I was away mainly due to my regular job demands. So during the last few weeks I did not have much opportunity to analyse any new companies or look at any new investment ideas. But I did have a chance to reflect on time as a key constraint.
Although time is a constraint for anything you do in life, I tend to think of time as a constraint or limitation on my much effort I can devote to investing and reading. Having a job, family and all other assorted interest puts a limit on what I can or cannot do in investing.
Thinking in reverse, I more or less know that I cannot do the following due to my time constraints
- options trading: It’s a specialised field, requires day to day supervision and lots of effort. Other than the fact that I am no way an expert in it, it is too risky for me as I just do not have the time or the stomach for it
- Deep value investing: This is the quantitative mode of value investing. I understand this form investing fairly well (atleast I think so), but this form of investing require more effort as one has to churn the portfolio more often. Also tempramentally, I am not comfortable with these ‘cigar-butt’ companies which are lousy companies, but may give a decent return. Also to practise this kind of investing, one has to diversify into a decent number of companies and then track them atleast quarterly
- Day trading: No time and no temprament for it at all. It looks like easy money these days. But long time back I made a promise to myself to invest into opportunities which I understand and avoid the ones I don’t. In the end I may miss some easy money, but avoid the pain too
- Gold/ Commodity trading: No time, special knowledge or temprament here
So by this reverse exclusion approach leaves me with searching for good companies with sustaniable competitive advantage which I can hold for long term. It may seem to be a very small area to work in, but it is not. For the size of my portfolio, if I can find 1-2 good companies a year, it is good enough.
Going forward (time permitting) I plan to expand my investment activity to special situation and deep value investing. But that is still some time off.
Also those of you who would have invested in reliance as an arbitrage situation, the bet would have paid off. Pre-split reliance was selling around 850 – 900 a share. Post spilt it is around 1140 a share. A 25 % return in 2 months.
Now I would like to boast that I made a killing and had some terrific insight …blah blah !!. That’s not true. I tried doing a sum of parts analysis before the split and read some articles on this arbitrage situation. Eventually I got stuck on two points
- How to value reliance infocomm. Conservative valuations (v/s bhart telecom) showed back of the envlope value of 275 per share (300 now). In the end I was not sure of how to value it
- If reliance infocomm could be valued at 275 per share, the value of the core business was at around a PE of 12 on current year earnings. Again I was not a 100 % sure if that was undervalued as the petrochemical business is on an upswing and the earnings were at a peak
In the end, as I was not very confident on my analysis, I did not make a big commitment. I am not regretting it though. I would rather do nothing if I am not sure than do something just because others are doing it (does not pay to have others think for you). However I am trying to reverse engineer the arbitrage and see how I could have analysed it better and ‘forseen’ this opportunity.
In anyone has an insight or did this in dec/jan before the split, please share with me. I would like to learn from you