1. Culture – most important yet most underappreciated in the investment process.
2. Strategy and execution – Strategy is quite important but it’s the execution that’s the hallmark of good leadership.
3. The leaders must be able to demonstrate profitability, scalability, and durability. These attributes contribute to the longevity of the business and its leadership position.
4. These leading companies are battle-tested through multiple cycles.
5. They demonstrate resilience and adaptability.
6. Have prudent capital allocation and capital structure.
7. Possess depth in management quality and their ability to transition the company into an institution.

 

– Here are some examples of such companies and their key leadership attributes:

 

A) Quantitative attributes

1. Market share → Asian Paints (53% market share in the paint sector)
2. Delta Market share → Bajaj Finance (gaining market share on incremental sales)
3. Least cost player → Shree Cement
4. Share of profit pool in that sector → Page Industries
5. Share of cashflows of that sector → Maruti Suzuki
6. Leadership Durability → Nestle (has sustained its market share in each of its product categories over a long period of time)
7. Leadership in new segments → HDFC Bank (as and when new segments in the industry emerge, gradually it ranks in the top 3 in each of those segments)

B) Qualitative Attributes

1. Culture → Titan (besides culture, it has also institutionalized along with management transition)
2. Innovation → Nestle (at the product level, packaging level, distribution level)
3. Execution → TCS
4. Expanding the total addressable market (TAM) → Bajaj Finance
5. Elongating the competitive advantage period (CAP) → D-Mart
6. Embracing disruption → Infoedge
7. Redefining competition → HUL

 

– Economic cycles amplify leadership: 

A) Macro perspective of cycles

In each cycle, there is ‘creative destruction’ where the leaders redefine and expand their leadership. These are ‘non-linear’ shifts one cycle after another. Currently, India is going through one of the most acute economic cycles in recent history.

There is a 4D framework of economic cycle drivers:

1. Debt
2. Disruption
3. Displacement
4. Dis-intermediation

The economic cycle durations are shrinking now, as a result sustaining competitive advantage period (CAP) for companies is also shrinking. This change has huge implications on the investment decisions that we make going forward. It also challenges the valuation multiples of companies.

 

B) Micro perspective of cycles

1. In each cycle, men are separated from the boys as new challengers emerge to take on the incumbent leaders. So, investors need to make sure whom are they backing and why.
2. The treadmill speed and incline keeps rising i.e the bar is raised in each cycle. What was good in the last cycle is just not good enough in the next cycle. That’s why managements need to keep re-inventing and redefining themselves.
3. The value paradigm evolves in each economic cycle.
4. Value migration accelerates with each cycle.
5. Each cycle gives the opportunity to expand the total addressable market but only the adapters can take advantage of that.

 

• How to value megatrends and leadership?

– There is no fixed formula.

– Must value the intangibles and not just the numbers.

– Value is reinforced and magnified through economic cycles. So, the classic value investing strategy of mean reversion will be challenged here.

– The intersection of Megatrends and Leadership is a multi-sigma event. Hence, standard valuation metrics cannot reflect this ‘Outlier’ event appropriately.

– The terminal value impact of megatrends and leadership is disproportionate that cannot be captured in conventional valuation frameworks as it’s an event that’s far in the future.

– Favorable value migration that happens during each cycle is difficult to capture in a conventional valuation framework.

We overestimate change in the short run and underestimate it in the long run – Bill Gates

 

• How to inculcate these megatrends into your portfolios?

– Focus on 3-4 megatrends in which you have high conviction.

– In each megatrend, identify & focus on 2-3 players who are showing leadership attributes. They may not be clear leaders at that point in time but should demonstrate leadership attributes.

– Among these, classify them into;

1. Clear leaders – companies that have shown most of the leadership attributes discussed above. They form the bulk of the portfolio.
2. Near leaders – companies that are not clear leaders but demonstrate quite a few of the leadership attributes. These form the aspirational component of the portfolio.
3. Emerging leaders – the probability of these becoming clear leaders 15-20 years down the line is quite low, hence they form the high-risk component of the portfolio.

