investing chat with fundamental investor

My Chat with Fundamental Investor

The trouble with so many of us is that we underestimate the power of simplicity” – Robert Stuberg

Continuing with my investing chat series with smart minds, I had an engaging and deeply thought provoking conversation with my good friend who loves to be known and called in the investing world “#FI” a.k.a Fundamental Investor.

This 30’s something has achieved what all of us work all our life for — Financial Freedom. Besides the veil of his pseudonym, nothing about his investing ways are a secret. He has been sharing his experiences on his blog and on Twitter

In this candid straight from the heart, #FI lays bare the way in which ordinary investors like you and me can also achieve. Dear Readers, grab a cup of coffee, tea or whatever your favorite beverage maybe and read through FI’s story in his own words.

 

Ravi: Hi FI, Please tell us something about yourself, your journey into the world of investing and how you achieved “THIS ”?

FI: Hi Ravi, Glad to have this chat. My answer to the first part:

fundamental investor
Son to wonderful parents. Brother to a Go-getter. Husband to a Lovely wife who is an Educator & a great Partner in this journey. Father to an awesome son who is Exploring & Learning. Friend to thousands marching on the Financial Independence Journey. Student. Traveller. Musician. Singer. Teacher. Fundamental Investor.

 

 

And to the second part….

It was in late 2006 that I began interning for my final year project. I was still in college then. In January 2007, I got my first stipend which was Rs 7440. I came home and proudly showed my first earning to my parents.

My father took the cheque, photocopied it, laminated the photocopy and asked me to invest that money. I still remember investing that stipend in a FD. Thus began my investing journey. The small gesture by my father resulted into investing every single month thereon.

From 2007 until 2011, I aggressively invested in Mutual Funds. You will be surprised to know that when the 2008 crash happened, I had no clue. I was fortunate that a crash came early on since I could buy more units. I was working hard and growing well in my career. My needs were less and hence I could save a good amount.

In 2011-12, I had a good capital base which I moved to equity. The businesses I chose really did well. The new government brought great sentiment. The compounding has been phenomenal so far. Businesses are progressing well.

On the work front, I was very fortunate to have the right mentors. I got great opportunities. I grew well and I really enjoyed my work until the last day. It really never felt like a Rat Race actually . I must thank the Markets for helping me Retire Early.

Financial freedom, away from rat race

My story in one Tweet:

The beauty of Indian Stock Markets is that a Person like me who has no Background/Education in Finance can also Create Wealth by Patiently & Consistent Investing in Progressive Businesses without Price Bias.
Anyone who Believes – Can !!!

 

Ravi: Wow, Your father must be really proud of you. Buffett wisely said “Time is your friend, impulse your enemy. Take advantage of compound interest and don’t be captivated by the siren song of the market”.
Next up, what accurately describes your current line of investment thinking / investing strategy? How has your investing philosophy / process evolved over the years?

FI:

I think the biggest edge I had was that I never invested to beat any benchmark. Even today, I am not running the Return Rat Race. I was fortunate that I never compared myself to any benchmark. This helped me to focus on my job, earn well and buy more shares of wonderful businesses over time.

I was never afraid to take any risks. I knew my businesses very well. Especially their future potential. I like to keep things simple. Over time, I developed my own methods of valuing businesses. I developed patience over the years.

I understood that it only takes a couple of weeks for a good business to give yearly returns. But, unless we hold the business at that time, we do not gain. I feel that focusing on the process can give big returns in due time. Process which I followed was simple:

Begin as Employee
Under Experienced Employer
Work Smart. Learn.
Grow. Earn Well
Avoid Debt
Invest “Aggressively”
In 12 – 15 years,
Be Employer/Employee/Passion
With God’s Grace, if Financially Independent, Chill 🙂

investing a solo activity

Ravi: Loved your point on not playing a comparison game. Investing is one field which lend more to solo act and less of a group activity. The day we realize we are each running a solo race and need not compare / benchmark against other solo racers we are at a tremendous advantage.

Bill Gates put it best “Don’t compare yourself with anyone in the world. If you do so, you are insulting yourself”. Can’t be more true in the life of an investor

Moving on, Based on your current thought process you have mentioned, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy?

FI:

The first criteria for a business to be investment worthy, is that we need to understand the business. Even before we get into valuations, business should be something we relate to. Else, we cannot own it for a prolonged period of time.
Let us take couple of examples which are from different sectors – Britannia & Indigo. Now, both are businesses where we can easily relate to. If we read about them and attend the conf. calls etc., it’s not very difficult to understand how they plan to operate. But, now, one sector (consumption) has different challenges. New products are coming every day.
On the other hand, the airline sector is heavily dependent on oil prices. Also, they have to keep the prices low and give phenomenal service. So, the question is, where will their earnings be 5 years from now? I ask myself simple questions before looking at the price.

