August 26, 2008

My personal investment journey - II

In the previous post, I described my investment journey till 2003. By mid of 2003, I had spent close to 6-7 years on reading and studying about the topic. I had read dozens of books on warren buffett and other value investors. In addition I had been analying companies for the past 5 years. So I understood the basics of investing, valuation and other aspects of investing.

What was missing was the experience and the softer aspects of investing. I had allowed myself to be swayed by the surrounding euphoria (partly though) in 2000. In addition by 2002-2003 when there were values all around (companies like L&T,
blue star etc were available at a bargain), I was still not confident enough to go the whole hog.

If you have gone through this phase or are going through it, you will understand. If you have not seen a lot of success (mine was relative, I had done well compared to the market) and even if you feel that your are doing the right thing, it is not easy to jump in again completely. So during this phase, I increased my holdings, but I was very cautious (maybe overcautious) about it.

The market had gone nowhere for the last 10 years and so unlike today, no one was interested in stocks.

So what were the key learnings for me till 2003 ?

1. Do not over pay for a stock. I learnt this from SSI. Yes, sky is the limit for these hot companies. However for every Infosys or PRIL or L&T, there are 10 pretenders. In addition this kind of early stage investing requires a different mindset. I do not have that kind of mindset.

2. focus on companies with sustainable competitive advantage which have a profitable growing business and are available at a reasonable price. I have made the best returns from this group. Ignore the long shots ..companies which will be the next HDFC, next infosys, next L&T etc. Buy HDFC if it is available at a reasonable price otherwise find something else.
Valuation and price matters. Promise is all great, but if a company does not meet the promise then the stock price gets killed. I learnt it from SSI and a lot of other investors are learning that lesson now via other companies.

3. Be honest and brutual about your mistakes. Do blame others like analysts, media, friends etc. If you have made a mistake, accept it and move on. In short – don’t whine !!

2003 – 2006 (Beating the market and making some money)

By the end of 2003, the market was up 73% and I beat the market by a few points. As I had beaten the market during the bear phase too, I had gained in absolute terms by the end of the year.

The portfolio mix was roughly the same, with a new addition by end of the year of kothari products which was a small position (I started experimenting with a few graham type stocks)

By 2004 year end, my portfolio was doing fairly well. I had done better than the market with good gains in asian paints, concor,
blue star etc. In addition I created a new position in BayerABS and Balmer lawrie by the end of the year.

I did no major additions or sale during 2005. Most of the stocks did well and the valuation gaps closed for several of my earlier picks as the market started recognizing these companies. I was able to do better than the market and was now fairly confident of my approach, which was now working well.

2006 was also a year with almost no activity in terms of buying or selling. To certain extent, I was still
riding my earlier picks and to a certain extent I was finding it diffcult to find ideas which were as attractive as my exisiting one. I had done most of my picks during the bear market of 2001-2003 when good companies were available at throwaway prices. I was still searching for similar opportunities in 2006. That ofcourse was a foolish thing to do then. I was not going to get those kind of opportunities in a bull market.

By end of 2006, most of the companies I held, seemed to be fully valued. I liquidated almost 60-70% of my portfolio and ended the year with small holdings in asian paints, reliance (which I got through my RPL holdings), Bayer ABS and balmer lawrie. In addition I started building a small position in Merck and

As an aside, in 2004, I discovered blogging and created my blog. This was my
first post.

2007 (rethinking the approach)

I began 2007, with a fairly liquidated portfolio and few holdings.The really good companies seemed to be fairly valued and so I was not interested in them. As this time I started exploring graham kind of opportunities.

Till 2007, my approach was always to buy good companies and hold them for a long time. However I was always split between the idea of buying and holding even after the company was selling at or above my estimate of intrinsic value.

In 2007, I read a book by Mohnish pabrai (Dhando investor) and also a few other books and comments by warren buffett. I kind of realised that if one is interested in making higher returns then you have to look at buying undervalued companies and selling at intrsinsic value. The portfolio churn is more and you have work harder at finding new ideas, but the returns are higher. So I had a slight change in approach in 2007.

I built a position in KOEL (kirloskar oil) and sold when it hit intrinsic value. I created new positions in cheviot, India nippon, novartis, VST, manugraph, HPCL, grindwell norton etc. In addition I bought and sold IGL (after I felt I was
wrong in my analysis), and did the same with MRO tek when it reached intrinsic value.

2007 was a crazy year.
Anyone could have made money. I did well too (maybe too well). However I did not go whole hog as I was not comfortable with the valuation for most companies. I had not forgotten my earlier lessons. Frankly I don’t care how well others are doing or what they are recommending. Maybe some people can trade profitably by looking at the tides, but that’s not for me. Real estate companies, Capital goods companies looked like IT companies of 2000 and so I stayed away from them.