– Market cap is not the criteria while identifying these company, this framework is based on leadership attributes.

– Finally, have a high concentration of these in your portfolio as it should reflect your conviction in Megatrends and the Leadership.

 

• The concept of Gorilla Investing

1. There are many monkeys in a jungle and very few gorillas – Rare
2. Gorillas are outsized as compared to monkeys – Dominant
3. Gorillas are not challenged by monkeys – Moats and Knights
4. Gorillas have lifespan double that of monkeys – Longevity
5. Find the right jungle where the Gorillas live (Megatrend) and then find the right animal (Leadership)

 

– Over time, the portfolio will have few gorillas and some monkeys which one thought would turn out to be gorillas but didn’t. The gorillas over a long period of time will keep outperforming and become a larger portion of the portfolio plus the monkeys once identified will be eliminated from the portfolio in order to invest more into the gorillas.

 

• It is difficult to correctly value these leaders in megatrends because valuation is done to calculate the price that we are willing to pay today for the value that we will get in the future i.e we are trying to figure out what the terminal value of the business is going to be but in these companies the change in that terminal value is so large that no matter what number you put on valuations today, it will become insignificant in the future. Such companies usually don’t revert around the means, so that makes it difficult for us to value them by the typical valuation frameworks.

 

• These companies become a sell only when your hypothesis of the megatrend and leadership is at risk. Simply moving in and out of them based on a temporary change in valuations isn’t a prudent strategy.

 

• Unorganized to organized shift is a megatrend, contract workers/consultants/temporary staffing is a megatrend as the business cycles are shrinking, the frequency of newer business models disrupting the old ones is increasing and automation is on the rise. The need for certain skills might be temporary, so re-skilling or temporary hiring of the workforce will be a major trend going ahead.

 

• Money managers should say no to misaligned capital i.e the capital which doesn’t concur with your investment philosophy and time horizon.

One rupee of aligned capital is worth hundred rupees of misaligned capital

Your state of mind is your most valuable asset and things such as misaligned capital can disturb your state of mind which might lead to sub-par decision making on your part.

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Things I believe in & Contrarian approach to investing

• Key pieces of the puzzle in contrarian investing are;

1. Works best for cyclical sectors.
2. Know the counter view on the stock.
3. Have a grip on the intrinsic value.
4. Be cognizant of risk.
5. Careful on leverage.

 

• When to sell? – Key is to think of it as a switch i.e if you like what you are buying then don’t worry about selling, one might go wrong on the selling as it might go up further but one needs to evaluate it as a switch and not worry about when to sell.

 

• If an investor spends less time buying/selling and invests more time on sizing and switching, then he would be much better off.

 

• For a money manager, capital flows will always come at the wrong time which becomes a bit of a problem when the quantum of assets under management is sizable. Here contrarian approach to investing can really be helpful as one can keep adding to the same contra positions regardless of the quantum of the inflows.

Contrarian investing is ‘not’about buying junk just because it’s contra.

• One needs to be very careful in leveraged stocks while investing via the contrarian approach. This approach works very well in the case of cyclical. Important to know the other side of the trade as to why the other side is selling. We need to have a good handle on intrinsic value and risk. If the investor doesn’t follow prudent risk management strategies then contrarian investing can become troublesome.

 

• At the end of the day, everything has cycles. At one end, the investor needs to be very careful and at the other end, he needs to be reasonably aggressive. For example, in the last six months, the credit cycle is showing extreme pessimism.

One of the most important aspects of long term investing is your ability to read cycles

One can’t always predict the top and bottom but all that is required is a reasonable judgment of where the cycle stands. Always ask yourself, where we stand in the cycle and whether it’s time to make money or save money at this moment.

 

• Charts can be a useful tool for contrarian investing as one can use the data to figure out as to how many other people are thinking like or unlike you.

 

• Common sense is an integral part of the investment process. For example, the small-cap universe was so expensive in January 2018 that it was logical to take some money out of the small caps. Similarly, in 2013, the charts of real estate prices were clearly telling us that it was time to sell real estate. Most of these decisions look sensible in retrospect but it’s useful only when you apply this common sense at the opportune moment.

