In this conversation, I was fortunate to talk to Jatin Khemani. Khemani has over five years of experience in investment analysis and portfolio management and is the founder and managing director at Stalwart Investment Advisors. We talked about his investing approach, the books that have influenced how he thinks and the scuttlebutt approach.
How and why did you get started investing? What is your background?
While I was pursuing MBA, I got my hands on a book "One Up Wall Street" written by Peter Lynch and in a nirvana moment I knew this is what I wanted to pursue as a career. I started investing when I was 22 years of age.
After graduating, I entered investment management as a research analyst working for an independent equity research house and then later moved to buy-side and eventually started Stalwart Investment Advisors in 2014. It is a SEBI registered independent equity research firm helping individual investors build a solid long term portfolio. Post my MBA, I also completed CFA(US).
Describe your investing strategy.
Buying simple businesses with some sustainable competitive advantage operating in an expanding market, serving a need/want which is net positive for the society, with an ability to deploy incremental capital at high rate of return, which are owner-operated with a good capital allocation track record, respect for minority and available at or below its reasonable valuation, which is enough to meet our hurdle rate based on a reasonable exit multiple and staying invested for long periods of time for compounding to work and avoid re-investment risk.
What drew you to that specific strategy?
There is enough evidence that this is a time-tested strategy which has allowed many to make billions of dollars. The strategy is too simple to make sense to many, however, the only trait needed is to practice it consistently and patiently for long enough and chances of a successful outcome would be fairly high. I am a slow thinker and like to take sufficient time before arriving at decisions, which makes me a very bad candidate for trading. I like to read and I am patient by nature, so this strategy gels with my temperament.
What books or other investors influenced, inspired, or mentored you? What investors do you follow today?
Some of the books that had big influence on my thought process are:
• "One Up on Wall Street" - Peter Lynch
• "Little Book that Builds Wealth" - Pat Dorsey
• "The Outsiders" – William Thorndike
• "The Art of Thinking Clearly" - Rolf
• "A Study in Simplicity and Uncommon, Common Sense" -Peter Bevelin
I am highly influenced by the work of Professor Sanjay Bakshi, a renowned investor, and follow his blog and teachings.
How has your investing changed over the years?
Over the years I‘ve realized the importance of position sizing, which is even more important than stock selection.
Other learning has been that investing is 90% about jockey (management), at least in Indian context.
Name some of the things that you do or believe that other investors do not.
I spend considerable time doing scuttlebutt wherein emphasis is to get qualitative insights and get an edge over other market participants.
What are some of your favorite companies? Where do you get your investing ideas from?
Currently, among large holdings there is Tasty Bite (BOM:519091, Financial), a company which is market leader in ready-to-eat foods in the US and also a meaningful supplier of frozen food to QSR in India. Other big holdings include Relaxo Footwear (BOM:530517, Financial), one of the India’s largest branded footwear companies and Wonderla Holidays (BOM:538268, Financial), India’s largest amusement park operator.
Sources of ideas are many- annual reports, peers, studying value chain, trade magazines and exhibitions, etc.
Do you use any stock screeners?
I generally do not generate ideas using screeners. I believe if it is in numbers, it is for everybody to see. The idea is to catch trends before they are reflected in numbers.
Name some of the traits that a company must have for you to invest in. What does a high quality company look like to you?
I put special emphasis on management quality and balance sheet quality. The idea is to partner only ethical and prudent promoters and businesses that have zero or very low leverage along with favorable working capital cycle.
A quality company would be present in a growing market, with a right-to-win (moat), ability to grow without resorting to debt or diluting equity, is owner-operated who is ethical and has a good understanding of capital allocation.
What kind of checklist do you use when investing?
I have a fairly long checklist with over 100 pointers, with a realization that its impossible to find opportunities which will tick all the boxes. End of the day, you have to ignore a few points and go with the gut, which is what makes investing an art.
Before making an investment, what kind of research do you do? Do you talk to management?
I talk to the management only if the information available is not sufficient to understand the industry and strategic direction of this particular company, which is generally the case when one is looking at micro/small caps.
What kind of bargains are you finding in this market? Do you have any favorite sector? How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I think majority of good businesses in India are either fairly priced or expensive compared to long-term averages. Currently, it has become very difficult to find bargains with the quality constraints we operate with.
From a 5-10 years perspective, my favorite sectors continue to be consumer discretionary, media & entertainment and logistics.
What are some books that you are reading now?
"Thinking, Fast and Slow"
Any advice to a new investor?
Investing is simple but takes a long time before one can manage emotions well; at least one complete cycle. Start with small capital and give sufficient time for reading and practicing. Always try to control greed factor, do not invest in something you do not understand. Have a diversified portfolio, no matter how confident you are about a particular ‘story’ there are always ‘unknowns’, so control risk with right position sizing. Most important thing is to have a good mentor, if you can’t find one let it be Warren Buffett or Charlie Munger (Trades, Portfolio) and learn vicariously from the wisdom they have freely shared.
Disclosure: No position in the stock mentioned.
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