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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

23 Questions With Nitiin A. Khandkar

'I am a patient, laid-back investor and do not like to tamper with my portfolio often​'

November 25, 2016 | About:

1. How and why did you get started investing? What is your background?

​I have a bit of family background in investing – the last three generations of my family​ used to invest in Indian stocks, albeit in a small way. I became a chartered accountant (Indian equivalent of US CPA) 2 decades back. A little before that, the Indian economy was opened to foreign companies and investors in 1991, and a number of foreign funds started investing in Indian equity markets. What got me interested in a career in investment research was that the job was so different from the usual accountant's/tax adviser's. It requires one to be on top of developments in economy, industries and companies. I eventually managed to find a job as a sell-side equity research analyst in the mid-1990s. This is where my investing journey began. I have been a sell-side analyst, buy-side analyst and portfolio manager, too.

2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?

​I would like to believe I am a long-term, value investor. Day trading is not for me. I get investing ideas from (i) my legacy coverage of Indian stocks (ii) my reading about various companies incl. their annual reports and news flows (iii) my contacts across several industries.

I like to carry out fundamental analysis of companies that interest me.

​First I like to get a fairly thorough understanding of the business, the industry in which it operates, the management pedigree, business acumen and track record​. This is followed by rigorous financial analysis of the company, using a spreadsheet program. I employ several valuation methods including DCF, absolute and relative valuation, NCAV, SOTP and the Graham Number, being the prominent ones. Wherever applicable, I like to run the Porter's Five Forces Model, the Herfindahl-Hirschman index, and draw up a mind-map of the company to get a 360-degree view.

Generally, I try and stick to my circle of competence. I do not invest in a great or promising company, unless I understand the business well.

In addition, I try to identify themes such as:

Deep Discount to Market Value of Assets, New Listings resulting from Spinoffs, Unrealized Gains on Investment Portfolios, Potential Value Unlocking via Spinoff of Divisions or Subsidiary Companies and Special Dividends on Sale of Assets.

Certain risk management measures are built into my portfolio, such as sector diversification and limiting exposure to individual stocks, maintaining a mix of large caps and mid-caps.

3. What drew you to that specific strategy? If you only had three valuation metrics, what would they be?

​My strategy has evolved over the years, from my experience as an investment professional, and constant application of thought.​ The valuation metrics that I prefer to use are absolute and relative valuation on parameters of P/E, P/B, EV/EBITDA and DCF.

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? What investors do you follow today?

​While I have read a few investment classics, the ones which really stand out for me are "Margin of Safety" by Seth Klarman (Trades, Portfolio), "The Most Important Thing Illuminated" by Howard Marks (Trades, Portfolio)​, "Education of a Value Investor" by Guy Spier, "Common Stocks and Uncommon Profits" by Phil Fisher, and "One Up on Wall Street" by Peter Lynch.

​All these books taught me different lessons most prominent ones being ​development of ability to think differently from the herd, doing my homework very thoroughly, learning from mistakes and ensuring I enter quality stocks at fair prices, not at fancy prices.

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?

​My oldest holding is a stock I've held for the last 22 years. I am a patient, laid-back investor and do not like to tamper with my portfolio often unless I have strong reasons to do so​. By laid-back I do not mean "not bothered about what happens to the companies in my portfolio" but not keeping track of stock prices on a daily basis and not taking calls for the short term. My typical return expectation from Indian stocks is 100% in not more than 40 months so I have to be quite choosy about the stocks I invest in. That doesn't mean I would not hold stocks for more than 40 months usually, as long as I like the story, I'd hold them for five years or more.

Yes I have made bad calls, but they were mostly on account of what the company management did which surprised the markets. I'd know within 12 to 18 months of investing, whether my investment thesis is shaping up the way I expect it to.

6. How has your investing approach changed over the years?

My investing approach has certainly​ shaped up over the years as I kept on reading more and more, analyzing more and more companies and learning from my peers and my own mistakes! As stated above, I place a lot of emphasis on understanding the business and management, than I did, than say when I started off.

7. Name some of the things that you do or believe that other investors do not.

​I do not consider myself to be an investment guru. I don't think I've figured it all out as far as investing is concerned. I don't have a secret sauce. But I am consistent and thorough in my work. I am constantly learning and upgrading myself. Yes, maybe I can say I have become even more choosy and have also extended my investing horizon to beyond five years to get the real juice off my favorite stocks.​

8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?

​I'd rather say​ that not all great companies make great investments unless one enters at a fair price. I am inspired by business leaders like Jack Welch, Steve Jobs, Andy Grove, Elon Musk, Sergey Brin and Mark Zuckerberg, to name a few. Quality of management is ultimately judged by how they managed the business in good years and in bad, the return they generated on shareholder equity and invested capital, and what kind of wealth they generated for shareholders in the long run.

9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?

​I do review stock screens on​ce in a while, but their outcome mostly disappoints me. Screeners make a poor job of assessing moat and management quality and are based on historical earnings which severely limit their utility. I've discussed other methods to identify undervalued businesses in answer to Question 2.

​Having said that, finviz.com has a good screener for U.S. stocks.​

10. Name some of the traits that a company must have for you to invest in, 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.

