May 31, 2014

How to miss a 10 bagger

What is worse than losing 100% on a stock ? It’s missing a 10 bagger !

What’s worse than missing a 10 bagger ? It missing a 10 bagger which you identified and decided to take no action inspite of knowing about the company. Now you must be thinking – that’s quite dumb ! In a way it is, but as always the story is more nuanced than just being dumb.

So what’s the name of this mystery company ?
Let me give some more hints J ..I wrote about it in July 2010 when it was selling for around 80 Crs market cap. It now sells at around 1400 crores. That’s a 20 bagger excluding dividends during a period where the market has gone nowhere.

I won’t tease you any more ….the company name is Mayur uniquoters! See the post here .
Now I can assign this to bad luck and move on. However I have never operated this way – I want to dissect each failure – failure of losing money or failure missing out on a 10+ bagger.

How did I miss it?
I wrote about this company in July 2010 when it was a micro cap and started a small position in the company. I was comfortable with the financial performance of the company, but was concerned with a corporate governance issue – issue of warrants to the promoter at below market price, when the company did not really need the extra capital.

As the stock price rose, I lost interest in the company and sold my small position as I was not comfortable with the corporate governance issue. In hindsight, I do not fault myself for this decision – it was the right thing to do based on the facts known to me at that point

The downside of labeling
So where did I really go wrong? As I look back, I can attribute the failure to a label I attached to the company. I was not comfortable with the management and attached the label of ‘poor corporate governance’ to the company.

After I sold my position in 2010, I continued to track the company and could clearly see the good performance. Inspite of the facts, I refused to change the label and remain locked to an existing view although the management did not show any new governance issues.
First conclusion or confirmation bias

The other name for this locking is called the first conclusion bias (read here). Once I had reached a conclusion I refused to change it, inspite of evidence to the contrary. It is only after the evidence became too obvious to ignore that I have revisited my conclusion and realized the flaw in my thinking

The illusion of high valuation
If mayor uniquoters was an isolated example, it would have been comforting to ‘label’ it as an aberration and move on. However there are a few more examples (atleast ones which are obvious to me).

Let me give another example and the back story behind missing the multi-bagger
Hawkins cooker: This stock was pointed out to me in 2010 when the company was selling at a PE of around 15. The company was and is easy to understand, has great economics and a wonderful management. So if such a company was presented to me on a platter , why did I ignore it ? The single word for that is valuations – The Company was selling at a PE of 15+ which in my mind was expensive.

I started off my investing life with high quality companies such as asian paints and Pidilite selling at reasonable valuations (15-18 times earnings) and slowly graduated to graham style low PE stocks (the reverse of most people). Over time, I got locked into a mental model where I started equating a low PE with an attractively priced stock and a high PE with an expensive stock.
The above thought process holds true in isolation, but it is important to consider the PE ratio in context of business quality. A business with weak economics is a bad stock even if it has a low PE and an exceptional business with a moderately high PE can still be a great stock. I have been aware of this fact, but still had to relearn this important concept all over again

How to change your mind ?
It would be safe to assume that if you are presented ‘data’ which contradicts your assumptions, you will change your prior conclusions ? Atleast not in my case !

Let me point to two extreme example –
Ajanta pharma has been a multi-bagger since it was pointed out to me by a very smart investor – Hitesh. I still have the email in which he shared the idea with me in 2011. At that time, I was not comfortable with pharma companies and thought that I could not judge Ajanta’s future prospects accurately.

That’s a reasonable argument and can be a plausible reason, but for the fact that this idea was posted on the website – valuepickr by Hitesh and donald. This website is run by Donald Francis and it has a lot of good investors who write regularly on it. The good thing about this forum is that Donald, Hitesh and ayush have encouraged a long term investing mindset with a focus on the process of investing. I am not praising the website due to any vested interest (I don’t have any), but think that one should read through the analysis on some of the picks made by the team
I personally follow this site and occasionally post on it too. Ajanta pharma and Mayur uniquoters are two such ideas which were posted on this site and analyzed in a lot detail. I have been following these companies over the last few years and inspite of over whelming evidence did not take the plunge

So much for changing my mind based on evidence  !
How to change ?

The first step in fixing a blind spot is recognizing one. Now that I have recognized multiple biases in my case, I have started focusing on the following points in my investment process

-          Do not equate a high PE with expensive. Analyze the business in detail and determine if the company can still double in 3 years at current or slightly lower valuations
-          Focus on quality before valuations
-          Constantly question my own conclusions. I have started doing this after each quarterly result – does the company match the original thesis (positive or negative)? Do I have access to some new non-quantitative information which should prompt me to revise my original thesis ?

