The Investing Journal

Notes on long term thoughtful investing

Page 3 of 7

Sell Decision: Some mistakes to avoid

So markets are at a high and in many ways it can benefit us. Apart from swelling our prides, it can add value in terms of having a portfolio clean up by giving away the over-priced stuff. And bull markets are not known to last forever. So it might be the right thing to dwell upon this subject for a while.

Pitfalls to avoid

Obviously, the above line of thinking i.e. selling the ‘over-valued’ means that one knows a lot better than others. Market prices reflects future cash flows anticipated from the business. And higher those stock prices go, higher are the in-built expectations from the company.

At one level though, especially during times when market is enthusiastic about the company in question, those growth anticipations goes through the roof – as its sky rocketing stock price would suggest.  So selling it might make sense. Right?

Most of the times, especially when you are sitting on some hefty gains, one might think like doing so. After all, if the stock is priced to perfection then how can one go wrong by not selling it to its eager buyers?  Well, sometimes you could go wrong.

Don’t think so? Then check what Rosenfield, one of the investing greats, had said in an interview with Jason Zweig about his sale of Intel Shares in 1980 which is published in the book Concentrated Investing

“On its sale, the Intel investment had generated a profit of 4,583 percent. Rosenfield told Zweig, “I wish we’d kept it. That was the biggest mistake we ever made. Selling must have cost us $50 million, maybe more.” Zweig didn’t have the heart to tell the then 96-year-old Rosenfield that the shares he sold would have been worth several billion dollars in 2000.”

Consider this an extreme example (!), but the moot point is there are some pitfalls to be avoided before making a sell decision.

 

Not all businesses are the same

Future cash flows are easier to predict, in a certain range, for some businesses than others. And market expectations can swing quite wildly for the latter than the former.

Hence, while arriving at a decision – whether it is buy or sell decision – one needs to think deeper. After all, this is what investing is all about – trying to bring down your frequency of error and its magnitude.

In case of a sell  decision, there could be a significant difference between the rate at which one thinks a business can compound its earnings and what that business end up actually achieving over the years.

Following are those ‘hard to tell’ business-types about which one needs to be doubly sure before arriving at a ‘sell’ decision.

(i) Asset-light businesses: By definition these are non-capital intensive businesses. For a moment stop and think how did the Indian IT companies grew at 20-30% CAGR over last 2-3 decades and simultaneously remain debt-free at all times? I believe it was a combination of global outsourcing demand + domestic pool of engineers + low capital intensity. After all, office space along with those desks and chairs, could be rented out right?

Also, some of the businesses which operate on float i.e. negative working capital are actually paid to grow instead of paying up to grow.

Whenever such asset light businesses see strong structural uptick in demand, they can step up their size with relative ease and cater to it. And it can also do so vice-versa.

Think how opposite is the case with capital intensive businesses like cement & steel. It takes them 4-5 years to add capacity. And by the time it comes up, demand cycle might have already turned upside down leaving them with surplus capacity and excessive debt.

Hence, instead of jumping to sell at some modest pick-up in demand, sit back and at least give it a shot of how things could look like 5-7 years down the line under different demand situations.

(ii) Non-linear businesses: If you ask me what could be even better than an asset light compounder – a neatly built non-linear business should be it. Non-linear businesses means those which need little incremental capital or expense outlay to grow its revenues. Google, Intel, Microsoft and our home grown Naukri.com are some of those types. Think about the regret which the seller who sold these years or decades back would have today!

But then there is lot of survivor-ship bias involved here. For every one Google there are dozens of those companies which ended up being bankrupt while trying to be one.

Hence, when you have yourselves owning one of those non-linear types which is showing positive signs of life and which markets have also noticed, don’t just run to the door as yet. Think scenarios. And if so seems fit, sell.

(iii) Surplus resources: Capital intensive businesses but with surplus resources, which are currently undervalued by the market, for one reason or the other, could temporarily achieve the status of an ‘asset-light’ type. The tenure of this would depend upon how much surplus are those resources vis-a-vis the demand environment.

Think about those NBFCs and banks which are currently operating at well below the permissible regulatory threshold of leverage. Also, some of these are currently operating at levels below their respective peers. Those are surplus resources which could be deployed if industry so demands.

Another example could be a manufacturing company operating at sub-optimal levels and which could cater to much higher demand levels by a combination of increasing utilization levels & brown field expansion.

(iv) Superior cash generating businesses:  Businesses with strong internal cash generation and close to zero debt can go ahead to invest and meet demand as the situation may warrant.