 

• According to Warren Buffet, one of the most important things while investing is;

The ability to have cash.

Cash is a residual asset class but an important one. The ability to have cash at the right time is the most important requirement to make big money. Warren Buffet could invest in late 2008 after the crash because he had cash while others didn’t.

• All big mistakes can be avoided by looking at;

1. Trailing P/E
2. Trailing P/B
3. Trailing price to cash earnings per share
4. Market cap
5. Balance sheet quality
6. IPO/QIP activity in the sector
7. Dividend yield
8. Leverage of the company

 

• In times of extremes, one of the best indicators is Market cap. In 1999, the market cap of Infosys and Wipro combined was Rs 1,07,604 crs whereas that of the entire cement and metal sectors combined was Rs 31,623 crs. In such a situation, one might sell early out of such high valuation stocks but eventually, one is proven right and the shifting should not be a problem when you are getting the entire sectors for the market price of two stocks. Similarly in Dec 2007, the combined market cap of the entire pharma sector in India was Rs 1,31,249 crs whereas that of DLF alone was Rs 1,83,082 crs. Currently, the market cap of top 5 stocks in India stands at Rs 30,84,528 crs whereas the market cap of the entire PSU universe is at Rs 16,81,081 crs. Note that this approach might not work if the company in question is in a disruptive tech sector like Google or Apple but in India, we don’t have companies that are at the forefront of global innovation at scale. Using indicators such as market cap at the extremes might not work over the short term but if the time horizon is five odd years then this concept works really well.

 

• For wealth creation across asset classes, a simple framework that can be used is the VCTS Investment framework;

V – Valuations

C – Cycle i.e how others are behaving in that asset class

T – Trigger i.e what changes a cycle and it is usually unknown

S – Sentiment i.e whether people are putting money in that asset class or not

The trigger is the most unpredictable factor and that’s why an investor will be better off relying on the other three parameters of the VCTS framework i.e valuation, cycle, and sentiment. When there are low valuations, people are generally scared about the prospects of that asset class. At that time, one mustn’t worry about when the trigger will happen and when it’s the other way around (bubble) then one should simply exit rather than waiting for a trigger that will push the markets into pessimism.

• Broadly, one can use the following indicators for evaluating the broader equity markets in terms of whether it’s time to be aggressive or conservative;

1. Price to earnings
2. Price to book
3. Market cap to GDP
4. Earnings yield

Don’t use just one indicator, instead use the above in combination.

 

• One can use gold and cash as residual asset classes. If credit/debt/equity is expensive like it was last year i.e when nothing is cheap then one can put money in gold.

 

• For real estate, it has been observed that when the difference between the mortgage rate and rental yield becomes less than 4%, it’s a good time to get into real estate.

 

• In general, the market cycle can be divided into;

Burst → Best → Boring → Boom → Bubble

Burst = Negative global news, aggressive institutional selling and valuations attractive

Best = Best time to invest as institutions are not buying but valuations are attractive

Boring = Institutions both buying and selling, valuations not cheap (eg: the current market)

Boom = Institutional buying, valuations costly, strong inflows of capital into the market

Bubble = Valuations off the charts, new valuations models emerge which are non-earnings/cashflow based, investors forget the existence of the word ‘risk’.

 

• For 99% of the people, average ways of investing are good enough i.e do SIP, proper asset allocation, hybrid funds, index/ETF investing. Achieving average returns over a long period of time can actually be a very good thing for the passive investor pursuing a career outside of equities.

 

• Some of the key traits of an investing person include;

1. Time management: Most successful individuals know how to manage their time. Reading is one of the most crucial activities for an investor and one must create time for it.
2. Thinking: People might be able to find time to read but not to think. Investors need to have a separate ‘thinking time’.
3. Temperament: It takes courage to buy at the bottom and clarity to sell at the top.
4. Reading: Crucial habit to become a successful investor.

