Key notes from 2nd Value Investing Pioneer Summit

My key notes from 2nd Value Investing Pioneers Summit

 

A Single conversation with a wise man is worth a month’s study of books – Chinese proverb

 

What if on a single day you had conversations with many wise men? This is precisely what I felt interacting with like-minded professionals at 2nd Value Investing Pioneers Summit.

Another Chinese Philosopher, Confucius said “By three methods we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.”

I am not sure which bucket to put it this in but listening to the distinguished speakers who called on their many decades of investing experiences was a great learning experience and a humbling attempt in gaining wisdom for me.

Below are some of my key notes from the summit:

 

Before you start

 

Please be mindful of these key points before you read the notes:

  1. Notes from all the speakers have not been included
  2. Only those points which appealed to me has been included here and this in no way a complete transcript of the speeches.
  3. Data, Graphs, Examples have not been included for avoiding misrepresentation.
  4. There may be mistakes of omission in the notes taken due to mental digressions.
  5. There is a possibility of errors of commission too due to my poor handwriting and note taking skills.

 

With these rules for the road, let’s dive straight in:

 

Durgesh Shah – “Lessons from Markets”

 

Durgesh Shah

Durgeshji brought his decades of investing experiences to present timeless lessons from the Indian markets. The presentation filled with anecdotes and analogies was truly a wonderful learning experience.

 

 

  1. Factors to be considered while evaluating Managements / Companies
  • Trust – Is the management trust worthy? E.g. TCS
  • Culture – What is the prevalent culture in the organization? E.g. HDFC
  • Focus – Does the management / company have a clear focus (Hero Motors)
  • Scalability
  • Delegation – Does the management hand over power sensibly (Motherson Sumi)
  • Integrity and Passion– Is the management passionate about the business or interests lie elsewhere in fast cars and other things
  1. While evaluating management companies be aware of the “Halo effect”.
  1. Causes of downfall of companies:
  • Arrogance. A thin line separates confidence and arrogance
  • Bureaucracy. A thin line separates process and bureaucracy.
  • Complacency. A thin line separates confidence and Complacency
  1. All of us have bought 100 bagger stocks at some point of time in our career but many of us lack the conviction to hold on to these stocks during the entire time frame. We exit the stock before it becomes a 100 bagger. To have conviction one needs to have:
  • Vision
  • Courage
  • Patience
  1. Success in the markets is also about a bit of luck and being at the right place at the right time. In the end, humility matters.

 

Samir Arora – “What they don’t teach you anywhere”

 

Samir Arora

Samir’s talk was laced with wit and wisdom sprinkled with a generous doze of humor. He began by listing out some of the popular assertions in investing and then gave examples / justifications as to why these assertions are wrong

 

 

Assertions

  1. We buy stocks where we have high conviction.

We have higher conviction in the stocks we reject. On the stocks we buy we go through multiple filters, long checklists, management meetings to convince ourselves.

  1. Our favorite holding period is forever.

Buffett had qualified this statement in the 1988 shareholder letter

“In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever”.

Now it makes better sense ?

  1. You should know everything about the company before you invest in the stock.

It’s impossible to know everything about a company and sometimes even the company top management themselves are unaware. You need to have a fair idea and then learn few things along the way.

  1. Buy stocks with Good management.

Only when things turn sour you realize dishonest managements. Even eminent authors like Tom Peters (Book- In search of excellence) , Jim Collins ( Book- Good to Great) who have dedicated and devoted complete time in studying  companies with good management have themselves  not got it entirely right. What chances do we have as investors to profile for good managements?

  1. Diversification is a protection against ignorance. Wrong

 

So what you should know

 

  1. Believe in the power of equity investing.

At an asset class level equities have been the best performing ones across countries. A paper “Triumph of the Optimists” by Elroy Dimpson, Professor London school of Economics looked at data for 16 countries for 103 year period (1900-2002) and found equities to be giving the highest return in every country

  1. Look at the big picture and the size of the opportunity. That will be profitable and worthwhile strategy. 
  1. Focus first on the list of stocks which you want to reject. We tend to have higher conviction on our rejected list of ideas. This gives you
    • A list of shorting ideas
    • Reduces the universe of stock from which you have to do your stock picking
  1. Momentum with Fundamentals and long short are very useful strategies 
  1. Try to gain knowledge and don’t waste your time in gaining more information – As an analyst or an investor, ask yourself if the pursuit of that additional piece of information does really add any value. In many cases, it does not.
  1. How one performs during negative market months matter a lot to your overall performance.
  2. Every stock is given 1 or max 2 years to perform. If any stock under performs beyond this time frame they are sold without any emotions. It will be the same for HDFC bank shares which is now held for 20+ years
  3. A good book to read:        Wealth, War & Wisdom by Barton Biggs

 

Samit Vartak- “Buy and Forget Vs Active Investment Management”

 

Samit Vartak

Samit in his inimitable style presented a data backed presentation on when to pursue active investment management.

 

 

 

  1. Why Quality Matters?
  • Quality companies are consistent and are useful during market downturns
  • Helps you avoid landmines (Vakrangee, PC Jewellers)
  • Fund managers do not want to lose jobs and look foolish picking unfamiliar names
  1. Stock returns are driven by
  • Re-rating of PE
  • Strong returns are a result of earnings growth
  1. You get reasonable time to evaluate an opportunity (1 Quarter or two) 
  • Have strong filtering and screening criteria so that these stocks show up on your screens
  • Analyze those which pass the filter rigorously.
  • Try to see if you get confidence in their earnings growth. One indicator for quality is gaining market share from competitors.
  • Examples of re-rating examples in the Indian small cap / mid cap space
    •     Bajaj Finance
    •     PI Industries
    •     Avanti Feeds
  1. Do not apply theory of American investors blindly.

Do not follow and apply investing literature from other markets blindly. Most of the famous investing materials           are written by American investors based on the US market. The degree of volatility and characteristics are                     different for the Indian markets.

  1. If you are pursuing a 12 to 15 percentage returns, then its best is to stick with quality companies and a coffee can type of portfolio. Active management should be pursued only if you are chasing 5 to 6 percent alpha. This is hard work and not a part time activity by any stretch of imagination.
  1. In active investing stay away from big blunders. This is very important.
  1. A profitable strategy is to follow the 80/20 Pareto principle. For 80% of your portfolio seek market returns and for the remaining 20% of your portfolio chase Alpha.
  1. As a fund manager set your heart on the process and not on its rewards. Clearly communicate what went wrong also to your investors so that they are aware of the process and not fixated with returns.

 

Hope you find the notes useful.

Keep Learning, Happy Investing.

 

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