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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

25 Questions With Rohit Chauhan of Value Investor India

'It takes me a long time to analyze and get comfortable with an idea, so a 20 to 30% upside is not worth the effort for me.'

December 31, 2016 | About:

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

I have a bachelor’s in engineering and an MBA in marketing. My first job was in sales and marketing, and I have worked in different functions in large corporations in India and abroad since then.

I got interested in investing as I had to manage my family’s finances after I finished my MBA. I started learning the basics by reading newspapers and books as this was the only way prior to the internet. I came across a book, "The Warren Buffett Way," in a public library and the book spoke about this billionaire in Omaha who had become rich by investing in stocks using some very common-sense principles. I was hooked.

Over the years, I read as much as I could find on Buffett, which lead me deeper into value investing and to the teachings of Benjamin Graham, Philip Fisher and other greats in this field. So, you can say that I have learned mainly through books, the internet just accelerated the process.

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

As I was exposed to Buffett at the start of my journey, his philosophy and teachings have formed the bedrock of my approach. Over the years, I have studied other great investors and have dabbled in deep-value investments, arbitrage and other opportunities. However, my core philosophy of buying good companies at reasonable prices remains the same.

I used to run screens in the past, but missed some very good opportunities as I was more focused on the numbers. I have changed my approach to focus more on the qualitative aspects now. My search process is now based on serendipity driven by general reading. I also maintain a list of companies I like and track, but have not added to my portfolio due to valuations or some other short-term concern.

When I come across an idea, I am looking for possible two to three times in three to five years. It takes me a long time to analyze and get comfortable with an idea, so a 20% to 30% upside is not worth the effort for me. I will look at the standard valuation metrics such as price-earnings ratios, price-to-free cash flow, etc. to screen out ideas at this stage. The work on trying to come up with a valuation range starts after I have understood the company better and can estimate its future cash flows with some degree of confidence. When I can do that, I tend to use a discounted cash flow approach to value the company

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

I was exposed to value investing when I read "The Warren Buffett Way" almost 20 years ago. The strategy made perfect sense to me as it seemed such an obvious way to invest - namely to buy something for less than what it is worth. Of course, it took me a few years and a lot more reading to learn the process and mechanics of value investing. However, the core philosophy has remained the same for me over the years.

I use the usual metrics of P/E ratio and EV/Ebitda to screen out ideas, but these metrics are just a starting point. I really do not rely on quantitative metrics alone to select stocks. The approach I take is to understand a company in-depth and estimate its cash flows for the next five to seven years. I then use a discounted cash flow analysis to see if the current price is at or below 60% to 70% of the fair value .

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?

I have been most inspired by Warren Buffett and Charlie Munger. The most important lesson I have learned from them is that being rational is a bigger determinant of investment success than a high IQ or any other skill.

I follow a lot of investors today – some famous and others not so much. A lot of my good friends, such as Neeraj Marathe, Ninad Kunder, etc., are very smart investors themselves and I try to learn from them as well. Some of the well-known investors I follow are Howard Marks and Seth Klarman. In India it would be Professor Sanjay Bakshi and Bharat Shah (ASK Financials).

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?

I do not have a fixed holding period for a company. If the company continues to execute well and the prospective returns appear to be above a certain threshold (around 20%), then I will hold the stock.

I do not use price as an indicator on whether I am right or wrong on a stock. I will usually detail out my investment thesis in my journal and have specific quantitative and non-quantitative factors to track the performance. For example, I may be holding a company that is expanding its franchise across the country. I would use the number of distributors, retail points, marketing spends and overall sales growth as indicators of performance. I will also track how the management is executing its plans.

As an example, I hold currently Cera sanitaryware in my and my client’s portfolio for six years now and continue to hold as the company has executed well during this period and improved its competitive position.

If on the other hand a management fails to execute and has new reason every quarter for the lack of performance, then I will bail out in one or two years. I have had many such positions in the past which I have shared regularly on my blog.

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

My process has evolved to become more qualitative and focused on aspects such as the competitive advantage of businesses, industry dynamics and management as these factors finally drive the numbers. This evolution has also happened due to the fact that markets have become much more competitive over the years and it is difficult to find obvious quantitative bargains now.

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

I think my holding period and patience with my investments is much higher than most other investors. This has often worked to my disadvantage as I have held onto losing positions for too long. However on balance, I think this approach has worked out well for me.

