These 10 Principles Will Help You Beat the Market

A value investor's insights

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Apr 06, 2016
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Vijay Kedia is a famous Indian value investor who has over 20 years of experience in the market. Vijay in Hindi means "victory." In 20 years he turned an investment of $20,000 into $100 million net worth today.

The following is based on his recent talk at an Indian business school. You can watch the video here.

In this talk Kedia shares the following 10 points that have helped him to avoid defeat in the market.

1. Create a fixed income outside the market for your livelihood: Never be dependent on the income from the stock market because it is volatile.

My view: While most investors talk of margin of safety when investing in a company, Kedia seems to be applying margin of safety logic even before entering the market. This is important advice for most people who cannot handle the volatile ride of the market.

2. Be informed and read a lot: The market rewards you as per your perception. If you think investing is a gamble, then it is a gamble. If you think it is a business, then it is a business. Read a lot and be a maniac when it comes to reading; it will help you connect the dots. For example reading about global events, such as what is happening in Brazil, will help if you are invested in a company that is exporting to Brazil.

My view: This is a No. 1 prerequisite, and I don't think any investor would argue with this. Also I don't think you can be a successful investor if you don't enjoy reading. When asked how to get smarter,

Warren Buffett  (Trades, Portfolio) once held up stacks of paper and said he read "500 pages like this every day. That's how knowledge builds up, like compound interest."

3. Invest a part of your savings, not the earnings, into stocks: So if you have decided to invest 25% of your savings in stocks, invest 12% to 15% as it is a risky business. Also you should only invest a certain amount based on your risk-taking capacity.

4. Don't trade and don't leverage: Trading is a 24-hour business. Don't invest from borrowed money.

Don't trade just because you see someone making money by trading.

If you give an example of Rakesh Jhunjhunwala's success in trading, you should remember that there is just one R.J., one Amitabh Bachan and one Katrina Kaif.

Also find out what percentage of someone's net worth is allocated to trading and the failures that person had, then invest according to your nature and your family structure.

Someone told me he was going to invest his father's pension money in trading. I held his hand and told him, "Don't do this."

5. Invest only for five to 10 years; minimum time frame is five years: Rome was not built in a day. It takes time for a story to mature. I always invest in small caps that go on to become mid to large caps.

Whenever I bought a small cap, people discouraged me. No one liked the stock. For two years the company went nowhere; after that it gave multibagger returns.

My view: This reminds me of a quote from Paul Samuelson in which he explains how good investing is a slow process and takes time.

"Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson

6. Invest only with the best management and let it worry about the company: If you invest with the best management, you don't have to worry. Just sip wine.

Management is playing golf, and we investors are worrying 24 hours about what will happen to the company, looking at the dollar, macro, etc. What is the use of being an investor? Let management worry because management has its prestige and its name at stake.

Good management in bad business is better than bad management in good business. Example: Indigo Airlines.

My view: The above principle from Kedia is actually opposite of what Buffett believes. But there are always outliers and exceptions to any rule. David Tepper has made good money investing in airline stocks.

7. Your investment belongs to the market and the profits belong to you: As long as you are invested, the profits belong to the market. Don't spend just because the stock has risen because tomorrow stock prices can collapse.

8. Book profits periodically: Invest profits in buying a house which is very important.

9. Keep a balanced mind: Don't be happy in an up market, and don't be sad in a down market. Be physically, financially and mentally sound.

He explains how one should avoid regret. He says a stock can go up after you sell it. Don't regret.

The stock market is a place of regret. You make money, you regret. You lose money, you regret. You make less money, you regret. That is why it is very important to keep a balanced mind.

10. Luck plays a crucial role. Do good karma: Be a good human being. The stock market is a mind game. If you are doing good karma, it will come back to you.

My view: Most investors would do well to credit part of their success to luck.

Howard Marks (Trades, Portfolio) has a memo on this topic.

Here is a point from his memo on luck: "But in investing, it’s hard to know what will happen and impossible to know when it will happen. Many things influence performance other than (a) investors’ hard work and skill and (b) the market’s dependable discounting of information about the future. Luck – randomness or the occurrence of things beyond our knowledge and control – plays a huge part in outcomes."

Also I've observed that a lot of investors who have been very successful for a long period of time do good karma.

Examples: Buffett with his giving pledge to the Gates Foundation. 

Mohnish Pabrai (Trades, Portfolio) with his Dakshina Foundation helping kids from poor families get good educations. Charlie Munger (Trades, Portfolio) with his selfless sharing of all his wisdom through his book "Poor Charlie's Almanack."

Vijay Kedia on when he sells

  1. When the focus of the management changes.
  2. When the product changes.
  3. When the valuation is too high to resist, sell. Gives an example of how he sold Atul Auto to Goldman Sachs (GS, Financial) when it was at a PE of 45.

Vijay Kedia on when he buys

"When I find something that has good management, good product, good branding and a competitive advantage."

Vijay Kedia on how to deal with lack of information when investing in small caps

"If you don't have information, don't invest. Nobody has told you to invest in that company. Astrologer did not tell me to invest in the market. I read 12 to 13 newspapers. I watch interviews of MDs, CEOs and entreprenuers. This is my passion. I don't watch serials. If you ask me if I watch Big Boss, Small Boss, etc., I would say I watch Big Cap, Smal Cap, etc."

Vijay Kedia on how to view management talk

"Sometimes management knows nothing. Whenever I've listened to management, I've lost money in the market. This is the truth. Management is also human; you never know what you can become. Management does not know what it can become. We have to be prescient and have farsightedness. Keep yourself informed to connect the dots. Sometimes I send articles and info to management."

Thanks for reading.

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