Note: I have compiled this article based on various interviews available on internet of Amitabh Singhi, some of which are quite dated. In this post, I picked up those quotes which I liked most. This post is not an attempt to explain Amitabh Singhi investment philosophy , which must have evolved further, post those interviews. Unless otherwise stated, Words in italics are extracts from his various interviews.
Amitabh Singhi is Managing Director at Surefin Investments, an India-based portfolio management and investment advisory company. Surefin has delivered a return of 25% compared with a Sensex return of 16% over the past 11 years [Source: Outlook Business, June 2013] and that too investing mostly in net-nets and low-priced stocks following Graham method, and maintaining a very concentrated portfolio. I have compiled a small note based on various interview. You can download that note from here. Below are the few extracts from this note.
Follow Graham to survive
I read about Amitabh Singhi for the first time in Outlook Business . I simply loved one of his quotes during interview. He said
“Right now, I have to survive. Therefore, we will stick to sure, conservative bets and grow from the current size. But once we grow, we will have to find larger positions that we can hold for a while.”
Amitabh Singhi says for someone like him, with low capital, practicing the Graham style of investing was the only way to grow. Over the next few years he wants to move up the next level from Graham to Munger. [Outlook Business]
As highlighted in my earlier post I am fully convinced of buying consistent compounders, which Prof. Sanjay Bakshi referred to in his post “What happens When you Don’t Buy Quality stocks”. But at the same time I am aware that it takes a lot of time and experience to analyse such stocks and the downside is huge if one goes wrong in understanding moat and end up paying high price for a commodity type business disguised as one with high entry barriers and sustainable returns. So for next few years I will prefer to follow a mix portfolio approach as highlighted by Amitabh Singhi in one of his letter to shareholders
What we want to do going forward is three-fold. Firstly, buy more cigar butts with 25% to 40% of the portfolio. Cash is always cash. Secondly, try to put 10% to 30% in special situations. And thirdly, buy some decent quality businesses at very good values with 50% of the portfolio.
Even Cognizant adopted, somewhat a similar approach, when because of evolving technologies they had to change the way businesses are run. This is what Forbes India commented about their approach.
Cognizant did a rejig too, dividing its business into cash cow, immediate future and long-term future, calling these horizon one (H1), two (H2) and three (H3), respectively. D’Souza took charge of H3. This change is risky. There are examples of companies that took the new technologies too seriously and got burnt. Consider Infosys. Many of its problems over the last few years can be traced to its ‘Infosys 3.0’ strategy, with its focus on products and platforms, and with its ambition to create tomorrow’s enterprise. The leadership was so enamoured with that vision that they dropped the ball on the cash cow—application development and maintenance. NR Narayana Murthy was compelled to come back from quasi-retirement, and one of the first things he did was to acknowledge this lost focus. [Forbes India]
I would rewrite the first line as cash cow [Special Situations], immediate future [Graham stocks] and long-term future [Consistent Compounders]
Another thing we have started doing is that we are investing in “buckets”. What this means is that investments that are similar in nature are grouped together and treated as one investment in the overall allocation of the fund. For instance, today we have five or so investments that we consider growth type situations wherein the companies are expanding and if the expansion goes awry over the next few years, we may lose about 30% of our investment (which ordinarily would not be an acceptable type of investment). But if the expansion plays out well, we will make a 2x and maybe even a 4x (if we are lucky) of our investment within 3 or so years. [Source: Outlook Business, June 2013].
I GUESS Greenply might be one of the five basket companies referred to above. See here .
I have always loved the basket approach. Frequently I came across some themes where it’s difficult for me to choose which stock is going to outperform, mostly because of the uncertainties involved. For eg. I followed basket approach for Inditrade Capital Limited [earlier known as JRG Securities], Phoenix Lamps Limited [Earlier known as Halonix] and Sah Petroleum, where the underlying theme is that, exit of PE investor in imminent in next 2-3 years and high possibility of substantial upside.