 

• Some of the well-known truths of investing are;

1. No decision is a decision.
2. There will be mistakes as we cant get all the calls right.
3. Forced selling or buying are good investment/dis-investment opportunities.
4. One must watch out for ‘hubris’ setting into fund managers as irrational exuberance can affect the best of them.
5. Money comes to a fund manager till he fails.
6. There is nothing called consistency in performance, one must strive for consistency in the investment process.

 

• Hybrid funds are a good option to protect from hubris. Here the fund manager, by default, has to sell when there is euphoria in an asset class and has to buy the pessimism, hence reducing this behavioral misstep. Closed-end funds have an advantage that they just don’t get money whether the market is booming. Credit as an asset class is quite illiquid in India as the investor mentality towards credit is that it should be held till maturity, as a result, it promotes good decision making as you are not looking for a bigger fool. All these options help protect against hubris from creeping in.

 

• Some advantages of being an investment professional;

1. The challenge of implementation of your investment theories. The gap between theory and practice is driven by one’s emotions that makes the whole process quite challenging.
2. There is no age limitation. One can continue as long as mentally fit.
3. There are multiple ways to make money in the long run. We need to keep refining our ways based on thinking and introspection.
4. Over the short duration, there is no correlation between competence, capability, and alpha generated.

• Some things to ponder over;

1. Can one’s weakness/biases go away?
2. Can you keep on learning as you age?
3. Managing public money has its own challenges and you need to continuously ask yourself whether you are doing the right thing for your investors.
4. Handling irrationality in the market is crucial.
5. Short term performance is never driven by process.

• Investment Professionals to follow;

1. James Montier – for his contrarianism.
2. Howard Marks – for his understanding of the cycles.
3. Michael Mauboussin – believes in pre-mortem rather than post when it comes to investing.
4. Atul Gawande – the importance of checklists and improving their implementation quality.

After his presentation, S.Naren and G.Maran took to the stage for an insightful 20mins discussion, Bloomberg Quint has shared that video on their Twitter account. Click on the [Link] to watch.

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The Journey

• Credited for being one of the early discoverers/investors of Infosys, HDFC, Concor, Ambhuja, Tata Motors, Hero Honda and BHEL. He is an investor with multi-disciplinary interests who left the institutional money management profession at the peak of his career to set up a boutique firm of his own and pursue his other interests.

 

• His three mentors are Michael Milken, Barton Biggs & Julian Robertson. According to Vinod, Julian is a great listener and one of the sharpest guys in the room. He recollected one of the quotes by Julian from when he met him for the first time and told him that he had some investment ideas to share;

In a bull market who needs research and in a bear market who can afford research

• He shared how in 1993 when the IPO of Infosys came, there were not enough people to buy the 13 crs issue. When he met Narayan Murthy for the first time, the business model made sense to him and found the team at Infosys quite humble. They ended up picking up a large stake in the IPO. At that point in time, they thought that Infosys will do well but no one had thought that it will turn out to be what it has.

In life, everything is unbalanced as it goes into excess on one side or the other

• For him, Brijmohan Munjal of Hero Honda is a testimony to the entrepreneurial spirit of India. He started the company when he was 69 years old. When they invested in Hero Honda, the market cap of the company was barely 40-50 crs. His humble demeanor and the passion for his business made Mr. Munjal stand out. The way he transformed the lives of thousands of people was evident from the level of respect he got from his colleagues, factory workers, and dealers alike. Besides great management, other reasons for buying Hero Honda were that Honda had more than 50% market share in every market they entered globally then why would that be any different in India. The contra stance on Hero Honda was that most people in those days did not believe that motorcycles would replace scooters in a big way but Vinod and his team firmly believed that it will happen. Hence, they picked up a large stake in Hero Honda.

 

• When he identified HDFC, it was trading at 1-2 times earnings and his thesis was that people will need mortgage going ahead as more and more Indians were buying homes but nobody seemed to be interested in the stock. He met the management and liked what he saw and ended up investing in HDFC. While analyzing a mispriced security, one question that the money managers often grapple with is ”whether you are stupid or the market is stupid ?”. Similar was their situation when they were thinking of buying HDFC trading at 1 times earnings. Finally, the reason that he figured out was that markets in those days loved hard assets, so no one was interested in businesses like Infosys & HDFC.

