Why this article? In the random event that some youngster at the beginning of his/her career reads this, I want it to be of some use for him/her. Its also a personal reflection on how I have evolved in my approach to equities in the last one decade. It isn't meant to evaluate my performance or say that my approach is right. But rather to record how each person evolves a unique investing style over time. There are lot of nuances of stock picking - have tried to highlight the key changes in my approach rather than my entire approach. (I tried to jot that down here some months earlier - http://anandhariharan.blogspot.in/2017/10/my-stock-picking-method.html)
In the beginning
I started out as an equity investor after a casual hallway chat at EY in 2007 thereabouts with a fellow Senior Consultant who at that time used to work in financial services risk advisory. I knew nothing about finance those days though on paper I had a PGDM from what is ranked as one of India's top 10 b-schools. Somehow neither the professors at SPJIMR nor my fellow batchmates could instil any interest in finance in me. I was (and still remain in parts) a techie who by mistake had wandered into a b-school.
Those were days when I used to take 3-4 flights every week. Delhi airport was just coming up and for some unknown reason I took a fancy for GMR Infrastructure. I knew nothing about what to look for in equities - I just bought GMRINFRA. I also promptly subscribed to Google Alerts on GMRINFRA. They seemed to win airport project after airport project and I felt it was all going good. The stock price, however, didn't move at all. I held it for some time. It did not make me any money and I would say I exited all equity investments by end of 2007 as it became clear that I didn't understand the mechanics of either equities or mutual funds. Luckily, I did not see any stock market action during the 2008 crash and up until I closed out my home loan some time in 2011-12, I completed stayed away from equities. (My relationship manager at the staid State Bank was rather surprised when I applied for home loan right in the middle of 2008 crash !)
Between 2008-2012, however, I had executed as part of EY nearly 2 turnaround strategy assignments and subsequently, the Aadhaar days came by. By trial and error, I became a finance guy though without too much systematic education. Around that time, I got an opportunity to be part of Vigyanlabs where I went on to invest all the proceeds of my gratuity earnings from EY into the company's shares. That was my re-entry so to speak to equities. Those 18 odd months at Vigyanlabs gave me an opportunity to interact with lot of investors while also building out a few iterations of the company's investor presentations from scratch.
Around that time I came across Moneyshiksha workshops which sort of laid the foundation for my equity investment theories. I should say it was very easy for me to pick up the fundamentals and with every new investor interaction I learnt more. My stint with Atlanta Healthcare helped me hone my finance fundamentals better though I was primarily responsible for marketing than finance. I systematically read through every investment book I could read, enrolled for Safal Niveshak classes and went on to make reading Annual Reports a hobby. Between 2012-2015, I would have read at least 100 annual reports.
Given that it is a decade since my first foray into equities, I want to try and reflect on how my approach has evolved over the years. If I ignore the 2007-08 period, my approach has thus far had two distinct phases:
2012-2015 - high ROE, high diversification
During the initial period, I simply looked at equities that seemed to have a high ROE and didn't care for much else. During those days (which was primarily 2012-14), for some reason nearly all my picks did somewhat well. I wasn't aware of multi-bagger concept those days. So a 25-40% return was reasonable for me. The approach was somewhat Peter Lynch motivated.
Sitting at Costa Cafe, I happened to check the tyres of an autorickshaw parked in front. I checked the tyres of some 100 vehicles that passed by me that morning and after some basic checks went on to pick MRF. I used to love stocks which has very low equity base those days - so at 4 Cr. MRF seemed the perfect stock. Along similar lines I picked up Britannia, Eicher and a whole bunch of others. My portfolio those days had anywhere between 50-60 stocks. I replicated a similar approach for my wife with decent success.
I was mainly looking for balance sheets with zero debt. Around this time, the case of Motherson Sumi highlighted the importance of looking at ROE and ROCE together rather than ROE in isolation.
During this period, I was totally a small/microcap person as I was simultaneously working with several small businesses. It was also the period when Motilal Oswal's QSGLP (Quality, Size, Growth, Longevity and Price) framework appealed to me a lot. It was easy to understand. This was a period when I thought equity valuations can be absolutely calculated. Buffet's statements around 'fat lady, thin guy' didn't make sense to me yet.
2015 - present day - concentrated portfolios
October 2015 marked a turning point in my career. The day prior to joining Wipro, I exited all my equity investments. I exited all social media and decided to retain only a Twitter handle. (Yes, I am rather capable of drastic changes :) !) It was around a year prior to that that I had attended lot of value investing workshops of Safal Niveshak and accidentally stumbled upon a certain Porinju Veliyath on Twitter. Porinju and Ashish Chugh were the first to impress upon me the importance of 'margin of safety'. For all their adorable literary skills, Safal Niveshak team could not drill this into me.
A certain case of Arvind Infrastructure spin-off highlighted by Ashish Chugh got me interested in special situations. I decided to dial Porinju and spoke to him over a weekend for about 10 minutes. That was when the concept of 'Concentrated Portfolios' also took root in me. Around that time I also had a weekend get together with Vishal@Safal Niveshak where again he emphasized the importance of concentrated portfolios. So some time starting Feb. 2016 I started rebuilding an equity portfolio grounds up.
Up until then I could never get a clear idea of equity valuations. Even today I think there is too much of theory around valuation with too many formulae and methods. Around this time I came across an interview of my batchmate at SPJIMR, Mrinal Singh. Mrinal spoke about how he looked at absolute numbers like Market Cap and Revenues and that was the last time I really evaluated equity ratios.
The other major change came some time in 2016 when I started focusing more in depth on cash flows over P&L. Since then my primary evaluations centre around the Balance Sheet (which I metaphorically call the patient's body), the Cash Flow Statement (which in my metaphorism is the flow of Prana) and P&L statement (the point in time diagnostic report) in that order of importance.
The other key concept I have started focusing on little more of late is the concept of Type A, Type B and Type C balance sheets which I picked up from a book called 'Romancing the Balance Sheet'. I must say it took me some time to understand the workings of working capital management. From looking for zero debt companies, I now enjoy figuring out where in the debt/investing cycle a company is. I look at the trends of debt and a double negative flow in the cash flow statement.
So what next?
As of today, my primary focus is on how my portfolio is performing rather than an individual stock. 13-14 stocks is what I find my sweet spot at - enough variety to keep me interested, enough diversification to manage risk.
I don't change this list - my churn rate is rather close to zero. Somewhere my personal experience has taught me that nothing much is possible to achieve in business in 1-2 years. J.Bezos's 7-year quote is rather firmly entrenched in my mind.
I continue to be a primarily small/mid/micro cap person. That said I am not too focused on relative sizes per se.
The book that is influencing me hard these days is 'Capital Returns' by Edward Chancellor. I picked it up based on S. Naren@ICICIPru's recommendation. I have drifted towards looking more at special situations with more emphasis on 'margin of safety'. Recently a stock crashed nearly 100% in 1 week hitting lower circuit for 6-7 consecutive days. It landed little above my average acquisition price. So Margin of Safety it is, wherever possible. I have nearly dissociated from the concept of Stock Beta as a measure of risk.
I am gradually drifting towards looking for bad news about a business or industry than good news. (Howard Mark's philosophy is little strongly engrained in me now though I can do with a little more.)
My next goal is to master the art of investing as outlined in this article (https://www.valueresearchonline.com/story/h2_storyview.asp?str=35159). I will keep you posted as I evolve my methods further. Till then enjoy owning a share of your favorite business :) !
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