I have already made changes in my stock picks in the recent past and the initial results are good. In summary I think there is a lot of value in analyzing the success of other people  – not to be envious of them, but to reverse engineer it and improve your own process.
Ps: if you guys have some stock tips, do send it my way. I will have a more open mind on it now J
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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

31 comments:

jegan Kannan said...

Sir,

can you kindly look into these micro caps machinoplastics and patel airtemps?

shanid said...

Dear Rohit,

Appreciate your openness in admitting the misses,of course valuepickr team is doing a wonderful job.
One stock am suggesting you to look into is valuepickr favourite Shilpa medicare...I feel @1500 cr market cap,stock trading below one year forward 15 PE.

Best of luck.

Regards
Shanid vh

Rahul Aggarwal said...

Rohit, do you have any other examples where you thought you were potentially betting on a multi-bagger and they didn't turn out that way?

I have just started exploring value investing but is it that people talk only about the ones that have done well?

Anonymous said...

Rohit, I have also missed out many such opportunities and it is part of the game. To name a few invested in alembic pharma when it has price of 35 and booked out at around 70. Invested in satyam for around 15 and again on 58 and booked out at around 103. Invested in Be ml recently at around 170 and sold out at 150. I was reading a article which says during 1990s, among TVS, bajaj and hero by looking at management quality, product protofolios, return ratio is etc TVS was best followed by bajaj which is struglling due to preference for motorcycle than scooters and hero has lots of management and ethics related issues but in next 20 years hero, bajaj in that order has created most shareholders return.

Anonymous said...

Hi Rohit,

How do you rate Cera in the latter category (that have run up multi-fold but can still smartly move up over next 2 years)There is buzz on these sanitary stocks and that may continue on the back of business growth

Rohit Chauhan said...

hi jegan
I am not too excited with patels airtemp ..used to own it earlier. its a weak player in a cyclical industry. good for a one time rating

rgds
rohit

Rohit Chauhan said...

hi shanid
shilpa medicare is another stock which I bought and sold in 2011 :) could not see how it will grow. anyway let me look at it again

rgds
rohit

Rohit Chauhan said...

hi Rahul
lots of example ...too many to list :) - Asian paints, l&T, pidilite, symphony and many more

I don't have to brag about anything as I am not selling you any stock picks. I don't work in this industry and don't earn my living through it ..so I have no incentive to do so

rgds
rohit

Rohit Chauhan said...

hi anon
missing some multi-baggers is part of the game. however the reason for missing it should be that you cannot understand the business. however if you do understand the business and if the fundamentals and other factors improve, why not buy again.

for ex: although TVS was expected to do well, an investor after a few years could have seen that Bajaj and hero Honda were doing a better job. once could have exited tvs and redeployed money in these companies. it should not be a one time decision

rgds
rohit

Rohit Chauhan said...

hi anon
I have biased opinion on cera ..have held it for last 3years and continue to do so. its a major holding for me

rgds
rohit

mahavir said...

yes I am still holding it after I saw the analysis by you.thank you.I kept on checking the track record of the company.fair value to sell was recommended but I was ok with valuation.you are right with illusion of high valuation.

Venkatesh S said...

Hi.. i m first time seeing this site... can i buy mayur uniquoters at cmp 330?

Kaustav said...

Interesting to know that you still continue to hold Cera. After a very good run up in the stock, do you think it has more steam left in it or just a HOLD for existing investors?

Vikas Rana said...

Another excellent post, thank you!!

But you have improved on this bias, noticed from your recent Symphony addition.:-) Boy..am I glad that you retained some of Amara Raja..didn't sell due to MD's political ambition.

I think most of the investors have this issue. But I like the fact that you have the clarity, conviction and temperament..which is great. This is what sets one apart.

I really like Dhwanil's skills/temperament in this regard/bias..:-)

I just want to be like you and Dhwanil when I grow up.

Vikas

ravi shankar said...

Hi Rohit
Rajastan Spinning and Weaving Mills-(RSWM) This is one stock that i have seen around Rs 120 and had a mouth watering 9% dividend yield. I gave it a miss at it was in textile industry which was out of my circle of competence.

Piramal Enterprises is one more stock which I have bought and exited recently. Ajay Piramal's capital allocation skills and their foray into financial services and strong focus on formulations were the reasons for buying this stock. But i found it difficult in estimating its earnings and hence got out it.

I would like to hear your views on Heritage Foods and RSWM.

Anonymous said...