Investing in highly uncertain situation
Analysis in paralysis may be disease that I need to cure. Seth Klarman in his classic book Margin of Safety talks about an 80/20 rule about information. Uncertainty is a great way to find depressed prices. And uncertainty is caused by information that is not available and cannot be available. So, sometimes if the investor can overlook a lack of certain information that may not be important but that the market thinks is very important and because of which the price is very low, the investor can make a favourable investment. There may be high uncertainty and low risk which is ideal to finding a great investment!
On uncertainty, my view is always to Seek Uncertainty on Favorable terms [though this post is about delisting, same principle applies in all uncertain situation]
Noida Toll Bridge [BSE code BSE: 532481] is a good example on how to seek uncertainty on favourable terms and get lucky. See the post by Neeraj Marathe here. My all time favourite post on unknown and unknowable remains Prof Sanjay post on Piramal Enterprises.
Importance of catalyst and what if market does not recognise the company for long period?
That’s something that I haven’t figured out yet. We just buy it because it’s cheap. Of course, India has got recognized now and you’re seeing things unlock within months or years. But when we are buying it, we look at some kind of earnings yield and to make sure that, if the guy’s honest, eventually he’ll come to me. So I might get four times earnings and lots of cash, maybe about 30 percent earnings yield on that. And well, it’s not coming in my hand, but even if I got it in my hand, I wouldn’t know what to do with it. So I’d rather have him deploy it in an intelligent way, but there is a risk there, and one has to kind of look through company by company and figure out, “OK. Am I comfortable leaving my reinvested capital with this guy or not?” But, we don’t know how triggers come, they come, but we just don’t know how they come.
Source of investment ideas
One of the good places to look is to find stocks that have lost favour among retail investors and are not on the radar of institutional investors either. Typically these are companies that are small in size that do not market themselves to investors often.
It is a combination of reading newspapers, screening, talking to friends, looking at investments made in the past, reading annual reports, etc. The process of getting ideas is often lumped together so long periods of inactivity are (fortunately) interrupted by brief periods of hyper-activity. [Manual of Investment Ideas, 2011]
There are lots of small companies that probably should not have been listed, that are listed. That gives an opportunity for people to find things when others aren’t looking there. [Morning Star]
One thing which I have noticed consistently in various interviews is that Amitabh Singhi makes extensive use of screening.
Prefers a concentrated portfolio
My instinct is to have most of the money in six to ten stocks with the top five stocks having 80% of the capital. We have done well whenever we have concentrated but there are times when it makes sense to make a basket-bet and buy a group of similar companies. We do not use any leverage. We would be prepared to use leverage for specific special situations but have not done it so far. [Manual of investment ideas, 2011]
Concentrating your investments makes you work harder; it makes you stay true to yourself in the profession, which you need to be. And you eliminate complete forms of luck, because if you’re concentrating, then you can’t keep getting lucky. You have to be right about each large investment. But that’s something I’m struggling with to be honest. I am not concentrating enough. I think it just forces your mind to look deeper and then have a higher conviction. And also work harder. [Guru focus, 2011]
Importance of focus [concentration] is best explained by Siddharth Roy Kapur, MD, Studios – Disney UTV in his interview to Fobes India, when asked about how he plans to double the number of his movie releases
“This isn’t a scalable business beyond a point. The idea is you want to make bigger movies sure, more innovative movies, but it’s not always about making more movies. We want to make movies that are more profitable, that up the ante in terms of creativity, that do path-breaking stuff. But it’s not about “let’s take 12 movies to 24 movies”. Like studios in the West, we’ve realised that the senior management’s time and attention on every individual project in this business is crucial. When you spread yourselves too thin across a wider slate of movies, that tends to get diluted.”
