Investing Mantra & DSIJ Products
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With Sensex cascading down almost 1200 points from Nov 10 to Dec 3, the investor sentiment on the street is muffed with the idea of whether to stay invested or exit. The chaos seems to have run down the street with neither analysts nor economists having any lacking clarity on how demonetisation will impact companies. Demonetisation has exposed the parallel economy in a big way and has compelled a change in the way of doing business.
During these trying times when Sensex is near its May 2016 levels, Warren Buffet's analogy says a lot.
“When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying - except stocks. When stocks go down and you can get more for your money, people don’t like them anymore”.
His ideology of “Price” for “Value” made him investment guru on value investing. “Buy low and sell high” a popular adage keeps the value investors in constant hunt for stocks which are available at deep discounts as per their expectations of growth or benchmarking historical valuations. For any investor, however, to assign value to a particular price can be deceptive in bull or bear market. A margin of safety provides to a certain extent a barometer to gauge this, often measured by ratio such as P/B.
Margin of safety is always dependent on the price you pay.
The father of investing Ben Graham’s example of truck provides the best idea on margin of safety.
“If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay; but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety…”
We have seen leading investment gurus look at the “moat” which means “competitive advantage” while selecting stocks. In an annual Berkshire meeting, Warren Buffet had said: “So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn't necessarily mean the profit will be more this year than it was last year because it won't be sometimes. However, if the moat is widened every year, the business will do very well.
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Based on these parameters, we launched for our investors “Value Pick” product. The offering attempts to balance the risk-reward ratio. Here, we provide one stock recommendation every month leading to 12 recommendations in a year.
Looking at India, the world’s seventh largest economy is projected to grow at ~7% this year. We get queries from investors - where to invest? Who will be the key beneficiaries? In this situation, when markets have corrected, it provides opportunity to investors who missed the last rally. We often refer to growth investing ideas when looking at such opportunities. There are certain businesses which face tailwinds due to economy’s need for better infrastructure and logistics, technology and demand. We have seen sectors like chemical, cement and infrastructure sectors gained traction.
Growth investing harps on the idea that small and mid-caps can grow at rates faster than the industry due to moat, scalability, gaining market share and management bandwidth. One can easily make out a growth stock by looking at its share price chart over the last 5-6 years. It will be a neat upward sloping graph with corrections not impacting its growth trajectory.
Vijay Kedia, a noted Indian investor, aptly puts the importance of good management while picking up growth stocks. “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 the management worry because management has its prestige and its name at stake.”
Most investors feel a sense of regret of having missed an opportunity when bulls dominate the market. This leads to “Herd Instinct”. The herd mentality leads to unsubstantiated rallies and/or sell-offs without seemingly any connect with fundamentals of the company. Many investors tend to benefit most by applying the contrarian investing approach to dodge the herd mentality led rallies in stock prices.
Leading contrarian investor Radhakisan Damani booked his space in Forbes billionaire list by ardently following contrarian investing. He always invested in sectors which were facing industry headwinds but had strong management and business sustainability. As said earlier, profits in the business can fluctuate according to macro-economic environment. However, there are businesses that will see a turnaround as market conditions improve and as their investments for growth start yielding returns.
At DSIJ, while designing products for investors we always give high importance on management team and moat while picking up stocks for our growth investing based products “Tiny Treasure” and “Mid-bridge”. Tiny Treasure looks at small-cap companies while Mid-Bridge looks at mid-cap companies. Here, apart from evaluating companies on various financial metrics such as ROCE, ROA and ROE, we give high weightage on promoter holding, debt structure and moat of the businesses. The recommendation are for a period of a year and at times less when the target price gets reached in a shorter time-frame.
According to Shankar Sharma, “there is money to be made in junk and mispriced opportunities”. Also, contrarian investing firmly believe that stocks markets keep reverting back to mean.
According to George Soros, “The worse a situation becomes, the less it takes to turn it around, the bigger the upside.”
Based on this ideology, we have recently launched our Upstream product. This product is unique due to the unique methodology used and it is our first product with holding period of two years. In times of uncertainties, probability of a contrarian pick providing high returns becomes far higher.
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HOW TO BUILD THE PORTFOLIO
We are frequently asked by our readers: how I should build my portfolio with recommendations in DSIJ magazine.
As per Warren Buffet, “The goal of the non-professional should not be to pick winners – neither he nor his “helpers” can do that – but should rather be to own a cross-section of businesses that in aggregate are bound to do well”
Mohnish Pabrai, an Indian-American businessman, turned investor when he accidentally bought stocks and viewed them after 20 years. He was smitten how practically the power of compounding can lead to exponential gains. A simple thought of how 2 to power 10 (Rs 2 invested for 10 years) becomes 1024 was sheer compelling. He lucidly lays down some rules he applies for picking stocks for his portfolio.
- Businesses that anyone can run and still these businesses will continue to be needed. E.g. – ratings, beverages
- They are same like the first point however they need good management, have deep moats and many tailwinds. E.g. banks, specialized IT, chemicals
- These are businesses where market is confused between risk and uncertainty. As per the current economic condition these will be NBFCs, realty, cement
- Bankruptcies, reorganizations, public LBOs and special situations. E.g. – mining and infrastructure companies with high debt.
Mohnish Pabrai recommends allocating capital proportionately in above four businesses to diversify risk and benefit from compounding.
To help investors build portfolio or rejig their existing portfolio, DSIJ offers Portfolio Advisory Services (PAS). In PAS, we provide the entire control to subscribers. We aid portfolio building by providing customized recommendations according to investor risk-return expectations and industry preference.
We at DSIJ constantly endeavour to meet the requirements of the clients through various products across the value chain. Through our MAGAZINE we keep investors updated on emerging trends in the markets. Our “Choice Scrip” section helps investors to invest in a low risk BSE 200 stocks while “Low Price” section helps investors to look at high risk stocks with share price below Rs 100.
Apart from this, we carry special editions, special reports and interviews from prominent personalities to provide unbiased research ideas to investors.
Our product Flash News Newsletter (FNI) appeases investors who like to know about stocks trending in a shorter timeframe of 1-3 months and which can benefit the most in current market scenario due to tailwinds in the industry, corporate actions (bonus, stock-split, debt restructuring) or changes in management.
We firmly believe “Markets will keep changing, good investing advice is timeless”. Safe investing!