Hi Rohit,

Excellent post,you had written on similar lines but on opposite diretion on Crompton Greaves.........Black friday shopping time is going on in markets wherein everybody buys everything and anything for the very reason that others are buying and the it may not be available to them later on.............lets hope that Black Friday(shopping) does not turn into some black day for stock markets.



Regards
Anurag awasthi

Rajesh Kumar said...

Excellent piece of advice. Happens. It happened in my portfolio with many stocks- Kavery seeds, poly medicure, La Opala, PI Industy, Acrysil- small positions taken which turned out so good in very short span of time that one could not raise stakes. But there are many beneficial small stakes- which plunged- Timbore Homes, Camson Bio, Kurturi, Neha International.... Taking a small stake in the beginning does save lot of capital. Buffet advised not to worry about omissions- just waiting for the perfect pitch.
You are a delight to read. I learn a lot everytime I visit your blog. Thanks a Lot.

Pranav Pratap Singh said...

Hi Rohit,

It is very honest of you to write this post. I think that honesty is a prerequisite to learning, and you don't survive in investing if you don't keep learning :-)

Now that we are talking about stocks that look expensive, I wanted to ask you if you have looked at Canfin homes. Looks like Canara Bank, like PNB Bank, is shifting its priority sector (upto 25 lacs) home loan business to its home loan comapny. Canfin has doubled in last few months now trading at PE of 10, still I can't think of situations where it can lose money in three years. This is considering that the current CEO has got extension of 2 more years. Any thoughts?

madhu vijai said...

dear rohit
can u look at EMPIRE INDUSTRIES
LOOKS OK ON VALUATIONS
drmadhupv

shanid said...

Dear Rohit,

For education purpose can you write a blog on how to become a full time investor.I mean what should be the pre requirements one should achieve before becoming a full time investor,what should be the size of investment corpus vs annual expenses etc....

Would be very glad to hear your thoughts on the same.

Shanid VH.

Raj Panda said...

Hi Rohit,

I too have faced a similar situation. In addition to this being a stock selection topic, to me it also seems to be a allocation framework topic. Let me explain the topic from allocation framework point of view.
Suppose, my allocation framework is such that, am pre-decided about keeping only 10-20 positions. In that case, everytime, I want to add a new position on fully allocated PF, I have to axe something that i already hold (the least liked one). But this is little difficult psychologically (to put it mildly).
Am thinking of a solution to the allocation problem on these lines.
Keep a overall allocation of 10-15% of PF dedicated for names where I am interested but something is stopping me from being fully convinced and making a full allocation. This 10-15% of PF can be allocated to say 5-10-20 names (say 1/0.5 % each?)
Over a period of time, if any of those businesses performs and i like it more, i start shifting allocation from my least liked idea in core holdings to this new one.
While doing this, i observe that my reluctance goes down significantly compared to, if i had to completely axe a current holding to make way for the new one.
This is something i picked up while discussing with some valuepickr's about turning many stones and gathering experience form it.
Let me know what you think of this approach and if there are any significant negatives.

Rohit Chauhan said...

Hi mahavir
good you did not listen to me :) it turned out to be a good call

rgds
rohit

Rohit Chauhan said...

Hi mahavir
good you did not listen to me :) it turned out to be a good call

rgds
rohit

Rohit Chauhan said...

Hi venkatesh
I have not bought it yet ..so I cannot advise you it.

rgds
rohit

Rohit Chauhan said...

Hi kaustav
the question we need to ask is the business scalable and does it have the competitive advantage to maintain the returns ?
if yes, then it has good prospects.

but if you are asking about short term view on the stock - I have no idea

regards
rohit

Rohit Chauhan said...

Hi vikas
how old do you think I am that you want to be like me when u grow up :) :) ?

just joking !

rgds
rohit

Rohit Chauhan said...

hi ravi Shankar
if you trust ajay piramal as a manager and capital allocation skiils, then why is it important to estimate the earnings yourself ? is it not possible to invest without doing that ?

rgds
rohit

Rohit Chauhan said...

hi anurag
Crompton greaves was a similar bias but in a different direction. there too I did not change my mind quickly enough when the evidence was there in front of me.
ofcourse the loss was smaller than the missed gains which the multiples of the stock price

rgds
rohit

Anonymous said...

rohit, r s softwar has same story. promoter warrant i mean. but it's moved fast. please have a look. it's bit undervalued after today's drop.

Shravan p said...

Sir,
Can you give inputs on IBWSL?
Regards,
Shravan

Rahul Gupta said...

Hi,

Great article. Some stocks that have crossed my list but am hesitant to invest for various reasons but the stocks look promising.

1. Ashiana housing
2. Kitex garment
3. City union bank.

Have you studied them and what's your Take?

Thanks