Category: Investing Process

How did I invest during Covid in 2020?

Covid has become a bad memory, thank god for it. In investing, we hear – Buy when there is blood on the street and to be greedy when others are fearful. Covid was a perfect example to evaluate what you actually did

Three years have passed and I thought it will be a good exercise to see if it’s easy to do the right thing when there is madness all around

A glimpse of the madness

Nifty dived close to 40% from 11,000  in the space of days, this is such a rare event that it’s difficult to think about it let alone stomach it

What was one of my first decisions –  I need to protect profit in one of my big profit positions Suven Life Sciences, My rationale was

Life science component though close to Mr. Jasti’s heart, it is pure play speculative bet and tough to put a valuation figure while the pharmaceuticals component is something the management may get rid off and then at ~INR 4500 crore market cap was richly valued

In hindsight this was not a great move as Suven Pharma went on to become stronger and stronger, I course-corrected and later recreated this … Read the rest

Timing an Index Fund

Passive index investing is gaining momentum (pun intended) among millennials. One of the questions that popped into my head

what would be better to buy an index hold or buy and sell using some easy-to-follow quantitative rule?

I ran some numbers

  • ETF – ASX VAS, Invests in Top 300 companies in Australia, It’s our version of USA S&P 500 or NIFTY 50 in India
  • Time Frame – Last 5 years
  • Strategy 1 – Bold and Hold (100 units)
  • Strategy 2 – Buy 100 Units if Current Market Price goes above Simple Moving Average (SMA 20) and Sell 100 Units if Current Market Price goes below Simple Moving Average (SMA 20)
  • The first entry is the same for both strategies

If you are a color person then every time the blue line (price) goes above the red line (SMA 20) you buy and sell if the blue line falls below the red line you sell

The initial results are unbelievable, Strategy 2 beats Strategy 1 by 2X

Also following this quantitative technique one can almost perfectly be saved from the covid crash. Given I was interested in the initial results I wanted to understand what would be benefits in real life … Read the rest

Dividend or Growth

Short post

The Oracle of Omaha has beautifully summarised how to adopt a dividend distribution policy through his shareholder letters

 

Unrestricted earnings that can generate incremental earnings equal above generally available to investors should be retained or else they should be distributed back to shareholders.

This model forces the management to be capital efficient and creates long term wealth for shareholders.  Buffett also advised to do a quick dollar retention test to identify if management’s decision played out well over long term or not. Read post on ITC to understand how to run this test.

One problem with this model like all other look-back models is that one has to wait for 4-5 years before realising if the management’s capital allocation decision played out or not. The only option with investors is to rely on past track record and expect that management will continue to make smart decisions.

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Get ready to make next 200% in tail stocks

One of the perennial problems of value investors like me is my urge not to pay up , while the world is different now to the one when I started picking up 20 percent annual growers at 10 PE or less in 2009-10 there were few stocks  in my journey which always looked expensive whenever I have evaluated them Kotak Bank , HDFC , NESTLE just to name a few

Prof Bakshi has a superb article why quality is almost always undervalued from 2013 you can read it here

“More profitable companies today tend to be more profitable companies tomorrow.Although it gets reflected in their future stock prices, the market systematically underestimates this today, making their shares a relative bargain – diamonds in the rough”

How can someone overcome this dilemma in a practical manner ?

This is where the concept of tail stocks comes into picture. The practical implementation can be done in 3 easy steps

  1. Buy 1 stock each of your desired quality company that you would love to add to your portfolio and valuation is the only reason holding you back
  2. Create a google spreadsheet like this
  3. Any time the stock action changes to “BUY” in the
… Read the rest

Why stock markets are rising?

It’s 2021, the COVID vaccines are rolling out and the stock markets are making new highs. Here are some charts making sense of this new bull run

India’s overall disposable income has increased 2X in last 8 years

 

But we are not buying more cars

 

 

In a double whammy covid-19 struck, now we have rising disposable income > lockdown means no spending > leading to huge money left in bank accounts

 

This new saved money was searching for returns and the fixed income instruments have become less attractive to savers as interest rates have gone down

so these folks opened equity demat accounts in big numbers – CDSL reported their best ever year of account openings

 

So it is the new money driving markets?

