1. How and why did you get started investing? What is your background?
I have always been attracted toward capital markets since my childhood. While pursuing my engineering degree from VJTI, University of Mumbai (2000-04), I started reading lots of books regarding it and got introduced to capital markets in detail. However getting a job in the Indian financial industry without any formal education is very difficult. To overcome this problem I decided to pursue my master's in finance from the University of Mumbai followed by gold standards in the investment field –Â i.e., CFA Charter. The important reason for my attraction toward capital markets was it's the only industry which can make you wealthy using your intelligence and without any significant upfront capital investment (highest ROI).
2. Describe your investing strategy and portfolio organization. Where do you get your investing ideas?
I have always tried to invest in companies which are market leaders operating in niche business segments and likely to cause disruption in the industry tilting the sector from unorganized toward operated by organized players. It helps the company not only increasing its margins but also the company's earnings grow at a much faster pace than the sector itself. I also make sure that company has got a competitive advantage to sustain the business for the longer term and can defend attacks of digital disruptions. The company should be operated efficiently to generate ROE in double digits to compensate equity risk, and management of the company should be willing to share the small percentage of this profit with shareholders in the form of dividends.
3. What drew you to that specific strategy?
Historically it has been proved through empirical research studies that no companies can generate sustainable ROE of higher than 20% and continue to grow earnings at 20% without any economic moat. If these companies are maintaining a payout ratio of 20%, then also make sure that accounting profit is a real profit – free from any accounting malpractices.
4. What books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? Which investors do you follow today?
It would be difficult and injustice to name only a few individuals or books for my success. In fact learning is a continuous process, and an individual should try to learn as much as possible by reading financial, brand-building books and from every individual that he comes across.
5. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?
Any decision to invest or divest is based on multiple factors. Whenever you make an investment, you believe in the growth story that company offers to you. Evolution of the growth story would depend on your assumptions and how these assumptions pan out over the period. Earnings of one or two quarters are good enough to test your assumptions which completes the mosaic or story.
6. How has your investing approach changed over the years?
As you evolve as an individual over the period, it influences your approach of looking at things from different perspectives. Reading financial books will only help you to understand the business from one perspective –Â i.e., numbers are everything. But that would be a fallacious trap, as numbers matter only in the short term. In the long term what is more important is how the company understands its customers and satisfies their needs, which would help the company position itself in a customer's life. We all know what kind of position Google holds in our day-to-day lives. Thus I also use toothbrush test to decide the brand recall of any particular product.
7. Name some of the things that you do or believe that other investors do not.
ESG framework can play an important role in investment strategy framework. Instead of using it for the selection of individual stock, an investor should try to use it for discarding stocks which should not be part of the portfolio.
8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies?
I do not fall in love with a company or CEO. I love them as long as they are performing well and following their karma – i.e., serving their customers in the most efficient way.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
Undervalued business is a subjective in nature, and it depends on the expectations of an investor, what he expects out of it. A good business may look overvalued in the short term but undervalued in the long term. I personally do not like to use screeners. One of the most efficient methods to find the undervalued business is to find a business with a stretched working capital cycle and management's inclination toward improving it. A lean working capital cycle will improve its operating margins and provide enough capital for future growth.
10. Name some of the traits that a company must have for you to invest in it, such as dividends. What does a high-quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.
A good business should be able to generate ROE of at least 20% for its shareholders. In simpler terms, this business should not be capital intensive so that on a lower capital it can generate higher returns.
A business should be in demand from it customers generating 20% year-over-year growth in its net earnings. Stock with a higher growth in earnings is more likely to witness expansion of price-earnings (P/E) ratio over the years.
At least 20% payout ratio will attract a diverse set of investors not limited to mutual funds, pension funds, etc., holding these stocks for a much longer period reducing the available free float shares for the public –Â i.e., lower liquidity higher premium.
11. What kind of checklist do you use when investing? Do you have a specific approach, structure, process that you use?
There is a list which comprises of point systems for corporate governance, industry analysis, etc.
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
Before you reach the final decision, it has to be backed by the quantitative analysis that includes DCF valuation, comparable company analysis, etc., and qualitative analysis from management interactions, porters' analysis, secondary research on business segment, customer survey, suppliers' survey, etc. The information required for this is collected from formal sources such as annual report, company management, Bloomberg or even from on-ground visits.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock?
Before you value any stocks, we must understand the business of the company and sector in which it operates. It will be a right approach to value a business without understanding the life phase of the sector/segment –Â i.e., innovation, growth, maturity, etc. Historical growth of the sector will help you to understand how the sector has evolved in the past and how it will grow going forward in a base case scenario. Phase of the sector will also depict operational characteristics of most of the companies –Â i.e., innovation phase –Â and will have revenue traction but less free cash flow. Once you have identified the life phase of the sector correctly, it will be easier for you to make the decision about which valuation model you should be using. Of course you can use multiple valuation techniques such as football field valuation by varying weights of each technique depending upon the life phase. In case of the innovation phase higher weights will be assigned to EV/Sales than DCF method, whereas in the maturity phase higher weights will be assigned to DCF than EV/Sales.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas and why?
I do not have any favorite sector as such. However I try to avoid heavily or actively regulated sectors (except banking) by inefficient regulator such as telecom, etc. The purpose of regulators in the market is to protect consumers and not to bargain on behalf of consumers.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
The market is fairly valued although at higher P/E in comparison to other emerging markets. However growth offered by Indian markets is unparalleled to any other emerging or developed markets.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
One of my favorite books is "Principles" written by Ray Dalio (Trades, Portfolio). The sole purpose of financial analysis is to find the financial truth, however good, bad or ugly it may be. We have to always analyze a situation from lenses of neutral person without any biases or prejudices.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
Considering frequent changes in accounting standards across the globe and varying accounting policies of companies, new value investors should try to read cash flow statements instead of income statements provided by management. Another important aspect they should develop is to follow the trail of money starting from customers' pockets to understand company's business model very well.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
There are no fixed tools which can be applied blindly for value investing. However a new investor can create his own tools by selecting common attributes of top-performing 0.5% companies from his markets and apply them in the selection of new investments.
19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments? What did you learn and how do you avoid those mistakes today?
One of the common mistakes committed by all investors in their initial days is cutting your long position too early and repenting later on for missing the multibagger opportunity. Do not make your decisions based on the perspectives of someone else like market. As long as the operational performance of a company is per your expectations and tenets which form the foundation of the growth story are intact, do not try to exit or cut your positions.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
Stop following daily stock price of your stocks and try to spend that time in following business dynamics of those companies, cues that could guide you about the character of management, credit rating reviews, actions of competitors, etc.
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