Finding Multi-Bagger Stocks: What, How and When | The Wealth Formula

PRS they have to understand the power is not in in writing vouchers every day the power is in shareholding shareholding then you will run the company in a very different mod and what if the stock uh as it always happens you buy the stock and it goes down I love it what do you do I love it because I believe it's it's ath Market doesn't understand that you have bought it or meeting me I think there were 20 25 investors and I asked some very uncomfortable questions on balance sheet cash flows to the promoter and I was kicked out of the meeting and that became the talking point for some time that page was kicked out of that [Music] meeting hello and welcome to money control I'm mahalakshmi and I'm going to take you through the wealth formula with my guest who has earned his reputation in the mutual fund industry as an astute midcap fund manager he started out in the world of stock markets at a rather turbulent time right after the 911 attack and that too as a credit analyst and then gradually moved on to manage Equity Funds he just quit kotak mutual fund after a 14e stinct to start his own investment fund during his tenure his funds assets under management Grew From a small amount 113 crores to about 36,000 crores and his midcap fund KK emerging equities fund has delivered an annualized return of 23.35% over the last 10 years so please welcome pankaj Thal pankaj thank you thank you so much for taking out time for the wealth formula uh it's my pleasure mahaki so bankage you started out at a at a very turbulent time you started out as a credit analyst how was that time like describe that to us and what made you move from credit to equities uh so the journey started in 20023 um um so while I was doing my ma uh Masters in UK London and Manchester um I was selected by some of the well-known investment firms in the world uh but to my luck 91 happened and everything was frozen um I looked back to India in terms of job opportunities and then came a call from one person called B chanoa he was heading the fixed income at principal mutual fund right uh he said that why don't you come there's a credit position open I said I don't know anything about it he said don't worry come and and I'll make you uh learn all about it so started my journey from the credit anist out there uh that was the time when equities weren't doing well and I used to see my colleagues the portfolio managers out there on equities they used to just pass time till 3:34 that as soon as the market closes uh they have to just rush by and uh uh 2005 uh was the turning point where uh the only only gap between credit and equities is you look on valuation side on equities for the upside or the downside on credit you come to a conclusion it's a zero sum game whether you will get your money back right but apart from that all the analysis of business management uh you know all the uh risk in the business is Remains the Same and I was very excited about the analysis of companies and sectors and stuff like that um in 2005 one of our funds uh uh was not doing well which was a small 20 CR fund uh which was the MIP so I just requested my boss uh that uh this fund is not doing well it's bottom of the charts uh why don't you just give me a chance to you know kind of start off with and he was kind enough uh to give me that opportunity and within next 12 to 18 months um we as a team did extremely well and the fund actually uh did quite well and we started getting inflows so MIP means the fund with 20 25% Equity equity and the rest is the fixed income component uh so that was a turning point the confidence started building it there were couple of other funds which were also not doing well took the charge of that as well and that started my journey but my boss was very clear you manage the fund but you have to also take the responsibility of the sectors you are already doing so I was doing a lot of work and uh very little time for me personally but I think that was the real time when it shaped me as a as a investment analyst out there and then I took another couple of funds um and they also started to perform uh and 2008 was the global financial crisis right um and that time uh in 20089 uh index come down to 8,000 sensex I'm talking about which is 70,000 today um and we I went to the Senior Management and said that every time the industry launches the fund at the peak right now if you see the entire anxiety in the street is very high people don't want to meet fund managers this is the time we should launch a fund uh maybe markets may go down by 10% who knows but over the next 3 five years this time will never come back uh we collected only 10 crores in the new fund and that was called principal emerging Blue Chip fund the next year it went on to become one of the um best performing funds I think for a long period of time with 180 or 190% return in one year okay so this was was it 2010 20089 we launched launched and 201 uh9 was the year when the market started coming up again and uh the fund did extremely well and I think when I moved on to kotak uh which was 2010 uh the 10 or 12 crores which we collected actually became 25300 crores when I exited so I think that momentum was extremely strong and in kotak then in 2010 I took charge of two funds one was the kotak small cap as it is known and the other one is kotak emerging Equity right both were about 110 120 uh or growths uh very small in size uh we worked our way along as a team and I think um as Helen says um all if you try to do alone is very little if you try to do as a team it's quite big and I think that proved along and till last month when I uh moved out of kotak to start on my ental dream um the kotak emerging fund from 113 crores yeah became 36,000 CRS and 127 CRS became 13,000 OD CRS so the journey has been excellent I think uh it was never a linear line it had its ups and downs but on the hindsight when I reflect back um quite satisfied right so let's go back again in time um you know what are some of the early learnings from credit analysis that you that you could apply to equities what was that learning curve really like the rigorous in the anal analysis I mean uh because in credit it's a 01 game um if the company defaults you never get the money back right um I think the early part of my career got shaped with the entire thought process that Top Line is Vanity bottom line is sanity but cash in bank is reality uh a lot of time in equity people run after pnl profit and loss account but what early days in credit taught me that it's not pnl which is extremely important it's the balance sheet and cash flows which are most important right and I think that's something which still is one of the most important learnings at a very early point in career and I I I could reconcile to that fact because I come from a business family right and uh when I saw my grandfather uh during my upbringing and my dad in maradi they have something called PARTA system you know daily cash bu still follow it right the PARTA system is so powerful concept we Indians developed which means that at the end of the day you could from your cash flows work it reverse and do your pnl right it's not the other way around which we all