Source

Sure it is but regionally we are much more attractive comparative to other countries for foreign fund flow

with inflows outdoing their previous highs made in 2013

so

  • Low interest rate
  • High retail participation and
  • FII flows

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Luck vs Skills

What could be more exhilarating than to participate in a bull market in which the rewards to owners of businesses become gloriously uncoupled from the plodding performances of the businesses themselves. Unfortunately, however, stocks can’t outperform businesses indefinitely, Bull markets can obscure mathematical laws, but they cannot repeal them.

Warren Buffett

The pandemic and financial markets recovery in 2020 is nothing short of miracle. No body expected it except few folks on twitter who somehow manage to get all calls right.

Michael Mauboussin’s in his book, The Success Equation gave us a very easy test to identify whether an activity involves luck or skill

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Learnings from BVP memos

A couple of weeks back Bessemer Venture partners (BVP) published their old investment Memos, this gave a rare peek into how VCs think when they are investing in future of technology.

BVP has made some serious returns from companies like Shopify, Twilio who are now public or other technology giants like Linkedin which got acquired

In my past post we discussed how traditional metrics can’t be used to invest in high growth loss making technology start ups.

In this post lets look at some patterns to look for when investing in such companies. All items are in italics below are directly from various Memos

 

1. The bet is on founder/s

One pattern that consistently emerges is that Bessemer’s best investment decisions centered on people. In retrospect, the early products themselves are barely recognizable today. Rather, passionate, analytical and relentless founders zigged and zagged their way to that elusive “product-market fit”, and these memos provide a glimpse of those winning entrepreneurs before they were famous.

Find intelligent, enterprising and ethical founders and once you find them stick to them

 

2. Growth is easiest and early sign

However unlike traditional models of looking at growth in cash, revenues. Look … Read the rest

Why I like ETFs

I have been an active stock picker since 2008-9 and this is the first year I have got my hands-on ETFs

So what are ETFs?

An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index

Lars Krojier has written an excellent book (Investing Demystified) on ETFs and you can get a good summary from this video series, I encourage you to spend 30 mins to go through them.

Like always I like a theory but I wanted to see numbers and once numbers stacked in favor of ETFs I got sold and started adding them to my portfolio.

How did I do the numbers?

I compared returns from Jan-2018 to Jul-2020 on a momentum portfolio, large indexes and active stock decisions I took between those dates

Why Jan-2018 as a starting date?

In Jan-2018 I had subscribed to a very well respected momentum service for their sake it will remain unnamed

What were results

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Evaluating low gross margin business ?

Avanti Feeds is the largest manufacturer of shrimp feed in India. Based in Andhra Pradesh, the Company is the dominant player in India’s aquaculture sector. Avanti Feeds is a great survivor in Indian aquaculture industry rebounding from death & obscurity

How Avanti became a leader?

In 2009, the Government made a decisive move to change the course of shrimp farming in the country. It allowed commercial cultivation of the whiteleg shrimp, also known as Litopenaeus vannamei. For this variant grew faster, was more resistant to disease than the black tiger shrimp and was more lucrative to cultivate. On the ground, Avanti spearheaded this change It convinced the farming community to get into the cultivation of vannamei shrimps. It partnered Thai Union Group, one of the largest global seafood companies to manufacture feed for white leg shrimp By 2017, the production of white leg shrimp touched 4.5 lakh tonnes in 2017, from 10,000 tonnes in 2010. While the production of black tiger shrimps, which was at 50,000 tonnes in 2009, was eventually stopped by 2015. Avanti emerged as the largest producer of shrimp feed in India

From -2019 Annual Report 

 

Like many other agri and aqua-based companies, Avanti feeds is … Read the rest

How I missed Canfin Homes

There is a beautiful passage in Steven Johnson’s Where Good Ideas come from

“Good ideas are like the neo nurture device. They are, inevitably constrained by the parts and skills that surround them. We have a natural tendency to romanticize breakthrough innovations, imagining momentous ideas transcending their surroundings…… We like to think of our ideas as $40,000 incubators direct from factory, but in reality they have been cobbled together with spare parts that happened to be sitting in the garage.”

This passage has a striking resemblance to how I look for new companies to invest, trying hard to find a hidden jewel in an obscure corner outside BSE 500 without realizing that many of them are tangled in many spreadsheets stored on my PC

Let me run you past one such case last year I was reviewing one of my existing positions GRUH Finance and unlike previous years I wanted to review GRUH not only in comparison to itself but to its peers – REPCO and Canfin homes. The reason for picking these two Housing Finance Companies  was

  • I also had REPCO in my portfolio so I will kill two reviews in a single seating 🙂
  • Loan book size
… Read the rest