Contributed By : Jatin Khemani, CFA
What they don’t teach you anywhere?
At 2nd Value Investing Pioneers Summit, Mr. Samir Arora, Founder of Helios Capital Management Pte Ltd. gave a talk on “What they don’t teach you anywhere?”
The underlying theme or message of his talk was that – there are no rules and everything must be doubted and challenged.
Samir went on to dispel some of the common beliefs/assertions that most value investors have. He said that as there are no rules, these should also be challenged.
- We (should) buy stocks where we have high conviction.
- Conviction on rejected stocks is more as we know with more clarity what is bad than what is good.
- What we buy, we track/watch closely. if the conviction was high, one would tend not to do that.
- Research focus should be on eliminating bad, not in choosing what is good.
- Our favorite holding period (should be) is forever
- Most investors take this statement of Warren Buffett as gospel truth without fully understanding what he actually said.
- “When we own a portfolio of outstanding business with outstanding managements, our favorite holding period is forever.” – is what Buffett said in Berkshire letter to shareholders 1988. The conditions of ‘outstanding business’ and ‘outstanding managements’ have to be met for stocks to qualify as ‘forever’ bets.
- While Buffett’s favorite holding period is forever, it is not the only option but favorite amongst many.
- We (should) own stocks for the long term.
- Our biggest advantage as an investor is we can walk away anytime unlike a promoter, so why should we hold stocks for long term? As an investor, we need to revisit our thesis on a regular basis and hold only if company continues to deliver. Example: We are holding HDFC bank for more than 20 years but yet don’t call it long term stock because the day anything goes wrong we can move out.
- An investor should act as though he had a lifetime decision card with just twenty punches on it.
- Warren Buffet: 1980-2006
- 2,140 quarter-stock observations from publicly available information
- 30% of stocks sold within six months
- Median Holding period: One year
- Approximately 20% of stocks held for more than two years.
- Buy companies with good management
- When will you know the management is good?
- How will you separate the Halo effect?
“Show me a company that delivers high performance and I can always find something positive to say about the person in charge.”
- You will know good management only if stock price increases. Perception of management changes based on the stock performance. Before stock price increase ; nobody knows is it a good management or not.
Example: Samir gave a great example of Cisco. In May 2000, Fortune magazine ran a story on Cisco in which John Chambers was portrayed as the world’s best CEO (after the stock’s superlative performance of more than 50x over the last 6 years). Exactly a year later, after the stock had crashed by more than 80%, the same Fortune magazine ran a story titled “Cisco fractures its Own Fairy Tale”
- Diversification is a protection against ignorance, it makes little sense for those who know what they are doing.
- We don’t know we are ignorant till something unexpected happens
- If concentrated funds do better, what if you buy 3 such funds? Do you still do better? Overall we own 40-50 stocks of three concentrated funds but our portfolio is diversified.
- Your stocks in a diversified portfolio are always part of some guy’s concentrated portfolio
- Before investing in an idea based on some facts and analysis, ask “who doesn’t know that”?
- While investors know a lot of information, not everybody acts in the same way.
- It is possible to have an insight basis well known facts and act on it even though the same information may be available to everyone else
- Example: In case of HDFC Bank everyone knows everything about the company. As an investor we need to focus on big picture & size of opportunity as tiny incremental information may not add any value.
- To make money in a company, you must know it better than anyone else
- If that is the case then only a single person can make money in any stock.
- It is not necessary to know more than everyone else. What is important is how we act and behave basis whatever information we have.
- Good people should not buy sin business
- If good people would not buy, then bad people will buy and make money to become stronger (pun intended).
So what should they teach you?
- Keep it simple
- Believe in equity investing (50% job is done)
- Book Suggestions:
- Triumph of the Optimists – by Elroy Dimson/Paul Marsh/Mike Staunton
- Wealth, War and Wisdom – by Barton Biggs
- These books show that over long period equity beat all the asset classes.
- Book Suggestions:
- Have a diversified portfolio. Reject Concentration.
- Try to get more knowledge, not more information.
- Money Saved is better than money earned. How one performs during negative months matter a lot to the performance. Example: Nestle, HUL etc.
- Bottom-up strategy works best in sectors/themes with strong tailwinds.
- Look first for reasons to reject, not for the reasons to buy. Rejection has far more conviction than buying.
- Investing isn’t complicated – buy businesses quoting less than they are worth. How do you know the worth? Well, that’s really complicated..!