MasterClass with Super Investors

Note: Quote in Italics are from the book “MasterClasss with Super Investors”. To manage the blog post length I have slightly edited and combined the quotes of same investor appearing at various places in single para. If it results in some misinterpretation, mistake is mine.

Thanks to Vishal Mittal and Saurabh Basrar for gifting me this wonderful book. After reading this book I really feel fortunate to be good friend of both of them for last couple of years. The purpose of this blog post is twin-fold, one to encourage everyone to read and benefit from this wonderful book and second to share my key-takeaways.

Short review

After writing the blog post I recognized that it has become too long and most people may not read it. So short review is JUST BUY THE BOOK. It will help both mature and new investors. There are very few books available on Indian Investors. The most important benefit of books on Indian investors is that one can understand the companies which are being discussed better and can relate themselves to the companies being discussed. The book contains investing journey of 11 investors. One can see the list of interviewees here . I am definitely going to read this book regularly to relate my experience with  these super-investors investing process and in turn to continue to improve my own investing process.  You can buy the book from here

Long review

I started my investing journey in early 2012. At that time I tried to meet as many senior investors I can. I can broadly categorize them into two types. First one were naturally gifted and can learn through observations. They suggested to me that reading investing books are simply waste of time. Second group encouraged me to read as many investing books as possible. They told me that they were able to avoid many mistakes by learning from the mistakes of other investors. Needless to mention that I am in second camp. I am a very slow leaner and unfortunately not gifted to learn merely from observation.

Zen in the Martial arts [a wonderful book gifted to me by a wonderful investor] teaches us to

Learn from all the masters with open mind. Once you learn the technique,
blend what suits you in your technique….
Here is my compilation of quotes from various books on “How to Learn”

About the book

The best part of the book is that the interviews are not just bunch of random questions . Authors have tried their best to go beyond the obvious to dig deep into the investors mind and reveal good insights to us. The book covers topics like
  • Reading books
  • Investing framework & process
  • Method of idea generation
  • Portfolio construction
  • Investing in cyclical
  • Taking leverage
  • Short selling
  • When to sell
  • Management vs Business
  • Investing in future and options
  • Taking leverage
  • Cash calls
  • Typical day of investor
  • Advice to new investors
  • Timing stock market during extremes
  • Important qualities for success
  • How they generate ideas
  • How they select and reject stocks
  • Some of the interviews go as back as 1980s and 1990s and the prevailing economic and investing environment then.
  • Another good part of the book is detailed description of why a investor bought a particular company and the mistakes committed by them.
  • Etc etc…….
After long time I had so many notes and highlight in any book. One of the investor profiled in the book says

Reading and re-reading books written by successful investors and traders, and relating them to your experiences will help. I avoided lots of mistakes by reading books about or written by successful investors.

Key learning for me

Each individual will have different takeaways depending on his/her investing journey, personality and the mistakes committed in past.  THE INTERVIEWS ARE VERY COMPREHENSIVE AND ITS IMPOSSIBLE TO SUMMARIZE ALL IMPORTANT POINTS OF A 450 PAGE BOOK IN ONE BLOG POST. This book contains interviews of 11 investors with varying investing styles. In this blog post, I focused primarily where I would like to tighten and improve my investing process or experiment with slight variation in my style. Your learning and key takeaways might be completely opposite to mine.

Focus, In-depth study, Concentrated portfolio and the Power of exclusion: 

Mixing of styles doesn’t work, you have to go deep. Everybody is blessed with one style.

What is your process to say no to 3,980 listed companies out of 4,000

One has to go deep into a particular subject. People go after breadth and length, while I believe one should go deep. We study the business so deeply that our vision becomes better than promoters from a stock market perspective. We can forecast their business better. 

One should be selective in the market, about what sectors form your circle of competence. Right now I have reduced my universe to just 5-6 companies across one or two sectors. Even earlier I used to track just 25-30 companies across 5-6 sectors. 

Many investors try to do everything – they chase whatever is in fancy. They stray outside their circle of competence and are not focused [Investor said lack of focus is one of the main reason of failure of many investors..]

The most important aspect in finding good ideas is to eliminate bad ideas fairly quickly.

If the long term potential is low I will still not be interested in the company. It is like something that Buffet talked about – we have to make 20 punches in the punch card. 

Where I typically lose money money is in smaller positions, which I bought WITHOUT MUCH ANALYSIS.  So I have started avoiding small positions, as the losses tend to add up. 

The most important thing in strategy is defining WHAT YOU WILL NOT DO. I am this and I want to do this – this is my strategy. YOU CANNOT SAY MY STRATEGY IS DO EVERYTHING. 

Normally I try to look at a company in some detail  before looking at the valuations, else one tends to get prejudiced. 