Ideally, a growing industry with long enough run away and strong cash generation capacity along with low debt levels could create lot of value overtime. So even if you wish to sell it given the enthusiasm around the company, plan to repurchase it as and when the tide goes down – as it generally will.

 

By no means is the above list conclusive. Instead, its an attempt to make us think deeper before we think of running towards the door. Irrespective of your past gains or losses, it is important to think and act like business owners at all times – be it while buying, holding or selling it.

Let’s not allow speculators – who are propping up the stock prices – to increase our error rates. We alone are enough!

Personally, have found this to also be the hardest part of equation i.e. arriving at a range where one is confident enough to give up his stake. And finally there may not be any right or wrong decisions but something you are comfortable executing it. After all, there is a limit to which one can expand his temperament.

If holding something outrageously priced keeps you awake at night, it could worthwhile trading it off for a sound sleep!

 

 

 

Markets are at a High

“The stock market is a giant distraction to the business of investing” – John Bogle

Stock market is a place with an ongoing tussle being the proverbial ‘bulls’ and the ‘bears’. Or as a philosopher might put it, between greed and fear. May be a neurologist might call it a fight between the two chemicals which our brain secretes – testosterone and cortisol.

Whichever way one thinks about it, markets reflect the underlying psyche of its constituents. And these are people with their own fantasies and fears.

Sometime either of these bull & bear periods could be prolonged enough to engulf even the toughest of the minds.

When it so does, the results are pretty silly. An adult with all this accumulated wisdom and with access to all unbiased facts ends up acting foolish. He does what his mind is ‘hardwired’ to do right since the days in savanna – following the crowd. “After all”, he thinks, “how can all of these intelligent fellows be wrong?”

And they are – if all are justifying their actions based on that of others. How is much is worth all your wisdom if you wish not to use it?

To me, it is crystal clear that we are living in one such irrational period of time. Broader market multiples are way far from where they generally are. In fact, they are literally going through the roof!

Image Source: Multi-Act newsletter (March 2017)

Current valuations are atleast 50% higher than their long term averages based on price to earnings ratio. And the results of such divergences have seldom been a ‘happy ending’.

So for current valuations to revert back to their long term average, there has to be at least one third of price correction or earnings should rise by 50% in the near term. Safe to say, chances of former is higher than the latter.

What should one do?

Armed with this knowledge, how should one respond? Is there a way to protect ourselves from someone else’s folly or even better, can we take advantage of Mr. Market’s folly?

This is how I happen to think about the subject:

  1. Predicting a fall is a futile exercise:

    Facts show that valuations are stretched and at some point, it has to revert back to its mean. But they don’t tell when. And they never do. There are hundreds of important variables interacting to determine our future. And to predict the it, one first have to predict those hundreds of variables, accurately.

    Any one wishes to give it a try?

  2. Ignoring valuations is dumb:

    People say that Indians are very price conscious. One generally does research, read reviews and ask friends before buying a 10K smartphone. They hardly do the same thing when investing 10L.

    Valuation is like gravity. Ignoring it is like intentionally hurting yourself. Higher the sums, more would be the damage.

  3. Be comfortable living with volatility:

    Just as gracefully one accepts ‘multi-baggers’, one need to take in those horrifying 50% falls. As Charlie Munger says, if you cannot stomach 50% declines in your investment you will get the mediocre returns you deserve.

    Well, I would add to it two things here (a) do not invest sums you would be needed within the next 5 years (b) if you indeed cannot stomach that kind of volatility, choose someone to work with who has a demonstrated track record of doing do.

I continue to do things I generally do. That is trying to turn around stones in search for bargains. Needless to say, this search has become painstakingly more difficult since, during such times, what we get is more dirt beneath those stones rather than what one would expect.

Which is fine. I don’t expect Kohli to turn centuries in every match then why should I expect too much from myself every now and then? I plan to continue with the routine and occasionally doing away with the overvalued securities and waiting on the crease for the ball that I can play well. Its test cricket which people are mistakenly considering as T20s. Difference between how one plays in each of these is huge!

How (not) to read quarterly results

So the quarterly results season has begun and the street has come out of its 2-3 months long hibernation. And the juggernaut called ‘market’ is all set to pounce upon the under & over achievers.

