“When the student is ready, teacher will appear” Zen proverb
During my regular surfing on the internet, in a stroke of wonderful luck, I stumbled on a fine interview of Dr. Vijay Malik. The interview was replete with investing wisdom from one of the successful investors in the Indian stock market. I was fascinated by the doctor’s simple yet effective “peaceful investing” philosophy.
This post details my key takeaways based on my understanding and interpretation of the ET interview.
Key investing takeaways
- Follow a concentrated investing strategy
Warren Buffet “Diversification may preserve wealth but concentration builds wealth”.
Over the past 10 years, Malik has selected 14 stocks for investment but he has offloaded eight over time
This implies that the number of stocks in his portfolio can be counted in the fingers of our hand – “6”. One needs to be extremely skillful and an astute operator to be successful following this strategy.
The other more fascinating insight for me was his strategy to be extremely selective on his investment choices. Over the last 10 years we had a deep recession in 2008 and a mini pullback in 2013 which presented us with multiple investing ideas. Think about it, of the 5000 odd stocks listed in the Indian exchanges, only 14 passed the doctor’s test.
Charlie Munger “To me, it’s obvious that the winner has to bet very selectively”.
Dr. Vijay’s strategy is Munger’s wisdom in action.
The key takeaway: running a concentrated portfolio of carefully picked stock can lead to enormous wealth creation.
2. Adding to an existing positions preferred over taking up new positions
Mae West “Too much of a good thing can be wonderful”
For instance, Malik started buying JK Lakshmi Cement in August 2008 at Rs 40 (split-adjusted price). Subsequently, the stock price kept on declining due to the global financial crisis and touched a low of about Rs 15. He kept on buying on the way down and his lowest buy price was Rs 17.5. Later, he sold the stock at Rs 69 a share in Dec 2009
If you have done your analysis correctly; bought the stock with a sufficient margin of safety then a fall in the share price (below your purchase price) should be seen as a welcome opportunity provided by Mr. Market to happily buy more quantities of that stock.
- Seek companies with a long history / track record
“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).” – Warren Buffett on IPOs
He does not focus on turnarounds, special situations or IPOs. He limits his investments to companies that have proved themselves with at least 10 years of sound business performance irrespective of their industry or market capitalisation
No running after the next IPO or praying for a D-mart like listing. We need to focus on companies for which there are publicly available data for at least 10 years for further deeper analysis.
While searching for investments look for companies with:
- Sustained revenue growth
- Improving profitability margins
- free cash flow after capital expenditure
4. Investment for the long term
Seth Klarman “The single greatest edge an investor can have is a long-term orientation”
The regret of selling the stock too early made him think long term, instead of spending time and efforts, trying to frequently find out perfect entry and exit points on the charts.
Individual investors need not align the stock or business performance to planetary movements of Sun and stars while expecting a fabulous growth rate to be declared every 90 days (quarterly). Having a longer term orientation may also help us from selling our winners early.
One good example of having a long term focus and being patient would be of that of Eicher motors which was trading at Rs 220 in April 2004 and in 2009 was again trading at Rs. 220. Today it is trading at Rs.28000/- per share.
Spare a thought for those poor souls who sold the stock early at 2X for Rs. 440.
- Quality of management vital
Good management is most important for any successful company, he insists. He reads past annual reports, credit rating reports and media articles to estimate whether the management has taken any such decision in the past which has been against the interests of minority shareholders. Any sign of actions where the promoter or the management attempted to benefit at the cost of minority shareholders is usually a “no go” criteria.
Corporate India is littered with examples on trampling of the minority shareholder interests.
E.g. Related party transactions where contracts are awarded to family members, issuance of convertible warrants at preferential rates to management, transfer of land to promoters at dirt cheap prices etc.
Where the integrity and quality of management is questionable, investing in such stocks may adversely impact the returns of the minority shareholders.
- Seek stocks with NIL or Low Institutional holdings
Malik prefers stocks that have low or nil institutional holdings as continued good business performance in such companies attracts institutions, which in turn can lead to PE re-rating
For outsized returns we need to go fishing in areas where the big boys are not there yet.
Philip Carret, the legendary investor practiced this successfully in his 79 years long investing career. We just need to keep our “antenna” up and tuned to pick up the off- beat stock ideas.
E.g. Carret Bought shares of a company called Neutrogena after he sampled a soap in a hotel room @ 85 cents a share. The company was later taken over by Johnson & Johnson for $35 per share
When you selectively bet for the long term after a thorough analysis of fantastic business run by a quality management then you will be at “peace” without any mental agitation or worry. No wonder Dr. Vijay Malik has named his investment philosophy as “peaceful investing” !!!
What different investing takeaways did you have? Do mention those in the comments.