2008 (Doing more of the same)
Jan started with a major high in terms of the market and low activity from my end. I have been analysing companies since then and looking for new ideas constantly.

2008 has seen the market tumble from the all time highs. As I was not comfortable with the valuations by the end of 2007, I did not add much to my holdings. I try not time the market, but time the price (this is a quote by warren buffett). What that means is that my buy and sell decisions are based on the discount at which good companies are selling to their intrinsic value. If there is a big discount I will buy irrespective of the market level. Ofcourse, most of the times this approach takes you out of the market at highs and makes you more active when the market is tanking.

My activity levels in terms of buying or selling are higher this year. My portfolio was in a semi-coma state for a long period as there was not much to do. However with a slight change in approach and better values, there is more activity now.

Future ?

I don’t know how things will work out. What I know for sure is that I plan to keep reading and learning. I plan to add arbitrage to my portfolio and make it a higher percentage. However overall, I plan to develop my approach further and deepen my understanding of various areas such as accounting, options pricing, and economics etc . The focus is to learn topics which would improve me as an investor.

If you have been with me for these two posts, you can see why I have a strong preference for value investing. This approach has worked for me and allows me get a good night sleep. It fits my temprament of slow and delibrate thinking. I do not like fast paced action and thrills (in my portfolio, movies are a different matter).

Even among valueinvestors, there are varying styles and each one selects a different set of companies for his or her portfolio. I think it is driven a lot by one’s experiences. In my case, I have stayed away from high growth, hot sexy companies due to my bad experience with SSI and other IT companies. On the other hand the boring, dull but solidly profitable companies have given me great returns. Hence my preference for those kind of companies.


Anonymous said...

Thanks Rohit
You have written very good posts. This will definitely help smalltime ppl like us.

kind regards

Shunya said...

Hi Rohit,
Do you use option for hedging your porfolio?? Pls let us know abt Options , if have ever used them to enhnace ur income.??

Anonymous said...

Hello Rohit
I have tried to figure out a good company please let me know if my stock screening is correct or not.

SKF bearings
Market Cap 1,159.06
Book Value 103.40
Debt / Equity 0.00
P/E 7.21
Dividend Yield %2.73
EPS 30.48
RO Net Worth 28.88
Current Ratio 2.06
Quick Ratio 1.54
Interest Cover 724.58
CMP 220
Few points i looked in this company as it's just 10% above of 52wk low of 202.
Zero debt company
FCF(5 yrs)206.10,210.80,156.22,101.44,92.01
Good PE.

What else i have to look into any stock.

Please note that i am learning how to pick a value stock, if i am wrong then pls correct me.

Warm Regards

Rohit Chauhan said...

Hi shunya

i have rarely used options to hedge and never to enhance my returns

ani - good to know that you find the posts useful


VISHNU said...

Hi Rohit,

I too changed my style to Graham after reading Sanjay Bakshi , Pabrai and John Neff.

I dont mind buying sexy companies at cheap price.

Ex: Hawkins Cooker. This company is no 1 Cooker Brand in India..Top Line and Bottom Line are expanding steadily.. it was available at 5 PE...and it was personally GOOD 2 bagger for me. and it is still available at 6 PE..

By the way, Grindwell nortan came to my screen sometime back..Can I ask whats your Margin of Safety here ?

Normalized PE is 17 ( not including 2007 Profit)
and normalized Dividend Yield 2.5 (not including 2007 Dividend)...I feel this stock looks cheap as 2007 Profit and Dividend is damn higher than the previous year's Profit and Dvidend. Not my kind of stock unless / untill I am confident of their Business and their position.


karthik said...

Hi Rohit,

Great Post... Keep it going :)

Any inputs on why BEL has had such a bad quater ? Has anything changed fundamentally?

I still feel inspite of the bad reasults it is still a good valuation. Please let me know ur views on this.

Rohit Chauhan said...

Hi ani
SKF bearing looks good on a fundamental level. however so do all auto component companies. key point to figure out is how will these companies fare if the auto companies do badly. so from rear mirror view they look cheap, but cannot say from the future perspective. if you ask me, the company looks cheap, but i am not too confident yet.

vishnu - will have a look at hawkins. I have invested a small amount in grindwell. their competitive advantage is their R&D and parentage due to which they have a continous stream of better prodcuts. in addition, their brand names and distribution also adds value.
however is not yet as cheap as i would like.

karthik - BEL books most of its revenue and profit in the last quarter. i would read too much into 1 quarter's results. the company does look undervalued to me still


Vic said...

Thanks for the 2nd part. Great to know more about your learnings.


Anonymous said...


Great post - as usual. Glad to know I am following your path i.e. learning….. learning...everyday but I have advantage of technology and people like you - who are more than happy to share experience & thoughts.

On your note about sustainable competitive advantage – what do you think of say “top 10 companies” you would like to own if price is no constraint for you or top 10 “Coca-Cola” for buffet in India.

