Masterclass with Superinvestors

Contributed by: Udai Cheema

I had pre-booked my copy and my excitement was justified as I found the contents of the book so enlightening that it took me just two days to blaze through the book.

Before I pick it up again to re-read and write a detailed book review for all of you, I would like to share my experience and learnings from the event organized by CFA society India at New Delhi on 25th Jan 2019 for the two wonderful authors of this book, Saurabh Basrar & Vishal Mittal.

Having read the book, my curiosity to meet the authors was understandable. Also, the thought of getting to know what according to them were the key elements that made these Super-Investor really ‘SUPER’ drew me to the event and boy was I in for a treat!

My journey began on the Shatabdi Express that leaves from Chandigarh in the afternoon for New Delhi. The best part about taking this wonderful train is that one can get a lot done on the way and that’s exactly what I did. I took this opportunity to pen down all the questions that were on my mind ever since I had read the book. Seeking answers I landed in New Delhi and took the ever so convenient airport express to the Hotel IBIS at Aerocity where this event was being held.

I chanced upon a great opportunity to interact with the authors for a few minutes prior to the start of the event. The details about how they started their investment journey were quite inspiring and the openness with which they shared their experiences and learnings was truly humbling.

They have been investing in the markets since the early 2000s and started Altais Investment Advisors in 2007. In December 2018, they published the book Masterclass with Super-Investors which has been quite a seller from what I gather from the investor community across India. It is a collection of some nicely compiled interviews with some of the ‘Super’/ ‘Highly successful’ investors in India who have created a huge amount of wealth for themselves over the last two to three decades.

Here are some of the key learnings and highlights from the event:

1. Every new investor comes to the market thinking on the lines of value investing and with a dream of getting rich the easy/quicker way but the markets tend to teach the newbies some painful lessons about reality.

•  Bottom line: Active investing isn’t nearly as easy as it looks.

2. Some mind-boggling questions that make the task difficult include;

• Is your idea a good idea?
• How much capital to allocate?
• What if it didn’t do anything for the time you held it?
• What if it delivered but you had already sold by then?

and so on…….

3. The most important thing for an investor is to understand ‘his own temperament and goals’. This insight into one’s own behaviour is essential for stock market success.

• In essence, one cannot become Warren Buffet or Rakesh Jhunjhunwala because they possess certain temperament and style of investing which is unique to them. The stock picks can be copied but not the knowledge and the temperament, this alone leads to a wide variation in the returns obtained by these super-investors and the ‘coattail’ investors.
• Rather than trying to copy someone else’s investment strategy, try to backtest and solidify on the strategies which have worked for you in the market.
• Independence of thought, Discipline, Courage and Delayed gratification ( for both, consumption and return on investment) are some of the keys to becoming a level headed investor.

4. Many investors jump onto the bandwagon during the market peaks but unfortunately, they are driven out of the markets in the first down cycle. In order to avoid that one needs to figure out a few things before deciding to plunge into full time investing.

• Do you even have a temperament for active investing? If not then go the low churn, long term investing way.
• What is your financial situation in terms of the size of your savings, alternate cash flow streams?
• Are you willing to commit a substantial amount of your net worth to equities? The base with which you begin can make a lot of difference to your performance.
• What do you want from the market? Is it simply another source of income or you wish to make serious wealth from the markets.
• How much effort and time are you willing to commit to investing?  Markets, in general, have given 12-13% CAGR over time, so if you are happy with that return then there is no point going full time into investing. Simply buying an Index fund for the long term will do the trick. Rather a better way to look at it in terms of ‘Return of Time Invested’.

5. Develop your own investment framework like some of the Super-investors have devised for looking at companies. For example;

• Ramdeo Aggarwal: QGLP framework i.e Quality of management, Growth visibility, Longevity of business, Price and valuation.
• Anil Goel: KCPLTD framework i.e Knowledge, Conviction, Patience, Luck and Timely Deployment of funds.
• Hiren Ved: GARP framework i.e Growth At Reasonable Price.
• Vijay Kedia: SMILE framework i.e Small in size, Medium in experience, Large in aspirations, Extra large in market potential.

According to the authors, there are five components to look at while analysing a company;

• Growth
• Return on Capital
• Free cash flow
• Capital Allocation
• Valuation

All five parameters have to be on the rise in order to make a multi-bagger.

• Growth without ROE and cash flow will be short-lived.
• High ROE and cash flows might help sustain high P/Es but won’t give high returns.
• Good capital allocation will determine the sustainability of growth and valuations.

6.  FOCUS is key to successful investing. Rather than becoming a jack of all trades, an investor should try to master a style of investing and stick with it.

• All the super-investors profiled in the book practice different styles of investing. They all are unique but one thing that they share in common is an extreme focus on their time tested methodologies and continue to refine them rather than trying everything that’s out there.
• Understanding one’s investments is of the utmost importance, otherwise, decision paralysis is likely when the going gets tough.
• Focus on the stock you wish to buy and wait for it to get cheap. Don’t rush to buy an alternative just because the one you like is expensive at the moment.