 

• Wipro was their biggest miss. So much so that in the mid-90s, Azim Premji had written personally to them to come and visit Wipro but, unfortunately, they gave it a pass.

 

• Had always believed that a day will come when we will enter ‘Satyug‘ in the Indian markets and with all the corporate misgovernance being severely dealt with of late, it seems to have arrived. Markets are impatient now to clear out the garbage and this will lead to a much healthier corporate ecosystem going ahead.

 

• In an emerging market, being overweight on real estate and gold as an asset class is a ‘poverty mentality‘, simply because you can touch it and see it makes you feel wealthy but that doesn’t necessarily make it a better investment. Simply by borrowing at 8-10% for a rental yield of 2-3%, you are setting yourself up for an inferior investment return. Real estate prices in India are simply too high to give a decent yield.

 

• Formal education is necessary but not a sufficient condition for success. Life isn’t so linear that one goes to school then college and finally he has arrived, it doesn’t work that way. Education doesn’t teach you things like hunger, leadership, courage and other intangible things needed to succeed in life. The Internet has democratized knowledge in a big way, so the necessity of having a formal degree for learning/acquiring new skills isn’t true anymore and with broader/easier accessibility of knowledge, the competition in various fields will also become more intense going forward.

 

• Reading annual reports help an investor hone his investment skills. While reading the annual reports especially the financials of a company, one should try to imagine how the stock would have performed over the last 10-20 years based on its fundamentals. As you start practicing that more and more, you will notice that your predictions about the past performance of a company start moving closer to reality over a longer timeframe. Get into the habit of speed reading and try to finish off an annual report in 30 mins & know the key points in it.

 

• As an investor, one needs to divide his time broadly into 4 activities;

1. Staying up to date with the markets and what they are doing.
2. Reading and doing research
3. Thinking and introspection
4. Meeting people from diverse backgrounds and having focused discussions with them in such a way that it adds value to both.

• Fundamentally, investing a one-man game but sharing/brainstorming ideas with like-minded people is important. Buffet would not have been Buffet without Munger, he made Warren a better investor.

 

• One must also read the history of the global financial markets for it offers some great lessons. One should look at investing both top-down and bottom-up.

 

• With advancements in technology and the power of social media, one would have thought that easy/timely access to information would have made our lives better but it turns out that we have actually moved from a period of lack of information to a period of ‘stupidity’. The amount of disinformation and the lack of analysis have increased. Silverlining is that this state of affairs is good for sensible/patient investors as this phenomenon has lead to the formation of ‘herds’ swinging collectively to both extremes and therein lies the opportunity for an intelligent investor.

 

• More than books, an investor must spend time listening to one’s inner voice, intuition, and analysis. Introspection can lead to a stage where you will be able to cut through the noise and hopefully the markets will start whispering to you. Spirituality can help investors quieten the mind, get control over emotions and stay level-headed in tough times. Outside of investing, one can read a good translation of  Lao Tzu’s Tao Te Ching as it tells us how the world works. Also one can read Yogavasishtha, these are the lecture notes of Ram’s education.

 

• It’s important to meet the management in order to know the people behind the company. Sometimes, the managements are delusional about what they can do and one can only get to know that by meeting/talking to them. While doing scuttlebutt rather than listening to what the management has to say/forecast, see if there is continuity between what the management is saying and what’s real. Look for evidence of a well-run company with humble individuals and good work/corporate culture i.e focus on the intangibles, so to speak. Try to figure out whether the team has what it takes to build, scale & sustain a great company.

 

• Sell good to buy better, should be the mantra behind selling decisions. Be skeptical when your entire portfolio is doing well, it’s healthy to have 70% of the portfolio doing well and the other 30% not so much. In a portfolio, moderate diversification is the way to go. One cant start off being concentrated but gradually as the management teams execute then one can think of concentrating but still not too much because no one knows the future. Humility in the markets is a great attribute to have for an investor.