Second, I look at their track record. How have they fared during tough times? The answer to this critical question speaks volumes about the promoter’s credibility to run the business in tough times. For me promoter pedigree is their ability to outperform during bad times. Period.

Third is valuations. Each sector has its own valuation method. And every investor might not be a great at valuation. Also, we need to remember the market values businesses differently in different conditions. Every single day, there are millions of minds valuing a business and hence the fluctuation in price.

We need to understand this carefully. In good times, a business can get 40 times earnings multiple and still be called cheap. In bad times, same company might be available at 10 times earnings and still market will call it expensive.
So, the way I look at it is, if a person is confident on the business, its potential, and earnings capability in the next 5 years, ability of promoters to run the business in good and bad times, then the best way would be to add shares of the business every month.

In this way, we get a good average. And if the business performs as per thesis, a lot of money can be made. Else, if business fundamentals change, we can move on.

 

Ravi: I think that’s great set of criteria and for me the killer point: “Add shares of the business every month”. We always want to find the next Eicher Motors or Page Industries when Eicher motors itself can be the next Eicher motors.
Adding to your existing positions of businesses you already own since you know them well may be more rewarding than finding a new idea every month.
Next up is a follow up to the previous question, if there were to be “FI’s 5 rules for successful investing” then what would that be?

FI:
In my long journey, I realized that what worked for me, need not work for anyone else. I mean the returns. But, the process has worked for so many. So with this disclaimer, here are some thoughts:

rules for investing smartly in share market

Rule 1 – Know why you are in the market. Be clear whether you are a trader, investor or just time pass. And don’t mix them too much. Too many personalities can delay Financial Independence indefinitely.

Rule 2 – Understand that Corpus Building takes time. Compounding works wonders on a huge Corpus. 10% of 1 Lakh is 10K. But 10% of 1 Cr is 10 Lakh. So, focus on building the corpus by Investing aggressively every month. Focus on Process. Returns will follow.

Rule 3 – If Business Earnings are deteriorating continuously, do not hesitate to book a loss and move on. Unless, you are confident that the business is just going through headwinds and it’s just a Phase. Celebrate fall in Price if No change in Business Fundamentals. Be Fearless.

Rule 4 – Never Ever Borrow and Invest. Never Invest Money which you would need immediately.

Rule 5 – There are many things in Life other than Investing. Investing is a place where Money needs to work hard. If we are also stressing ourselves, we will lose out on personal life. So, maintain that balance. It helps to sleep better.

 

Ravi: That’s a great set of easily understandable and implementable investing rules. Talking of rules, read an interesting take on rules:  “Learn the rules like a Pro so that you can break them like an artist”.
Moving on, what has been your best investment idea (need not be the most profitable) till date? Can you also elaborate on the thinking that went behind the investment idea?

FI:

There have been so many ideas which worked. I take this opportunity to thank every employee and promoter who really worked hard to create my wealth. There were many businesses I owned at various periods from 2011-12.

I was looking to understand new sectors, new businesses. I got in touch with the Company Secretaries of some companies and tried to gauge the potential. Various material online also helped in understanding where the earnings could reach in due time. I always kept it simple.

investing ideas

No recommendation since I don’t own any of these businesses significantly now.

Few businesses I bought regularly for around 4-5 years were Cupid, Mirza International, Waterbase, FreshTrop Fruits, Himatsingka Seide, MM Forgings, Shemaroo, RSWM, Britannia, Arvind Infra, NCL Industries, IFGL Refractories. I was fortunate to have got most of these businesses at very low earnings multiples.

Most of them progressed extremely well in earnings. Few gave multi-bagger returns on my capital. I was very aggressive in buying shares since over quarters, I developed an ownership feeling.

I played sugar as a cyclical, and I was lucky in terms of entry and exit. My calculations played out well. But, I don’t think it is worth timing cyclical. Also, in cyclical stocks, earnings can be very lumpy. Multiples can be misleading. I was plain lucky I would say. I would not play cyclical scrips anymore even though I made good returns. It’s just my view .

In 2016, I shifted my entire corpus into 2-3 businesses wherein the Margin of Safety in terms of price was huge. My dreams was to have a good dividend stream on capital created  So that move was in line to this dream. The Dream of Dividend Compounding!!!