As a long term investor of value investing pedigree, I sometimes ponder how much relevance should one attach what a bunch of guys achieve over a 3 month period? Should one swear by it – as market usually does – or just be indifferent to it? Three months just looks to be too short (after all, it’s only 66 weekdays right?). And we know the problem with shorter sample size or in this case, shorter periods of evaluation. Basing long term judgements on shorter history is, basically, devastating for your financial health.

So the problem we face is somewhat more than required information flow. But all information is good – provided we know which bits to attach importance and which to ignore. That is, one needs to separate information from the noise. Ignoring vital information just because there is too much noise around may not serve us well as business owners.

We need a framework which can take in all those quarterly figures, digest them and interpret those results in the overall business context. Check how things are progressing vis-à-vis our initial thesis. And if required, make amendments to the thesis. Finally, check out how the margin of safety now differs versus what was it earlier.

Simple right?

Indeed. But the key lies in figuring out the interpretation part well. After all, what differentiates a truly good investor from the rest is how well can he interpret things and accordingly make a decision.

Following are some pointers to this end:

  1. Ignore the coveted EPS: Majority of the investors today, including ‘professional’ investors, are short term focused i.e. having less than one or, in few cases, two years of horizon in mind. Also, almost all swear by the P/E ratio. The result – near term EPS is what their mind is anchored to. Basing decision on quarterly EPS is far from making a worthwhile decision. EPS, in fact, is relatively easy to ‘make up’.
  2. Dig Deeper: Ignore those headline numbers. Focus on what leads to that reported sales growth or margin expansion. Look at how every cost & income item disclosed in the P&L is moving. If available, make sense of those segmental numbers. Look out for any accounting gimmicks. Managements, in general, never fall short of the same.
  3. Footnotes: Many times, those exceptionally good, EPS boosting results are explained better by notes to accounts than operating numbers. Such moves tell us more about the management rather than the business performance.
  4. Apply the sustainability filter: Margins may be higher due to some temporary favourable development. These breather periods are not known to be prolonged. As investors, we would be wise to ignore those temporary gains from our evaluation. Vice-versa for unfavourable profit tolling developments.
  5. Sit back & think again: This is the most important of all and I will explain more on this below. But it is important to wait & reassess things before coming to a conclusion. Our minds are not wired to be ‘independent observers’ when there are already lot of things going behind the veil of our mind. We, by default, end up wearing coloured glasses. And it takes time & deliberate effort every time to wither these biases down.

Currently, I’m reading this gem of a book – The Hour Between Dog & The Wolf written by a trader who then went on to become a neuro scientist. It is a gem of a work for every serious investor to understand. Essentially, what it says is our minds are predominantly driven by varied chemicals at different points in time.

Testosterone when aided with dopamine leads to ‘on top of the world’ kind of reckless optimism.

Say, you expect a company you hold to do 15% sales growth, 10% margins over the medium term. In the just announced quarterly results company reported 20% sales growth, 13% margins and unexpectedly high EPS. At this point, our mind enters a different zone. It losses its ability to carefully think through things. You no longer wish to read the results further. You know you are right. You have done it.

God forbid, consequences could be far reaching if one were to act during such times.

And it is when information becomes a bane. For our thesis what is more important is what company achieves over his medium term horizon of say 5-7 years but our mind ends up substituting short term improvement for a medium term outlook improvement. And this could be far from truth. One can see this effect live when a company reports better than expected result.

This is what happened to share price of an apparel retailer, V-Mart, when it reported a robust December quarter sales growth – which looks difficult to sustain in all seriousness.

Just one good three-month period was enough for company to quote at 2x its price!

The effect of this chemical is more pronounced during bull markets when there is enough optimism and capital around. And given that we are currently going through one such time, we need to be cautious.

The other exact opposite of this chemical combination is another chemical called cortisol. It basically breeds depression & pessimism in our minds. So even if things are good enough, one would fail to appreciate it. 2001-2003 bear period in the Indian market would vouch for it. Company quarter after quarter, year after year kept on reporting good numbers, but market would not budge!

So earnings went up, stock price remained flat leading to significant decline in trading multiples in general, overtime. We are yet to see something as depressing as that particular and widespread period. Be it large cap or small cap, all were equals.

Today’s markets are exact opposite where smaller the company, higher is the growth opportunity – or so does the buyer says – and higher are their valuations versus larger peers.

Ben Graham would have had a hearty laugh looking at current market euphoria. He has lived through many of these. Just as we eventually would.

Overall, before arriving at a conclusion sit back and allow for some cooling period to pass. Never jump out of the chair and run to be the first person to announce to the world the numbers which just got reported. Quarterly numbers are an important & authentic source of information. But half-baked assessment is no better than noise.

