October 2, 2009

Getting it perfectly – Wrong !

I managed to achieve perfect timing this time. It managed to sell exactly before the fundamental performance of VST and India nippon turned around. I wrote the following post on the two companies and my key reason for exiting the two stocks was stagnation of their fundamental performance for the last 2-3 years.

VST reported a 126% increase in their net profit, driven by a 100% increase in topline. This increase is not really a one time increase as the other companies in the industry like Godfrey Philips have reported similar results driven by the topline growth. I have yet to investigate the sudden turnaround in the industry and whether it is sustainable.

Indian nippon reported a 100% growth in profits, driven by a 20% increase in topline. The reason for the profit growth in excess of the topline is due to the operating leverage enjoyed by the company. I need to analyze how sustainable is the performance for India nippon.

My confidence levels in terms of fundamental performance is still higher for VST than India nippon (irrespective of the stock price). The reason is that VST sells a consumer product with pricing strength, whereas India nippon is an auto component supplier which could be benefitting from the upturn in the auto business. The company however, does not enjoy as much pricing power and hence may not derive as much benefit from the upturn in business.

So where did I goof up?
The first thing i do when something turns out different from my expectations is to analyze if I could have analyzed it differently. My reason for the exit was stagnant fundamental performance (irrespective of the stock price).

At the time of the sale, after I had analyzed the two companies, I could not foresee a turnaround in the business. In case of VST an economic downturn will not hurt the businesses and hence when the economy turned, I did not expect the business to turn as much.

In case of India nippon, It can be argued that the auto industry is turning around and hence it just a matter of time that the auto component industry would benefit too. However, it was difficult to reach such a conclusion in case of India nippon as the company has performed poorly in the last 3 years when the auto industry was still doing well.

The other drawback with these companies is the lack of transparency on the part of the management. The Annual reports are very brief or cryptic and there are no management calls which an investor like me can read to get an idea of the likely direction of the business. A professional investor having access to the management would be able to avoid this problem.

The final point is how long should one hold onto a stock before the fundamental performance turns around. I typically hold a stock for 2-3 years and even longer if the fundamental performance is satisfactory. However if the fundamental performance is deteorating, I tend to exit the stock. As someone has said – Hope is not an investment strategy.

Indentifying turnaround in business performance is difficult for me and I tend to get the exact timing more wrong than right. Ofcourse this is not new for me – I have sold L&T in 2003 after holding it for 5 years, right before the company took off

It does not disturb me
The above occurrence does not disturb me. It does not mean that I am proud of missing such turnaround and will not analyze my thought process further to see how I can improve on it in the future.

I have said in the past that if I can get a 70% success rate in my picks, I will do fairly well. What is the logic of this number ..did I pull it out of my hat?. There is a logic to it. I typically invest in a stock with a 2:1 to 3:1 odds. What that means is that if the stock is priced at 100 / share, then the possible upside is between 70-80 and the possible loss is between 20-30. The expected gain (gain * probability of gain + loss* probability of loss) is around 35-40 ( .7*70+.3*30) or 30-40% which provides me a margin of safety too.

My actual success rate has been around 70-80% in the past with the gain/ loss ratio around the same level. As a result, I have been able to meet my return targets in the past. In addition, an additional lever in managing the performance is managing the allocation percentage to a specific idea. One should allocate a higher percentage to the ideas where one has higher confidence.

Follow me – in reverse
Considering my almost perfect record in selling (around 0%), I think it would make sense to hold or buy when I decide to sell :).

When I suggest, that you should do your own research and not buy based on my recommendation, I am dead serious about it. A 70% success rate has worked out well for me. The impact of the 30% failure has been further reduced as i have not allocated too much of my funds to those ideas as I did not have as much confidence in them. If you decide to have a higher allocation than me, your results could be worse.

An additional point: I tend to change my mind suddenly, if the current facts invalidate my expectations. So I may end up buying something which I recently sold or sell something which I bought and realized that my thesis is wrong.

11 comments:

arunsg said...

Rohit,
I'm glad you found VST +ve ; I had bought this stock around the time you'd posted your sell; I had the conviction that my buy decision was correct. of course, my regret was why didn't I buy this 6 months back...

Cheers,
Arun

Anonymous said...

Rohit - Thanks for sharing your thoughts.

I have small holding in VST, which I bought @210/share. I decided to keep this holding as a FD as Dividend yield at buy price is around 14%.

Regards
Prashant

rehan said...

Dear Rohit ,
I have been a PM for several years . Lately i have decided to manage my own portfolio only . For the first time , i am enjoying the independence and freedom which only managing yr own portfolio brings . I can tell u that the way most mutual funds are managed today is that the PM is not willing to take risks ...and has no clue when to sell . To be sure , selling is very damn difficult , and anyone who masters it , will be so much better than others . If one can avoid a value trap , have decent exposure levels to individual ideas, and learn to exit ..he has made it . By the way r u friendly with google documents ? rihan

Vic said...

Hi Rohit,

It was easy for me too as I didn't have VST to begin with, don't want major tobacco exposure..:-)

Also, smaller % was for India Nippon.

Does India Nippon makes sense @ this price based on your analysis (i.e. whether the future performance would be sustainable)?

Thanks,

Vikas

Rohit Chauhan said...

Hi arun
i am not still sure about the fundamentals of VST ..i just feel that there could be more sustainability in terms of fundamental performance.

one quarter of performance is difficult for me to assume that the co. has turned.

btw - i still hold a bit of VST ..but at the same time there are other more attractive opportunities

rgds
rohit

Rohit Chauhan said...

Hi prashant
thats one way to look at the co. ..a steady dividend provider

rgds
rohit

Rohit Chauhan said...

Hi rehan
I have never managed money for anyone ..so i can understand what you say, though have not experienced it.
mutual fund managers are constrained in various from acting intelligently ..a few them must be smart, just they have to chase assets and hence cant take good decision.

agree with you other comments. also i think its not necessary to achieve perfection in buying and selling ..as long as one get it more right than wrong and the rights outwiegh the losses ..it works out well

i know about google docs and have used it

rgds
rohit

Rohit Chauhan said...

Hi vikas
I am still not sure of how sustainable is india nippon's performance.

also both VST and india nippon have always been very small positions for me.

if i dont have strong conviction, i would rather move on to the next company than try to squeeze water out this stone

rgds
rohit

Vic said...

Rohit,

I look forward to your posts on "Other more attractive opportunities".

Only Balmer (ur Core Portfolio) appears to be undervalued at this point.

Is it worth looking into Hawkins again?

Thanks,

Vikas

Rohit Chauhan said...

Hi vikas
there are slim picking these days ..not too much popping up. hawkins is good fundamentally, though i have yet to make up my mind on it
rgds
rohit

KD said...

Hi Rohit and all others,
A belated Happy New Year to all of you. I came from vacation and just read all your posts for Oct'09..so this reply.
I liked your idea about CRY and would like to donate. For some time I am donating to HelpAgeIndia as they are doing some good job for poor and needy aged people.
On the particular post (selling yr holdings in VST etc), I have suffered from not investing when I was almost decided to invest in TTK Prestige and Rallis. Both of them have almost reached their true value..so there is a lesson to be learnt here. What's your take on Maruti and LIC Hsg? I had invested in them in Dec'08/Jan'09. A decent gain, so what should be done - sell / hold?
Thanks, Ketan