You have to be very selective. How many people have made 20% CAGR returns over a long period. That happens by being highly selective. You can make a lot OF MONEY IN CYCLICALS, BUT IF YOU ARE NOT ABLE TO GET OUT OF A CYCLICAL, YOU ARE FINISHED. What’s the point in wasting time on JUST CHEAP STOCKS. If one wants to, one can keep the core stocks intact and keep dabbling with a small part of the portfolio. 

I consciously seek to keep the average age of my portfolio high and control the need to dis-invest at the investment stage itself. I try and avoid buying stocks that need to be frequently sold in my concentrated core. Most of my selling is out of the exploratory portfolio [Exploratory portfolio is 30% of this investors portfolio and holding period of portfolio stocks atleast three to five years]

Position allocation

If I look at the success of all the great investors – believe me if was those two to four great ideas that made then who they are. Its not whether you are right or wrong, but how much money you make when you are right and how munch money you lose when you are wrong. 

Don’t waste energy over small allocations – there is a price to that energy. 

Better to stick to companies with some track record

Companies which have grown well over a 10 year period without diluting equity and without getting seriously in debt are always interesting. 

Its useful to see if the company has generated any meaningful RoE over the past 10 years or not. If the ONLY THING THAT IS CHANGING IS INDUSTRY AND THE COMPANY IS DELIVERING GOOD NUMBERS FOR PAST TWO QUARTERS, it may not be very interesting.

Most interesting are companies who have been in business for few years, generally established a good track record, have reached a certain meaningful level of profits and look ready to move on to the next phase of growth [Companies below 1,000 crs market cap and atleast 5-10 years of stable operations behind them]

We figured that the maximum returns, with least failure rate, came in the bucket of current earnings growth. The second category was value, AND TURNAROUND WAS THE WORST CATEGORY. But once in a while, you should give yourself the leeway, provided you know how to manage the risk, and it should not become the norm. 

One of the key aspect in my investment process is to buy stocks of companies which have done well over the past 10 years, rather than companies which we can ONLY HOPE TO DO BETTER IN FUTURE BECAUSE OF A GENERAL THEME. 

 In turnaround risk -reward is high but strike probability is low. WHEN MARKET VALUATIONS ARE ELEVATED, THERE IS TENDENCY AMONG INVESTORS TO GRAVITATE TOWARDS TURNAROUNDS BECAUSE THEY ARE CHEAP.

I have realized that investing in turnarounds is not different from event based investing. A big learning has been not to play an event. Our analysis has shown that if you buy the stock post event, then also you make money. We say this lot in our office now – don’t play blind, play seen. You only play blind when the valuations are so much in your favour that its just not in the price. Our data has shown that multi-bagger stocks have given enough time to research. In our own track record, we have found that several of these CAGR killers come from ‘Potential turnarounds’ How can you know that all the events will happen and that too in your estimated time frame. 

Sometime we see a change and we think it will happen so soon, but it might not. When its new, you don’t have a grasp of all the variables. Buffett invests in companies which are stable and where he understands the business model. 

 I do not invest in companies that have track record of less than 15-20 years. Companies that have a 15-20 year track record have usually gone through three to four up and down cycles including a big cycle. So they would have learnt from their mistakes. If you ask me to invest in a company which is two to three years old, I will not do it. However, even in a new company, if its a known management with track record, I will look at it.

China and disruption risk

For every company you study, ask yourself whether China or digital can disrupt this.

Why majority of investors fail

Many investors try to do everything – they chase whatever is in fancy. They stray outside their circle of competence and are not focused

People become very arrogant and over confident

People have made lots of mistakes by looking at short term only

After some level of success you start feeling like God. The atmosphere around you start making you feel kike that. 

It has happened due to lack of discipline and self-awareness. Investing the closest one comes to a zen-like state. Its all about controlling your emotions. You have to feel sense of vulnerability at every stage. Its important to have extreme adaptability, learnability and flexibility. If you are rigid you are dead. There is no standard path to becoming a great investor, but the basic traits are learnability and adaptability. 

Earnings and valuation

When market becomes expensive, going down quality/Market cap curve generally been a mistake. As bull market proceeds ONE NEEDS TO GO UP QUALITY CURVE, LIQUIDITY CURVE AND MARKET CAP CURVE. 

If you ask me, my philosophy is GARP, but I want to buy businesses that the market is willing to give disproportionate value in future. PE expansion can be major part of the return. I am not saying that’s how I will buy, but that is a bonus. 

Risks to the markets are the highest after you have gone through an earnings up-cycle, because people tend to project the growth into the future. 

 Macros

Apart from interest rates, I don’t look at macro factors much and don’t spend a lot of time on these aspects. First of all, what will happen is uncertain. Secondly its impact on the market is also uncertain. You have to focus on your own investments and if these macros will impact them. 