And while reading quarterly numbers appropriately requires no special skills, training our minds and getting over our hard wired mental blocks does take time & effort. Especially for those companies which we hold or closely track – i.e. where we need our interpreting abilities the most!

Learning from the Giants

Fortunately for us, in the world in which we live one doesn’t necessarily need to ‘reinvent the wheel’. Someone else has already done that. We just need to absorb that knowledge and add something incremental to it before passing it others.

And investing does not happen to be any different.

Reading & taking time out to think over the work of some of the most successful investors of our times is a sure way to improve our own framework.

In this sense, we guys are a lucky lot! We virtually happen to have access to all the intellectual work done by Buffett all his life in form of his annual letters. And he happens to be one of the finest investors of our times. The fact that he was officially a part time teacher for close to 15 years in his early life is an added advantage for learners like us.

In a similar way, there are several other successful investors which, though, may be somewhat less covered by mainstream media but in every way important to learn from for our purposes.

There is a column to right on this website which has a category titled as ‘learning from the giants’. It is my endeavour to make part of this journal some of the key learnings coming from these giants, overtime.

 

Some of the less talked names

Recently, I finished reading Prof. Greenwald’s book titled Value Investing: From Graham to Buffett and Beyond. In second half of this book, professor discusses the investing framework of some of the successful value investors. What is interesting to note is there is little similarities in way these investors operate but each one has achieved investing success which we all desire!

I thought of writing a post on some of the key learnings from some of these ‘super investors’. Most of the discussion would be centred around these investors and how think of investing.

 

Glenn Greenberg

His track record is one of the best in the industry. He has happened to deliver annual returns somewhere in mid 20s between 1984 to 2008 thereby beating the S&P500 index by a wide margin.

His entire investing philosophy could be summed up in three points:

  • Concentrate: He would frequently take large positions in companies he has conviction generally holding just 8-10 stocks. Contrast this with today’s leading MFs which own 50-80 names! Does this mean he is taking excess risks to earns those returns? No, on the contrary, in order to build enough conviction to take those weights, he reads & learns in order to become an expert on the industry at hand. Can a diversified fund manager even know what his 80 companies are doing? Keep aside the question of knowing how well are those companies doing in their businesses.
  • Buy Strong Companies: His definition of a ‘good’ business coincides with what Buffett would call as ‘Moat’. What he says here is not much different. What is worth observing is that for a long term investor who believes in creating a concentrated portfolio, restricting themselves to invest in stronger businesses helps. How can one put 15% of his assets in a company whose future five years hence cannot be determined with some degree of certainty?
  • Buy them Cheap: Can good business be acquired cheap? Yes, most of the companies tend to have volatility range, from low to high in a year, ranging between 80-100%. And both of these prices cannot be right! Markets happens to be predictably irrational. Thereby trading away long term prosperity for short term pains. What else can we ask for as value focused investors!

He views a company as a cash generating machine which makes him frequently using DCF to value businesses. But given the sensitivity which DCF output shows to seemingly minor changes in assumptions, he prefers to err on the conservative side of the equation.

 

Seth Klarman

For most of guys in the value investing community, this name needs no introduction. His investing style focuses a lot on the behavioural side of investing.

  • Look at the downside: Evaluate the downside first. A 10% return with no probability of downside is worth more than one with some higher returns but with relatively more risk of losing.
  • Motivated Sellers & Missing Buyers: Basically someone who would sell without really answering the question – how much is it worth? It could be for regulatory reasons but more frequently would be for emotional 

 Not everyone is comfortable owning something is somewhat depressing today irrespective of what it could be worth tomorrow. Especially if one would latch up to the next ‘hottest’ thing with just a press of a button.

Important thing here is that generally things here are predictable i.e. they move in a pattern. So, if a company is removed from the index today, there is a high probability that its prices could go in the depress zone sometime later as funds – whose performance (and jobs) depends upon how close they are to their benchmark – along with passively managed index funds go on to a selling spree.

Another example could be an industry facing cyclical slowdown – there would be multiple bargains in the same industry. So, one can work once on the industry and can potentially invest into multiple companies within it.

  • Market-independent situations: This is his way for searching up potential investments which are not dependent in any significant way on market & its fantasies. We could term it as ‘special situation’ investing. These have their own schedule of payoff in terms of returns. Company specific developments would lead to final returns.
  • Geography Agnostic: Basically, geographical boundaries do not bind him. Given his taste for deep value bargains and also how rare are these, he frequently goes outside his home ground.