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?

Asian Paints (BOM:500820) is one my favorite companies (I do not own it now) and has a very strong brand and is very well run. It has delivered a 30%+ CAGR to its investors in the last 15 years.

Some of my favorite CEOs are Jeff Bezos of Amazon (NASDAQ:AMZN), Elon Musk, and in India it would be Ajay Piramal (Piramal Enterprises).

I personally judge the quality of the management based on a few key points:

  • Does the management have demonstrable competence in running its business (earn a return on capital above the cost of capital)?
  • Does the management have a long term profit and growth mindset?
  • Is the management ethical and fair to all its stakeholders?

If the management does not check out on the last point, then I would pass on the company even if they are good operators.

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

I do not use screeners now as most opportunities which screen well are also priced accordingly. Any company which is growing well and earning a high return on capital is usually selling at fair valuations. As a result, I have moved away from quantitative screens.

I am looking for an efficient way to find undervalued companies, but I think the competitive nature markets means that I am not going to find one. I usually follow other investors and depend on a general reading to come up with interesting ideas. Finally I have a list of companies I follow, which I would like to own if the price is right.

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.

I have taken the following comment from Warren Buffett on this point to heart – "Leaving the question of price aside, the best business to own is one which can re-invest its capital at high rates of return for a very long period of time."

So an ideal company would be one which earns a high return on capital (20% or higher), is able to re-invest all its profits at the same return and continue to do so for a long period of time as its target market has a large potential. In addition to this, such a company is also available at reasonably cheap valuation. It is rare to find a company which meets all the criteria, but if you own one, then just hold on to it.

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?

I have developed a template which consists of multiple screens to capture all kinds of quantitative and qualitative information about a company and its industry. I usually start by reviewing the numbers for a company and more often than not, reject the idea at this stage.

If the company passes this stage, I will pull up the annual report for the company for last five t to 10 years and go through them. If the idea still looks interesting, I will then pull out my template and work through it by analyzing the company using multiple mental models to evaluate it from different viewpoints. Finally if the company passes all the qualitative and quantitative screens, I go through a valuation exercise.

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?

I follow the usual process of reading up on the last 10 years of financial statements and annual reports. In addition to that, I also try to understand the economics of the industry and competitive landscape. Finally I try to work through my checklist to analyze the idea from as many view points as possible.

I do not depend on talking directly with the management as much and base my decision more on what the management has shared in the conference calls and how they executed the plans.

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? If you can, give some of examples.

I usually use a multiple approaches to valuing a stock. The first step is usually to work backwards and figure out what are the growth and return on capital assumptions embedded in the stock. This usually serves as a good screen to identify overvalued situations if I do not agree with the optimistic appraisal of the market.

The next step involves coming up with scenarios around growth, return on capital, margin, etc. I will use these inputs to arrive at a range of fair value. If the current price of the company is at the lower end of the range, then I will start a position.

I rarely build a full position in the beginning and prefer to get more comfortable with the company and its industry over the next six to 12 months. If my confidence level improves and the price remains attractive, I will build a full position.

Although I do not believe in quantitative metrics, I have rarely bought a stock above a 40 PE no matter how good the prospects as the valuation risks beyond this level are quite high.

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

The Indian stock market for the most part is fairly priced, especially for quality stocks. I am currently finding value in financials and a few misunderstood companies where the earning power is hidden due to investments being made by the management.

I tend to avoid cyclicals, especially companies where the performance of the company depends on the price of a commodity. There are investors who are able to do well with these kinds of companies, but my temperament is not suited for such kind of companies.

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

I usually do not base my decision on the overall market level and do not consider the level of valuations of the market as a whole. Due to the demonetization event in India, where the government recently cancelled the old 500/1000 re notes and forced a conversion to the newly issued 500/2000 currency, there is a lot of economic uncertainty in the short term.

I do not have a specific view on how this will play out in the short to medium term, but feel some of strong franchise companies will do well. The prices have also dropped reflecting this uncertainty, which gives a good opportunity to long-term investors.

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

I am currently reading a few books which are really not directly related to investing. The ones on my book shelf are – "Master Algorithm", "Nobody Wants to Read Your Sh*t" and "Dark Matter and the Dinosaur."

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

I would first ask the person why he or she wants to get into investing. Does the individual want to learn the basics and thus make better decisions for his or her long term financial goals?