Management

Most promoters don’t know how the future will pan out for them. 

Promoters could be selling because of his own circumstances, one should decide independently whether to buy or not. 

Success and failure patterns

You keep learning from success and failures, and keep superimposing that knowledge on your next picks. You think about patterns that didn’t work in the past and why they did not work. The beauty of our business is that there are no clear answers. 

You should have a habit of reflecting on what worked and what did not work and you should do that repeatedly. I think it is the best learning and something that stays with you. 

I want to repeat the success patterns that I have experienced rather than trying to learn everything.  Although I might make some variations as per the circumstances, the core will remain the same. 

Investors mature only after seeing 2-3 bull and bear cycles

For majority of investors it took 2-3 bull and bear cycles to form their investment philosophy and by when mistakes of commission became very low.

Most money is made in the third cycle as an investor. If you observe it closely, most investors get seasoned after the age of 50. They just stop making mistakes.

Miscellaneous

There is also a difference between investing afresh and holding a stock. At the time of investment you don’t have to stretch, very often the market gives you a better and safer entry point at a future date. 

Writing down what you doing and the reasons why you are doing it – whether it is buying a stock, not buying a stock, selling a stock or not selling a stock – is useful. Reviewing these at a later date will help you spot flaws in thinking that can be corrected. 

Initially a highly process driven, long form approach has to be adopted until the process becomes second nature. [Its only after 2-3 bull and bear markets that number of mistakes comes down]

Be prepared that your portfolio can fall 70% in crisis time.

Now that the markets are getting more institutionalized, if you think there is a thematic or sectoral play, you should just buy the best and the largest company. You will make the fastest money on a risk adjusted basis. That will hold true unless you have a small or mid cap company where the growth is really disproportionate as compared to the industry or it is highly undervalued. 

in every bull market, I invest in some real estate to generate income. A parallel income is required. This comes from my bad experience in the early days.

Never compromise on the infrastructure required to do equity research. One of the Investor profiled in the book invested almost 40% of his net-worth at that point of time in buying computer and access to capitalline database.

I don’t spend too much time worrying about the thesis playing out. My time is spent before investing when I validate a thesis. 

Even when I like a particular business idea, I see if it fits a broader theme. The understanding of a theme and the stock happen in-sync, and when they take place in parallel, conviction builds up very quickly.

Technical Analysis  [ I know this is a very controversial topic among value investors. So please form your view only after reading the interviews]

Investing or trading in the market only using technical analysis is unlikely to be productive. Unlike some technical analysts who believe stock price contain all the information, I believe stock price contain some, but not all information. So while I do look at charts, I wouldn’t call myself technical analyst, because that way you focus too much on price. I think its ok to look at charts, but only as additional information.

Stock price can move a lot more than you expect – both on the upside and downside. 

If I see the 30% growth slowing down to 20% AND THE STOCK PRICE ALSO FALLS, then I will take it far more seriously. Not only is the stock price under performing, but the business is also under performing. So I will make the sell decision in combination of these factors. Also the extent of overvaluation has to be taken into account. If the stock is only moderately overvalued, any weakness in price should be taken more seriously. Looking at the chart only covers the risk that though you may know a company well, but there is always something you might not know.

I won’t put a stop loss on a stock which is undervalued. But I will build my position in such a way that I don’t lose too much money if I am wrong. But if a stock is worth 1,500 and is trading at 4,500, I will put a stop loss on it regardless of how good the company is. TO PUT IT SIMPLY, I DON’T MIND BENEFITING FROM THE EXCESSES OF THE MARKET, BUT I DON’T WANT TO POSITION MYSELF FOR THOSE EXCESSES.

I had a market view before the market started declining, but once it was declining I just acted. I took the same view in 2008. MARKETS ARE GENERALLY SIGNIFICANTLY OVERVALUED OR ATLEAST SLIGHTLY OVERVALUED BEFORE THEY CRASH. IF THE MARKET IS OVERVALUED, IT MAY CRASH FOR REASONS THAT WE HAVE NOT SEEN TILL THAT DAY.

Its possible and important to time the MARKET AT EXTREMES. I have realized that the sweetest money is made in the final bull rally to the top. So without being too smart, you should capture that last market movement. Its more important for stocks where you know valuations are overstretched and you are playing momentum or for stocks where conviction is not that strong. We first see if all the classic signs are there [I have omitted the examples given by investor to keep blog post length reasonable]. Then if the stocks or markets fall down 20% from the top and try to retrace to the top, but the markets continue to look weak, that is a sign.

Leverage

I don’t take on leverage beyond 5-105 of portfolio. Usually, I hit this ceiling in bear markets. In bull markets, my debt whittles down to insignificance. I take on leverage only in market extremes or when valuations are compelling. I reduce leverage to zero within a specific time frame.

 

 

 

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