Given his long experience, well documented history, somewhat unquenchable thirst for bargains, studying his records deeper would be worthwhile.

 

Walter Schloss

A disciple of Graham, he never moved out of the fast shrinking pool of asset based bargains. So devoted was he that he preferred to keep his fund small by giving his clients periodic exits and focus on the coveted space of bargain investing.

His 45-year track record of outperformance is excellent – 15.3% CAGR for their fund vs S&P’s 11.5%

His investment process is one of the most simpler ones I happen to come across.

  • Significant fall in stock price: He would buy something which has declined relentlessly in recent past. More often than not, these are stocks which now have all the negatives priced into it. 
  • Avoid levered companies: One of the most difficult problems to solve in a deteriorating business is that of debt. So he would avoid companies which are levered 
  • Patience: He is ready to hold on for years. Given how poor health of the business is when he buys into it, it takes time for things to resolve and market to revalue the company. His average holding period is ~4-5 years. 
  • Diversify: His approach is statistical. For any statistical approach to work, it requires sufficiently large sample size else, sample biases can creep in. Hence, he would frequently buy into 100 or so names – similar to Graham.

But more than statistical, I find his approach behavioural i.e. market overacts to bad news and he supplies patient capital and then waits for business problems to get fixed. The result – he earns the cumulative improvement in earnings over his holding period along with some bit of re-rating in stock’s trading multiples. He frequently says that his preferred rate of return from such investments is 50% ! 

  • Avoid meeting management: He feels this is not required. His approach is polar opposite to that of currently famous technique – ‘scuttle-butt’ – where one meets company insiders, suppliers, customers, competitors and what not!

In all, most of what Schloss does is temperamental.

If Greenberg’s strategy is to own a concentrated portfolio of good businesses which is somewhat undervalued by the market, Schloss would look to cash upon market’s behavioural mistake of punishing a non-fatal mistake too much.

For Greenberg, it is important to study the industry in detail and think like an owner while Schloss thinks of himself as a retailer i.e. buying cheap merchandise to be sold at a profit at some later date.

If Greenberg prefers to invest within a smaller selected universe of 80-120 stocks, Klarman would literally call entire universe as his universe!

All of these giants have their own way of thinking about investing.

But one thing is unifying – all happen to have patience to look beyond the immediate quarter or the year ahead. They take a far longer view of the scheme of things. Stock price movement does not seem to be their problem – after all, most of the times, its someone else’s mistake super imposed on them by way of quotational losses!

Our job – to learn from a role model who’s thinking closely resonates with our way of thinking and then make incremental improvements based on our own idiosyncrasies. But never stop learning from those who are different from us. After all, they have a record stretching over decades which one needs to respect!

Focus Investing

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” – Warren Buffett

Portfolio construction is a topic which, literally speaking, is not given adequate ‘weight’ as compared to its relation with overall portfolio returns alongwith the effort which an investor needs to put in to generate those returns.

If one were to invest in 50 or so stocks, we can be sure that quality of ideas – and hence overall portfolio quality – may not be as strong as one that is built on 7 or 12 stocks. Why? For the simple fact that the quality of ideas tapers down as one moves down through the list. If it is so obvious then why do highly paid ‘professionals’ would do something this dumb too frequently? Well, in a world which measures risk by volatility, it shouldn’t be a surprising outcome.

A portfolio with say 7 stocks would generally be more volatile than one with 50 stocks. But so be it! By selecting 50 stock portfolio over 7 one does an irrational trade-off – he gives away an opportunity to profit from 7 conservatively chosen ideas and instead gets into one with large number of stocks and hence lowers the overall portfolio quality while also reducing its chances to generate excess returns.

You might argue how can one be sure that a concentrated portfolio is bound to perform better than others? To this an answer would be: It may not outperform every time (i.e. every given year) but over a longer period (at least >3yrs) if the manager has done his job right in terms of selecting conservatively assessed businesses and acquiring them at substantial discount to their intrinsic values, sooner or later he should be able to earn his deserved reward. In this sense, markets test more of our patience and our ability to keep emotions under check than our IQ or intelligence.

Robert Hagstrom has beautifully explained all of the above by way of a case study on this topic in his book The Warren Buffett Way –

Using the Compustat database of common stock returns, we isolated 1,200 companies that displayed measurable data – including revenues, earnings, and return on equity. We then asked the computer to randomly assemble, from these 1,200 companies, 12,000 portfolios of various sizes, forming four portfolio groups:

  1. 3000 portfolios containing 250 stocks
  2. 3000 portfolios containing 100 stocks
  3. 3000 portfolios containing 50 stocks
  4. 3000 portfolios containing 15 stocks – the focus portfolio group.