I am fully convinced about concentrated portfolio approach and started following it in special situations where each bet is generally between 5-15%. But for straight equity investments, I still do not have the conviction required to invest 80% of portfolio in 6-10 stocks. Also one needs to look at Diversification beyond % allocation. Different stocks need different allocation. One can also read this interesting post by Abhinav/Niren
On Small & Micro cap companies
Tiny companies, like the ones Buffett was supposed to be buying in the 1950s and 1960s are available here. As Buffett said about Korea in 2003 –there are many such opportunities available in India. The reason is that we have the second largest (after the US) number of listed companies at about 6000 companies out of which about 2000 are actively traded in India. Also given the robust Chartered Accountancy practice in the country the quality of financial statements and numbers available is reasonably good. Also, given the impression that many companies have corporate governance issues, many honest companies trade at discounts because many investors tend to throw the baby out with the bath water. As a result there are many unknown, small companies that are like Jersey Mortgage, Bankers Commercial, Rockwood, National American Fire Insurance, Western Insurance, Davenport Hosiery, Meadow River Coal & Land, Westpan Hydrocarbon, Maracaibo Oil Exploration, National Casket Company, Sanborn Maps and others that The “Snowball” mentioned Buffett to have done [Interview with Corner of Berkshire and Fairfax, 2009]
Any one who is interested in investing small & micro cap companies should study Paul Sonkin investment philosophy. One point which he consistently highlights is that time required to study a small & micro cap is much less compared to a mid-cap and large cap stocks. In other words Return per Unit of Invested Time is much higher in case of small & micro caps stocks. Ofcourse to mitigate risk of one needs to restrict allocation in each stock to 2-4%.
Can we understand how the business is going to make the cash flows that it is already making? Because the P&L are just numbers on a piece of paper. Can you visualize the thing in your head and say if he sells for this much, this much goes to cost and raw materials, this much goes here, there, etc.? And then you can see after a 10-year average that they have been OK, then you jump into the “what if” questions. What if raw materials double? What if the top two guys leave? What if there is labor unrest? What will competition do, etc.?
Then, the last 10-year numbers should be good. It should be a well-run business on the numbers. We spend a lot of time looking at what he’s done and it becomes clear to me. And if the numbers aren’t clear, then I’m not interested.
So once all of those check out, then we start “Scuttlebutting”. So in most situations we will make some calls and really do some spy work (which I love).
Singhi also relies on a checklist of every item in the balance sheet and the income statement, and then of all the mistakes that he has made in the past. [Edited extracts from interview to Valuewalk]
Much of the ground work on smaller companies centers on the supply chain, auditors and ex-employees. “I want to know all the unlisted businesses of the promoter. I want to know how much it means to him,” says Singhi. Similarly, if he is evaluating a financial services company, Singhi likes to closely scrutinise the history of the CFO. Where has he come from and what was he up to earlier? “If you have a dishonest guy running finance you will end up looking at manufactured numbers and book value will not mean anything.” The operating mantra at Surefin continues to be, “If something looks too good, be suspicious till you are proven wrong.” [Outlook Business, June 2013]
While investing in small companies with lesser known auditors (not to say that the big boys are squeaky clean – on the contrary, it is the best brand sweating exercise that I know of) and a one-man show management, it is useful to go ‘see the place’ in a country like India. Typically, shareholder-shy-managements sometimes end up giving the wrong impression with their weak shareholder communication and their brief annual reports printed on toilet paper quality. Evaluating and meeting the management in person can thus be a far more effective exercise in assessing the true value of the company. We have found a good number of gems this way and in most cases we only invest when our personal assessment of the management agrees with our analysis on-paper.
My passion in studying successful investors can be best explained through Farnam Street tag line
“Master the best of what other people have already figured out.”
I would like to end this article by quoting my favourite quote from one of the Paul Sonkin interview:
“Keep your eyes open and your mouth shut. The most common mistake that students make is when a boss, for example, asks him for a red umbrella and then he comes back with a blue one and an explanation for how it’s going to keep him dry. If you have seven different teachers, you might need to learn how to do something seven different ways. Then you can just absorb it and decide what suits you. Then when you go to work, you’re probably going to need to learn to do it in an eighth way. Arguing with your boss is just not a good idea.” [CBS interview 2009]