Investment Style
The retail investor’s greatest advantage is the small size of his capital and the flexibility that the small size provides him. What distinguishes our investment style/ philosophy from most others is that our investment style places all investment fundamentals in conjunction with this advantage to make our decisions.
The smaller the size of capital, the greater is the number of opportunities that become “playable”. A large mutual fund may very well know that XYZ is a great stock, but if the company’s market capitalization is small, the mutual fund can’t participate in the opportunity. Similarly, while the small investor can shuffle the entire portfolio to avoid/ capitalize on a certain trend, the large fund doesn’t have the same liberty. Lastly, the impact cost of an incorrect decision is significantly lower for a small investor than it is for a large fund.
For the large fund, long-term investment is often not a matter of choice but rather of compulsion; for a small investor the matter is always of choice.
As has been popularised by Bill Ackman, an average large cap stock moves up 50% from its 52-wk low to its 52-wk high. Obviously, there is no dearth of number of opportunities in the stock market to make returns. Given his small size, the retail investor is well-placed to utilize as many of these opportunities as he can identify.
The large fund must ensure that it is able to identify these opportunities, as must the retail investor. But there is a difference. The large fund can’t participate in the opportunities created in smaller companies, and the large fund must ensure that the opportunity is “durable” enough. The small investor doesn’t have the same constraints. His constraint is only the identification of opportunities.
This is what we help the small investor achieve. We look for opportunities that the market brings forth to the small investor, and help our small, agile, alert investor participate in these opportunities.
Although it is not possible for us to assure returns or avoidance of loss, we place the highest priority to preservation of capital in each quarter. Returns are secondary in our quest; we further believe that the distinction drawn between a defensive stock and one that performs are superfluous in the short-term.
As a result of our exclusive focus on the needs of the retail investor, our manner of viewing things is very different. Example:
1. We do not see the long-term as a cornerstone of investing: We reject the notion that investing is only for the long-term, and short-term investing is equal to “trading”. We see stock prices as they are: volatile,
2. To us, certain definitions are different: a defensive stock is also a performing stock, value is simply exit price
3. Portfolio turnover is a friend: A stock with an identifiable trigger can help reduce uncertainty in near-term returns and also improve efficiency of capital. Therefore, we typically have investment horizons less than a year, and often approximately three months.
4. Seek multibagger portfolio, not multibagger stocks: Often, in a desire to claim long-term clairvoyance, investors tend to stick around in stocks in the hope of claiming a multibagger. However, the percentage of multibagger stocks will often be small; in our experience, it is far better to aim for a high visibility multibagger portfolio that a poor visibility multibagger stock/ a portfolio of such stocks.
Investment Process
1. We believe markets are constantly changing and a frequent re-evaluation of opportunities and threats helps. Also, we do not believe that markets are efficient to a high degree, so opportunities take some time to play out. A balance should therefore be struck between the re-evaluation of opportunities and threats and the length of time that should be provided to identified opportunities to play out (or not) as desired. In our opinion, a quarter is the ideal time gap between these two factors. We accordingly do an assessment of our overall portfolio positioning and strategy each quarter.
2. Our first step is to make a comprehensive assessment of how the broader markets are likely to behave in the quarter. This assessment takes account of: a/ liquidity conditions, b/ comparative demand and supply dynamics for stocks in general, c/ valuations of indices, d/ other political geo-political factors to account for, if any. This first step determines how much cash we hold at the beginning of the quarter.
3. Our second step involves sector/ size selection; i.e. decisions regarding which sector to hold and in what measure, or which size category to hold and in what measure. These decisions involve making judgments on near-term earnings growth vis-à-vis expectations, as also investor belief in certain sectors/ size-classes. Typically we work with a portfolio that has very little alignment with the Nifty, for: a. our portfolio choices are not made keeping in mind the benchmark, and b. ours is a multi-cap portfolio.
4. Then onwards, we look for the best ideas within these sectors. This decision is typically based on earnings momentum and near-term expectations.
5. Further to such ideas that are top-down, we work with a handful of bottom-up ideas that are highlighted in our screeners in quarterly results.
6. Apart from the “cash-call” that we make, diversification is the other risk management tool we have at our disposal. We avoid concentration of our portfolio with a single “big-picture” idea or a single stock and rely on two/ three different themes which account for 10-15% of the portfolio in any given quarter.
7 .We believe in constant evaluation of stocks in our portfolio. Upon every significant rise and decline in a chosen stock, we evaluate the reasons behind the same and, if needed, take action throughout the quarter on such positions.