Next, we calculated the average annual return of each portfolio in each group over a 10-year period (1987-1996). Then we compared the returns of the four portfolio groups to the overall stock market (defined as the S&P’s 500 index) for the same period.

  • Among the portfolios containing 250 stocks, the standard deviation was 0.65 percent; the best portfolio returned 16% annually, and the worst was 11.4%
  • Among the 100 stock portfolios, the standard deviation was 1.11 percent – 18.3% best, 10% worst
  • Among the 50 stock portfolios, the standard deviation was 1.54 percent – 19.1% best, 8.6% worst
  • Among the 15 stock portfolios, the standard deviation was 2.78 percent – 26.6% best, 6.7% worst

Notice that higher the number of stocks, lower is the standard deviation from mean returns. So a manager working for an institution happens to love his job, it is obvious that his interest would lie in creating a portfolio which is fairly diversified and which mimics the index against which his performance is assessed.

And if another manager happens to outperform index and his fund by a significant margin, he can always show up Sharpe ratio, beta, standard deviation, etc. of that manager’s portfolio, compare it to that of his fund – which would obviously be on lower side – and announce to his clients that he took much less risk than the manager in question and hence on risk adjusted basis, his performance and that of any other outperformer is not much different. Clients are happy that the manager took much less risk (risk in terms of volatility) and manager has retained his job. What a win-win combination – but only for the manager!

Clients with decades in hand for investing were short changed for manager’s need to maintain his job. He chose to lower the probability of generating excess returns and traded off higher returns for lower volatility. Knowing the power of compounding where every percentage point counts over one’s investing life time, it looks like a terrible idea. And yet in economics they still preach the concept of ‘rational economic man’.

He further concludes by saying –

From all this, one key finding emerged: When we reduced the number of stocks in a portfolio, we began to increase the probability of generating returns that were higher than the market’s rate of return. But, not surprisingly, at the same time we also increased the probability of generating lower returns.

To reinforce the first conclusion, we found some remarkable statistics when we sorted the data:

  • Out of 3000 250-stock portfolios, 63 beat the market.
  • Out of 3000 100-stock portfolios, 337 beat the market.
  • Out of 3000 50-stock portfolios, 549 beat the market.
  • Out of 3000 15-stock portfolios, 808 beat the market.

With a 250-stock portfolio, you have a one-in-50 chance of beating the market. With a 15-stock portfolio your chances increase dramatically, to one in four.

So we now know that less is better when it comes to investing. But what are challenges one needs to consider while adopting this strategy? These are the ones I think is necessary for any focus investor:

  • Understand how institution imperative works: As outlined above, markets can remain irrational for period longer than the investor-manager can hold on to his job. Similarly, one can say that for someone who manages third party money – he needs to be sure that his clients are compatible with how he thinks about portfolio construction.
  • Temperament: One needs to have correct mindset in order to reap the rewards from concentrated investing. Markets are volatile. In fact, on average, a listed company has 80-100% price movement from yearly low to yearly high. But as Buffett says, volatility is a friend of an investor enemy of a speculator. With right temperament one can harness the fleeting power of volatility into compounding wealth & generating excess returns. Focus on the value part of the equation rather the more easily available counterpart – price.
  • Own the right businesses: Another unsaid part of the above exercise is time horizon and business quality. In my mind both are inter-linked i.e. with stronger businesses, which are also compounding their intrinsic values at good enough rates, it is easier to hold on to them for years versus a weaker or below average quality business. Focus investing requires an investor to take very long horizon for the business in question. Higher the competitive advantages which a company enjoys, easier it becomes to hold on to them as market takes its own sweet time to reevaluate company’s prospects.
  • Stock Selection: This is possibly the most important thing for a focus investor. Which fewer stocks in place, one needs to be sure of the business, understand it deeper, value it conservatively and acquire it at a substantial discount to its value five – seven years down the line. This is something which one learns by experience over time.

 

Finally, is 7 is the right number or should one go with 20? I believe there are no right or wrong answer for this. One needs to understand & introspect and come up with deems fit for him. As they say to each, his own! But what we need to ensure is to not spread ourselves unreasonably thing than what the situation would warrant.

 


Niraj Bardia

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