​When analyzing companies, I like to go "Beyond Quant​" which is reviewing the qualitative factors such business model, moat, management quality and using them to arrive at valuation. High-quality companies have these attributes (i) managed by competent and ethical management teams with demonstrated execution and capital allocation skills, (ii) robust, scalable business model (iii) strong moat (iv) robust operating cash-flow and free cash-flow (v) low leverage (vi) decent dividend payout ratio (vii) full-fledged, proactive IR (regular analyst briefings/con-calls). This would pretty much sum up my definition of an ideal company.

I've found that, strong companies with good management often give some positive surprises to investors and I am not talking of the quarterly earnings surprise.

​A bad company is one being run by a dishonest, unethical management. Period. Companies being run by ethical, good​ management could survive the worst possible shock or even a Black Swan event. But companies with bad management could get wiped out at the slightest sign of difficulty, leaving investors in the lurch.

11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard cut rules?

​Analysis involves some thumb rules and some company specific factors. I do not consciously use checklists, though.​ Process is described already.

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?

In large caps or midcaps, more information is already in the public domain than most investors could handle. It's the analysis of publicly available information  with a view to arrive at views different from the consensus, which is the difficult part.

In case of very small companies, ​I do prefer t​o talk to the management to get a sense of their vision where they intend to take the company over the next few years. But my homework goes way beyond as far as possible I do a bit of scuttlebutt, visiting stores (what the sell-side calls channel checks), try to get a sense of customer opinion, even talking to competition in some cases. My network developed over the years, sometimes comes in handy.

13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap?

​Since I stick to my valuation methods as described above and insist on a margin of safety, I often end up not investing in quality names.​ However, from time to time, markets are kind to rigorous, finicky investors like me, and bring my favorite stocks down to comfortable valuation levels on bad news like Brexit, Deutsche Bank, Eurozone Debt Crisis, etc. That's when I like to go heavy into such stocks. More often that not, the valuation anomalies correct themselves in short periods of time.

Cheap is not cheap when the stock's a value trap or distressed company. I stay away from commodities and cyclicals for this reason.

14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?

​In the biggest of bull markets, a few stocks do trade at reasonable valuations. And in the worst bear markets, some stocks are still expensive. ​Likewise, in the best industries, not all stocks are great and vice versa.​ So I would not go with preconceived notions, but look at stocks at that point in time, to determine whether they're cheap or not.​

15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

​I think market being overvalued or undervalued does not appeal to me much. Simple reason is mentioned in answer to question 14. My concerns are mostly on key economic indicators, which give a sense of things to come.​

16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?

​Currently I am reading "Equity Research for the Technology Investor: Value Investing in Technology Stocks" by Sundeep Bajikar.​ He has shared some invaluable insights on how to analyze the tricky tech sector stocks.

17. Any advice to a new value investor? What should they know and what habits should they develop before they start?

​Read, read and then read some more. Read value investing books, and keep reading company 10-K and 10-Q filings. Good thing about the SEC regulations is that companies have to make elaborate disclosures. Management Discussion & Analysis is not to be missed​, or skipped, ever.

18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?

There are a number of high-quality blogs out there. 25iq, Base Hit Investing, Intelligent Fanatics, MicroCap Club, Activist Stocks, to name a few. I do not usually like to piggyback or coattail as that amounts to trusting someone else's judgment. I believe I should always develop my own views and insights into businesses.

​​19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?

​The biggest mistake was to trust management which subsequently engaged in wrong things or in shareholder-unfriendly decisions. Each failure has lessons which must be used in future decisions.​

20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?

​As I stated earlier, I am into activity. It's only during market crashes that I get active. Otherwise, when some of my stocks move way beyond my valuation range, I liquidate a part of my position.​

21. How does one avoid blowups in value investing?

​One cannot avoid mistakes completely in value investing. There is no foolproof strategy. I have read about the smartest investors making mistakes, and I may not be better than them.​ As time goes by, one's investment process has to get more and more refined.

22. If you are willing to share, what companies do you currently own and why? How have the last five to 10 years been for you investingwise compared to the indexes?

​Cannot disclose names. But I have comfortably beaten the bellwether indexes.​

23. Here's a fun one What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?

Let me restrict myself to a new stock, one not in my portfolio already. ​It would probably be Tesla Motors (NASDAQ:TSLA). Or SpaceX, whenever it goes public. I know a lot of people will not be convinced, but if I'd be willing to take a bet on one man it would be Elon Musk, a true, leading thought leader of our time.

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Rating: 4.2/5 (5 votes)

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Comments

rajesh.kottapalli
Rajesh.kottapalli - 1 year ago    Report SPAM

Really wonderful Article.

valuetrading2016
Valuetrading2016 - 1 year ago    Report SPAM

Excellent.

A. Pelman-Jones
A. Pelman-Jones - 1 year ago    Report SPAM

Nice to read your perspective on stock selection, themes and research methods.

RyanM
RyanM - 1 year ago    Report SPAM

What comes across most from this interview is a true sense of wisdom that only comes from years of experience. A lot of this advice appears very simple, but in practice it requires a great deal of discipline. Great article!

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