So throughout my journey, my process remained more or less same. I continued to buy businesses every month. I continued to evolve. I sold only when I found an opportunity much better than current.
Today, I own very few businesses. Dividends, hopefully will grow as business progresses  let’s see.

 

Ravi: Shifting the entire corpus to 2 – 3 stocks takes deep conviction. It’s risky but as they say -Diversification preserves wealth but concentration creates wealth. There is nothing like the perfect number of stocks to own but it is wise to remember what the legendary Peter Lynch had to say “Owning stocks is like having children, Don’t get involved with more than you can handle”
From master stroke let’s move on to mistakes. Mistakes are sometimes referred to as “unexpected learning experiences”. Can you share any investing mistake(s) you have made and the lessons we can learn from them?

FI:

I consider myself fortunate that I associated myself with right people. I learnt from people who made lots of mistakes themselves and hence I didn’t go through any major catastrophe. I have been guiding friends on email for years now. I get to see so many experiences and it makes me a better investor.

Stock Investing mistakes

Few mistakes:

One mistake I made was buying a good business during bad times & not holding on to that business during it’s best times.
For eg:
I used to own a Refractory company. It was one of the best, well managed businesses. When the sector was going through tough times, I went on averaging lower. I knew the business well. After a long period of averaging & holding, suddenly, the sector picked up.

A rally followed & I sold at my cost. I was relieved. I couldn’t hold anymore. Patience ran out. The stock moved 2x from my sell price in a matter of months.

Another mistake I recall is buying a stock when it was hitting Upper Circuits  There was a company called Shree Hari Chemicals. I remember it was hitting circuits every single day. Their financials also looked decent. I remember buying on one of the upper demand circuits.

It went up a little and then journeyed downwards. I learnt an important lesson. I remember the sleepless nights. As a rule, I always wait for a business to come out of extreme demand or extreme supply. Liquidity is key for me.

I remember playing with Options Derivatives a little during 2013 time frame. I made a lot of money on my first option. First Time Lucky. It was a Call Option on JPA  I took a bigger bet second time. As we approached expiry, the premium went on decreasing. I didn’t know about the time decay concept then. That was a big lesson. I lost my investment. I never ever ventured into speculating again.

I am fortunate that these mistakes didn’t cost me dearly. But, yeah, good learning.

 

Ravi: Reading your mistakes remembered what another legend Bogle said “Learn every day, especially from the experiences of others. It’s a lot cheaper”. One lifetime is not enough to learn by doing all the mistakes oneself.

What do you believe are the skills one needs to hone to become a better investor? Why do you feel these skills are required?
FI:
Buying when price goes down without drastic change in fundamentals is a great skill to hone. This can only come with deep understanding of the business dynamics and the sectors.

Staying away from noise helps enormously. Media always slaughters stocks after they crash and idolize them when they go up. Our skill is to view business independently from price movements. I know this is tough, but only in crisis, great opportunities arise.
Learning from other’s mistakes is another great skill  Why repeat them unnecessarily?

Being emotionally strong is a great skill. This is because, if we only depend on intellect and excel sheets, we miss great opportunities. We need to remember that market prices stocks based on multiple parameters. If we feel that the figure we get in excel sheet is what the value is of the business, we are living in a fairy tale 

Keeping things simple is a wonderful skill. I can go on and on…

 

Ravi: That’s again a great set of skill set to hone but as with investing, these skill sets are easy to understand but difficult to cultivate. Glad that you brought up the point on Simplicity. They say the most complicated skill is….to be simple!!!

Last question, outside your passion for stock market and investing, are there any other interests / activities which are close to your heart?
FI:

I have a wonderful family. My wife and myself were associated to spiritual organizations and worked a lot on social causes. So, we are emotionally pretty strong. I am blessed to have my lovely wife as my partner in this journey. I love music. I play the guitar & love to sing bhajans.

We are blessed to have a lovely son who is getting home-schooled along with many other children and wonderful parents. So, we have an exciting journey ahead. With grace and blessings, I have freedom of time on my side. I have a wish to empower more and more people to get Financially Independent. I have some plans to achieve them in due time. Let’s see how they materialize

 

Thanks FI. That was a wonderful conversation filled with insights. Thanks for your time my friend and wish you all the very best in life and investing.

 

Dear readers, hope you enjoyed this conversation as much as I did. There are a lot of takeaways for a careful reader. One key message I would like to emphasize – Never overlook the power of these three things in investing- Simplicity , Consistency and Commonsense.

I will be back soon with another installment of my investing chat series . Till then, Keep Learning and Happy Investing.

 

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