Prashant D

Anonymous said...

Thanks Rohit


hardtoget said...

Hi Rohit,
thanks for the great post,
can you elaborate a bit more on the returns part, in the sense i keep on reading things like
" if you had invested 5000 in so-n-so stock in 2002, it would be 5 lacs by now" without any elaboration on how that works out.


Rohit Chauhan said...

hi prashant
great companies for me are
asian paints

i am not including some of current hot favourites give an analogy with cricket ...just because you have scored 3 centuries in india does not make you a sachin tendulkar need to perform long and in varying conditions (australia ? )

Rohit Chauhan said...

Hi harold

what these statements mean is that the stock has compounded at 275% per annum for last 6 years.

such statements have bais built in it. if you look at some stocks which have done well in the last 5 years, you can look at their starting price and look at the current price and make such a claim. the key issue is, not looking backwards. if i look at the stock now, can i claim that will happen. that is the key to making money ..finding tomorrow's winners ..not yesterday's heroes. that ofcourse is easier said than done


Anonymous said...

Hi Rohit,

Thanks a lot. I am not looking for current hot favourites.

All the companies are in my list except crisil. I will try to get more info on this.

Prashant D

Rohit Chauhan said...

Hi prashant
this list is more of a top of mind list. there are definitely more of such companies

Anonymous said...

Hi Rohit
If everybody starts running after the top 10 companies
then returns they give will be lesser & lesser. Is it what meant by Value investing?
After reading your blog, i bought "The WB way" book read it twice.
What you have written on your blog is identify the comapnies which are unnoticed by mass
which have low PE, good growth showed in past and will give in future, and which are at attractive price.
That requires skill. I think selecting any 10 companies from BSE 30 and sitting on them for 5 yrs will definitely fetch you money but that doesn't require skill.

My point is every body will be looking for top companies, and after some time top companies won't be TOP companies.


Ninad Kunder said...

Hi Rohit

Buffets quote " Investing is simple but not easy" is something that I value and identify with.

I think your journey has been in sync with that, keeping it simple but putting in a lot of hard work.

People who look at Buffet dont realise that there is a lot of hard work that goes in keeping it simple.

I think enjoying the journey is more important than reaching the destination.



Anonymous said...

Hi Rohit and others looking at SKF..please do not ignore a recent development. SKF Sweden (parent company) is establishing its own 100% subsidiary in India for making large-size bell and taper bearings.
with SKF India's cash on books, they could have done this greenfield expansion in the Indian listed company also. But they chose to do it through 100% subsidiary of the parent company. Indian shareholders will not benefit from this.
I also had a look at SKF India some time ago. Everything looks great-the products, financials, valuations, etc etc. But this one news negates it all for me.
Have a look at Fag Bearings instead.

Rohit Chauhan said...

hi anil

it is true that if everyone thinks a company is good, then the valuation reflects. think infosys in 2000 or l&t in 2007. so the key is to find company which the company has mispriced. however just holding any 5 companies in the bse 30 index may not give you good returns if you end up overpaying for it. price or valuation is as important as quality ..somehow a lot of people forget that.

Rohit Chauhan said...

Hi ninad

investing is simple (the basic concept) , but definitely not easy in application. takes a lifetime. but the journey is definitely fun for me. i think if you love doing it, it does not feel like work, which explains why buffett has been doing it for so long.

hi neeraj
i have read the same about SKF and that is definitely a red flag.

Anonymous said...

Hi Neeraj
As i know that news was in June 2007 at that time price was around 309-315
& CMP is around 230 approx. i think after that news 4 qtrs numbers were good and as per expectations. So this can be actually buying opportunity for good company. as it is (might be) down by -ve news and weak market conditions.

What is your say Rohit?


Anonymous said...

Hi Rohit
In the example of Balmer & Lawrie, you have arrived at intrinsic value of 896 and then CMP was at 55% of Intrinsic value. I have not fully understood how you arrived at that value but now CMP is around 385 is it still good buy at CMP? (I am not just jumping on that if you say yes :) )


Rohit Chauhan said...

Hi ani
as long as you believe in the intrinsic value, if the co. sells at a discount then it is a good value. key point is the estimate of the intrinsic value, whether it is growing and how soon the gap will close


Manish Chauhan said...

Hi Rohit

I am really influenced by your way of investing and your experience , i have also started trading but i am not a stock trader but derivative trader , i mainly trade in options .

I am more interested in value investing and basic of making great investment decisions . I like to write on investing . may be you would like to have a look at my blog :

Looking forward to read more interesting things from you .


Oracle Developer said...

How to protect portfolio using derivatives? I am not seeing that option written in ur blog or ur journey as an value investor in last 8-9 years. I was told someone that say if you have investments of 5 lakhs in different stock and u can take options in nifty for same amount and protect the downside. how it works? any write up in next blogs may be?