Buying a stock is technically buying a piece of a business. Will you buy any business without thoroughly understanding it?
Most of the investors will answer the above question in negative but when it comes to actually making the buying decision in stocks, they look for hot tips, tend to trade too often and too soon and believe anybody who gives any credible story on the business without doing any due diligence.
How often you have heard that people will talk about how buying ‘shares’ is akin to ‘gambling’. With the temptation to make quick buck, most of the investors, without even doing an elementary research about the stocks, invest their hard-earned money simply on the advice of a broker or a friend or sometimes even a random analyst on business channel(s). It is a pity that we do more research before buying a cell phone than before investing into a stock! No wonder, such investors invariably lose money in stocks and then label stock markets as ‘ Casino ‘.
Another common tendency of investors is to ‘chase’ stories.
“Something new, I must have it, what if this is that stock that will make me rich… I can’t miss it.”
“This guy at the office told me that he is hearing some problems with this company, It is also down 5% today, I should sell this. I don’t want to lose all my money in this.”
“I have doubled my money in the stock.. Let’s just sell it and book profits”
There are many such reasons why people buy and sell their stocks. People tend to trade more often and make less money.
Why trade for short-term when there are stocks of quality companies that could go up multi-fold over the next few years.
9 out of 10 traders make losses in all kinds of trading. It is not by accident but is designed that way. The only guys that make money in this process are stock brokers.
Choice is yours – get rich slowly & consistently or get poor quickly.
India is a developing nation with tonnes of opportunity making it a dreamland for any long-term investor. A strong Government at center, prospects of better governance, favorable demographics, consumption boom and a trillion dollar infrastructure investment makes a solid case to invest in India. If you believe in the India story, it is imperative for you to select right stocks in the right industries to participate in this great story and we can help you with that.
The winning strategy in wealth creation is to identify few good companies, buy their stocks at attractive prices, track their performance closely & stick to them as long as they execute. Buying such off-the-radar and under-tracked stocks when no one was even talking about, becomes the next hot stock one day. You don’t have to have a portfolio of 40-50 stocks (over-diversify) or bet all your money on just 2 or 3 stocks (over-concentrate). You have to strike the right balance. Indeed it sounds simple but as Warren Buffet puts it ‘Investing is simple but not easy’.
Quality Of Business:
A lot of our time goes into understanding the economics of a business. We have proprietary screens where we filter the companies on the basis of various balance sheet and cash flow ratios and we spend our time understanding businesses which pass our initial screens. We do not invest in any company where we don’t understand the business and which doesn’t pass the initial filters.
Management Quality
Investing in a great business can be injurious for shareholder’s wealth if its run by a dishonest/ unethical management. We evaluate the management on the business decisions taken in past, their accounting policies, their actions in past for minority shareholders amongst many other parameters. The management of a company has to clear an exhaustive checklist for us to be interested in that company.
Valuation
“Price is what you pay, Value is what you get” -Benjamin Graham.
A lot of wealth is destroyed by paying an extremely high price for a great company and a lot of wealth has been made by buying moderate businesses at cheap valuations. Value plays the most important role in an investor’s return. It is always possible to derive a range of fair value for understandable businesses and sensible investing is to buy well below that range of intrinsic value.
We use variety of methods to derive that range of fair value for the companies we like and we are patient to wait for the price to reach in our buying zone before we ‘load up’, so to speak.
Downside Risk Mgt. (Margin Of Safety)
A great source of pain for a large number of investors comes from the fact that they consider only the upside while making the buying decision.
“How much can this stock make ?”
“How much will be my returns ?”
These are far more common questions we hear than “How much can we lose?”
We are very particular about the latter question. We want to know how much we can lose before making the investment and that’s where we derive safety in our investing. We don’t want to buy if the risks are symmetric. We really like Mohnish Pabrai’s Dhandho framework:
“Heads I win a lot, Tails I don’t lose much” and we focus to make our investments in such a way.
Awareness Of Business Cycles
There are very few things that go in one direction. Things get better and things get worse. There is eventually a cyclicality in most of the things and great amount of money is made and lost when investors forget this important point. Extrapolations of positive and negative news are a norm in the industry and to take informed judgement against the prevailing extrapolation can give phenomenal return to investors who are able to do it successfully. We are conscious of the above facts and try our best to be well informed and take advantage of such cyclical events.
Contrarianism
“To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit” -Sir John Templeton.
Most investors are just trend followers. Even the investors who claim to follow value investing paradigm and claim to act against the market sentiment usually end up buying stocks that are widely discussed, followed and favoured. Taking a call against the current euphoria is often very difficult and we focus on opportunities like these.
But we would like to mention a very important point here. Its not enough to bet against the crowd. A contrary stand should be taken not just for the sake of Contrarianism but because there is a proper reasoning for the same.
“Just because everyone doesn’t jump in front of a moving truck, doesn’t make it right”
HOW DO WE DO IT?
- Regularly screen over 5,000 companies listed on Indian stock exchange using our proprietary quantitative filters.
- Check the company from ‘Corporate governance checklist’ and ascertain that the management runs business ethically. We strongly believe that a great business run by a crooked management will not create wealth for minority shareholders.
- Carry out an exhaustive quantitative analysis of the company and its competitors to see understand the financials of the company and industry
- Carry out an exhaustive industry and company research which involves
- Reading various industry journals
- Meeting buyers and suppliers of that industry to understand industry’s value chain
- Meeting company and its competitors’ managements to get their perspective and future prospects
- Channel checks to get a feedback on company’s products and policies first hand from dealers and distributors and getting the feedback directly from horse’s mouth i.e. end users.
- Study valuation trends of the company and sector over the past decade to understand whether current price offers any margin of safety. Only those stocks make it to the final list which meets all the criteria.
And we distill all this work into easily comprehensible and strongly researched stock and industry reports.