7. Develop good habits such as reading, maintaining an investment journal, being thorough with your analysis and reflecting on your past stock picks to figure out what has worked for you, what hasn’t and why.

8. To be right in turnarounds and cyclicals needs special insight. Considering the probability of success is low, one should stay clear until you have a good understanding of how to play them.

9. Risk Management is important. One needs to assess risk from all the angles which include market risk, portfolio risk and stock risk.

• All super-investors have developed their own risk management strategies and every investor must strive to do the same.

10. Understand that intrinsic value is a moving concept. If the management executes and the business is in an up cycle, one should not be afraid to average up in a good quality growth story.

11. All the super-investors made their big money in a few stocks which shows the importance of capital allocation in a portfolio. It’s not about how many stocks you get right rather it’s about how much money you make when you got it right.

12. When to sell?

• Fixed notion of intrinsic value, tendency to capture profits in a bull market and the psychological trauma of a prolonged bear market can lead an investor to book profits early.
• Some of the reasons for late selling could be not timing the commodity cycle accurately, falling in love with your stocks even if the fundamentals are dwindling.
• So one must develop some structure around selling, a strategy of sorts. An investor needs to see a market cycle or two to realise the importance of this as some things need to be experienced in order to imbibe their true essence. Simply reading in a book can’t replicate the experience of a 50% drawdown at a portfolio level. You need to experience it to believe it.
• Stock price going way beyond fundamentals or deterioration of fundamentals can be some of the criteria that an investor can use to build an effective sell strategy.
• Forgo the delusion that you can find the top or the bottom of a stock. Hence, either you will have to sell on the way up or on the way down. If it’s on the way up then it can be done slowly with each incremental rise but if your strategy is to sell on the way down then it has to be relentless once the threshold is breached.

13. Make the ‘study of the market cycles your top priority‘. Sooner you understand the power of the market cycles, faster you will realise that markets are supreme and some of the return you are making in a bull market is more due to luck than skill.

• An uptick in the market cycle can make ugly ducklings look like swans and a downturn in the market cycle tends to throw the baby with the bath water.
• A broader sense of where we stand in the market cycle is crucial. This might help an investor safeguard his portfolio to some extent for an eventual down cycle and maybe come into some cash in the portfolio which can be deployed in the bear market. The reason for highlighting a few words here is that doing so can be challenging and needs experience but one should try.
• Going through a few market cycles is imperative in the making of a seasoned investor.

14.  Reflecting on past decisions and their outcomes have been a crucial factor in the success of all these super-investors.

15. If you have not been successful so far, don’t give up. It only takes one market cycle for someone to be successful. The problem starts when investors start becoming arrogant after making some money and stop differentiating between luck and skill.

16. Don’t regret. Markets are a place of regrets. If the stock goes down, you regret why you bought it. If the stock goes up, you regret why you didn’t buy more. If you sell early you regret, if you sell late you regret. So your peace of mind is in your hands, if you wish to regret then market gives you plenty of reasons to do so.

17. Believe in continuous learning.

• Learn to differentiate between facts and opinions. Keep in mind that there will be varied opinions about the same facts and that’s what makes the markets so dynamic.
• Have strong opinions held weakly. Allow yourself to change your strongly held opinions if facts change.

18. Take responsibility for your mistakes. There is no point blaming the markets or anybody else for your losses or failure of diligence.

19. An investor has to be an eternal optimist. You cant bet on the bright future of your companies if you are not optimistic about the future itself.

• According to most of the super-investors, whatever wealth has been created by equities in India in the last twenty years will be dwarfed by what will be created in the next twenty years. – That’s optimism for you.

20. Respect the entrepreneurs. We as investors should never forget that we are simply riding on the shoulders of these super-humans who build great companies from the ground up. It is extremely difficult to scale up companies and they deserve all the credit for giving it a shot.

Conclusion:

It is one thing to go about gathering knowledge for oneself and its another to share it with others. The Super-investors along with Vishal and Saurabh have done the latter with their book ‘Masterclass with Super-investors’. This seminar provided a great opportunity to know the people behind this mammoth effort.

Having read the book myself, I would highly recommend it to anybody who wishes to make a success out of themselves in the markets as the wisdom shared by the Super-Investors is priceless and the way Saurabh and Vishal have compiled these interviews is nothing short of fantastic.

A special shout out to Jitendra Chawla and his team at CFA Society India for organising such informative events.

Important Disclaimer: The contents of this article must not be construed as direct quotes from any of the speakers. The ideas/opinions mentioned here should not be taken as investment advice of any sort as they are for educational and informational purposes only. This article has been compiled exclusively from the author’s notes penned down at the event and contains significant emphasis and paraphrasing on the part of the author. The following content must be read keeping this in mind at all times.

-UC