Session by Mr. Samir Arora- 2nd Value Investing Pioneers Summit ,Delhi 2018

Contributed By : Jatin Khemani, CFA

What they don’t teach you anywhere?

At 2nd Value Investing Pioneers Summit, Mr. Samir Arora, Founder of Helios Capital Management Pte Ltd. gave a talk on “What they don’t teach you anywhere?”

The underlying theme or message of his talk was that – there are no rules and everything must be doubted and challenged.

Samir went on to dispel some of the common beliefs/assertions that most value investors have. He said that as there are no rules, these should also be challenged.

• We (should) buy stocks where we have high conviction.

1. • Conviction on rejected stocks is more as we know with more clarity what is bad than what is good.
   • What we buy, we track/watch closely. if the conviction was high, one would tend not to do that.
   • Research focus should be on eliminating bad, not in choosing what is good.

• Our favorite holding period (should be) is forever
• • Most investors take this statement of Warren Buffett as gospel truth without fully understanding what he actually said.
  • “When we own a portfolio of outstanding business with outstanding managements, our favorite holding period is forever.” – is what Buffett said in Berkshire letter to shareholders 1988. The conditions of ‘outstanding business’ and ‘outstanding managements’ have to be met for stocks to qualify as ‘forever’ bets.
  • While Buffett’s favorite holding period is forever, it is not the only option but favorite amongst many.

• We (should) own stocks for the long term.
  • Our biggest advantage as an investor is we can walk away anytime unlike a promoter, so why should we hold stocks for long term? As an investor, we need to revisit our thesis on a regular basis and hold only if company continues to deliver. Example: We are holding HDFC bank for more than 20 years but yet don’t call it long term stock because the day anything goes wrong we can move out.

• An investor should act as though he had a lifetime decision card with just twenty punches on it.

• Warren Buffet: 1980-2006
  • • 2,140 quarter-stock observations from publicly available information
    • 30% of stocks sold within six months
    • Median Holding period: One year
    • Approximately 20% of stocks held for more than two years.

• Buy companies with good management
  • When will you know the management is good?
  • How will you separate the Halo effect?
    
    “Show me a company that delivers high performance and I can always find something positive to say about the person in charge.”

• • You will know good management only if stock price increases. Perception of management changes based on the stock performance. Before stock price increase ; nobody knows is it a good management or not.

Example: Samir gave a great example of Cisco. In May 2000, Fortune magazine ran a story on Cisco in which John Chambers was portrayed as the world’s best CEO (after the stock’s superlative performance of more than 50x over the last 6 years). Exactly a year later, after the stock had crashed by more than 80%, the same Fortune magazine ran a story titled “Cisco fractures its Own Fairy Tale”

• Diversification is a protection against ignorance, it makes little sense for those who know what they are doing.
  • We don’t know we are ignorant till something unexpected happens
  • If concentrated funds do better, what if you buy 3 such funds? Do you still do better? Overall we own 40-50 stocks of three concentrated funds but our portfolio is diversified.
  • Your stocks in a diversified portfolio are always part of some guy’s concentrated portfolio

• Before investing in an idea based on some facts and analysis, ask “who doesn’t know that”?
  • While investors know a lot of information, not everybody acts in the same way.
  • It is possible to have an insight basis well known facts and act on it even though the same information may be available to everyone else
  • Example: In case of HDFC Bank everyone knows everything about the company. As an investor we need to focus on big picture & size of opportunity as tiny incremental information may not add any value.

• To make money in a company, you must know it better than anyone else
  • If that is the case then only a single person can make money in any stock.
  • It is not necessary to know more than everyone else. What is important is how we act and behave basis whatever information we have.

• Good people should not buy sin business
• If good people would not buy, then bad people will buy and make money to become stronger (pun intended).

So what should they teach you?

• Keep it simple
• Believe in equity investing (50% job is done)
  • Book Suggestions:
    • Triumph of the Optimists – by Elroy Dimson/Paul Marsh/Mike Staunton
    • Wealth, War and Wisdom – by Barton Biggs
  • These books show that over long period equity beat all the asset classes.
• Have a diversified portfolio. Reject Concentration.
• Try to get more knowledge, not more information.
• Money Saved is better than money earned. How one performs during negative months matter a lot to the performance. Example: Nestle, HUL etc.
• Bottom-up strategy works best in sectors/themes with strong tailwinds.
• Look first for reasons to reject, not for the reasons to buy. Rejection has far more conviction than buying.
• Investing isn’t complicated – buy businesses quoting less than they are worth. How do you know the worth? Well, that’s really complicated..!

Link to complete presentation by Samir Arora