In such a case, I would ask the person to find a few good books on personal finance and understand the basics on savings, compound interest and the various options on passive investments such as mutual funds, real estate, etc. This would enable the individual to make informed decisions about his or her savings over a life time. On the other hand, if the individual wants to get into this field as he thinks this is an easy way to make money and get rich, I would advise him to drop the whole idea and find something else to pursue.

One needs to be passionate about this topic and be ready to learn and pursue it for a long time even if the returns don’t materialize for an extended period of time. If you are fascinated by this field and ready to learn over your lifetime, then it can be quite a bit of fun and in the end rewarding too.

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

I usually follow multiple investors and boards. I don’t piggyback any particular investors, but use their ideas as a starting point of my analysis. I try to source my ideas from as many sources as possible, but avoid giving any weightage to the source to avoid the risk of authority bias.

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?

My worst mistake in the past has been to hold on to investment ideas even after the original thesis was no longer valid. It was a classic case of hope over reality. The first of such investments was in early 2000 where I lost close to 90% of my capital in an IT services firm. I had bought stock in the company by blindly extrapolating the recent growth rate which was in excess of 50%. The bursting of the dot com bubble caused the demand to collapse and so did the stock price. I, however, kept holding the stock and exited at a 90% loss ( I have shared the story on my blog).

I don’t think I have been able to overcome this problem completely and still end up hanging on to positions where the original thesis has been diluted. The change I have now made to the process is to write down my thesis upfront and review it annually. Once you write down your thoughts upfront, it is more difficult to rationalize away the new facts. This has helped in cutting my losses much earlier now.

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

I think one has to detach one’s ego from the stock market. The performance of my portfolio due to the ups and down in the market is not a reflection on me.

I think the Indian spiritual guide – The bhagvad gita is very helpful on this count as well as in leading a much better life.

21. How does one avoid blowups in value investing?

I think risk management is critical to investing. If an investor takes care of the downside and does not blow up, then one can do quite well in the long term. I would say that one avoids large drawdowns by sizing positions correctly and diversifying across industries and companies. I personally never exceed more than 10% in a single position and hold around 13 to 17 stocks in the portfolio, which reduces the risk of a major drawdown while allowing me to do better than the indices.

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 investing wise compared to the indexes?

I cannot share my specific positions but my portfolio is weighted towards non-banking financial firms in India as I think the penetration of banking services is quite low in India. In addition to that, public sector banks, which account for 70% of the lending, are retreating due to large non-performing assets on their books. This has created a unique situation where the top firms are voluntarily giving up market share at a time when the overall market in itself is expanding. This has led to a situation where the non-banking firms are cherry picking opportunities and growing at 30%+ rates.

The recent demonetization event in India has introduced a temporary bump in the road for these firms, but the long term trend remains intact. The upside of this temporary bump is that valuations have corrected quite a bit due to short term concerns.

In terms of performance, the last five to six years have been very good for equity investors in general and mid/small cap investors such as me in particular. I have done substantially better than the market due to the tailwind from low valuations in the beginning of the prior 10-year period.

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

My guess is that he would prefer a franchise with good long term economics. I would guess it would be HDFC Bank in India, which is quite similar to Wells Fargo, which is one of Buffett’s largest holdings in Berkshire Hathaway.

24. What is the most contrarian investment you've ever made? Why did you make it and how did it turn out?

I think my most contrarian investments occurred during the fall and winter of 2008 to 2009 when the world appeared to fall apart. The Indian midcaps and small indices dropped by 70% and there were a few companies such as Lakshmi Machine Works which had 70%+ market share in the textile machinery space in India, were selling for less than cash on the books, with no debt and a profitable businesses to boot.

Unless the entire world fell apart and we stopped making clothes, it was tough to see companies such as the above going bankrupt. All these investments turned out quite well as we all know that the market recovered from mid-2009.

25. If most fundamental investors study the greats (e.g. Buffet, Klarman, etc), surely value investing is no longer a 'contrarian' investment strategy?

I think value investing is still a constrarian strategy due to the difference between theory and practice. The idea of buying something for less than its worth is universally accepted. The difficult part is practicing it. A company is available for less than its worth when there is some short term problem with the company or the markets and the crowd is running for the exits. It is difficult to ignore the crowd and suppress your natural instincts at such a time.

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