and this do today so I think that PARTA system in the early 90s and mid90s when I used to see my dad uh my brother uh and from my grandfather days I think which was a very powerful concept and I think it just got formalized when I took a role on the credit side and I think that's still the most important learning which still goes with me today right so panage um zoom in on the period from let's say 2004 to 2007 2008 uh usually when markets go up that was the big you know India growth narrative and those are the times that we saw that you know companies were really leveraging they were going out and building their businesses and there was great confidence in growth and balance sheets obviously you know took a beating and that we got to know only in hindsight so when you have these you know pitch between um there is a conflict between growth narrative versus cash flows how do you navigate what are some of your you know uh thoughts and lessons uh from that I think uh now this is the third time I'm seeing a conundrum uh and and obviously in Bull markets people forget the basics of investing no uh we first saw in 20078 U in the form of infra power real estate people were valuing land Banks and I still remember one of the most talked about IP was there uh or meeting me I think there were 20 25 investors and I asked some very uncomfortable questions on balance sheet cash flows to the promoter and I was kicked out of the meeting and that became the talking point for some time that Fage was kicked out of that meeting but finally on the hindsight valuation didn't matter because cash flows and balance sheet was important so I think U there are three Cycles which have been proved uh one was the 20078 it came in the form of infra power and other things in 2017 onwards uh especially 17 when you saw a big search in mid and small cap people again forgot that was pass uh alal stocks I wangi manpasand and so and so forth um and other uh narratives which were uh you know thing upon then came the uh startup era and now you are seeing the struggle with the startup era because people forgot the main essence of investing people were just flown away with narratives and I think in in today's environment there are risk started to Growing again on the same concept I am seeing companies in many sectors uh when you look at the Last 5 Years cash flows they are zero um to fund that growth growth fund what do you do how do you fund that growth yeah Equity could dilute yeah and that always from a medium to long term is not the best for an investor apart from financials financials has to do it because it's a leverage business from a business perspective but non-financial yeah this is a decip a recipe of disaster and today when I look at some of the EMS companies some of the uh you know uh other stories which are Brewing uh and low free float companies uh you know many companies have not generated cash flows right for Fairly long period of time right people are getting flown on narrative and the growth story but growth without cash flows is not sustainable in my view and I think if your Basics are okay I think you can you can navigate that cycle well right fair enough that point on cash flows is absolutely uh bang on let's um again another question I wanted to ask you was about you know stock picking style let's start from there because in your farewell note you said that you have picked up about 400 stocks in the last you know 14 years and that's a fairly big number because today I think the universe of boock in which mutual funds invest itself is not more than you know 320 3 330 so obviously you have pretty much scanned every stock that was investable uh for a mutual fund so tell us about your process to zero in on you know the right stock so I think uh 400 is the overall number across both the funds there will be duplication on number of stocks also but that's fine but uh we had a while I was in kotak uh we had a universe of 430 stocks which we actively tracked uh and actively means every quarter meeting the managements at least have everything models running and and and and process oriented when I look at unique names will be how many about 240 230 240 250 okay um and uh over the cycle over the cycle um and few of the learnings has been that if you look at the table which I provided in my fairwell letter uh that about 16% of one of the fund holding became 10x plus u and some of the learnings were I think there are six points to picking up stocks which has worked well for us as a team at K the first one was uh the selection of entrepreneurs and promoters I think that's the Crux and especially in the mid-market space we have seen that right promoters create value over a period of time with the right intention right honesty and we had tried to bring Art and Science to it wow employ employ supp customer deer distributor and eem you get a sense culture of the organization and the culture and the intent of the promoter is right or wrong and the first Port of Call used to be to that CA itself okay they know the lifestyle of the promoter in and out and we believe that the promoter's balance sheet in India and the company's balance sheet are not separated promoter leverage capacity so I think that analysis gave us the confidence on whether he's the right person and leopards don't change their stripe so we used to go back into the history and do a lot of analysis so I think promoter and their skin in the game and are average holding sense has been that 55% plus promoter in the game uh that's a reasonable number to work out with promoter SK in the game Financial talking about right because there's limited scope of that and and our analysis suggest that they don't create value in the longer term very few of them okay right still in India us it's a different ball game Al together everything is professionalized no there's no concept of promoters I think that's very important and I think promoters in a mediocre business can create value bad promoters in a great business can destroy value and I think if you look at India is going through a massive or go will go through a massive transition in the next 5 10 years where the old God is giving way to the new God and our sense is my sense is that he generation born with silver spoon they don't have the passion yeah but there are a lot of entrepreneurs and I think next 30 40 50 of those entrepreneurs will create the India's next decade or two decades can we find 10 15 20 of them I think that's the selection on promoters the second one is on the business itself that the opportunity size is large enough or not and I think opportunity you won't be able to grow I think that's very important the third point is that uh return on capital is extremely important and companies which became multi baggers for us one common thread was that they generated return on Capital in excess of 16 177% wow uh so that when they grew by more than 15% or 15% plus they didn't need to dilute Equity or raise debt correct the internal approvals used to fund the to fund the growth and I think that's very important because lower return on Equity Capital grow Market tank they have a tough time because they can't grow and they should work on return on Capital so that's the third point the fourth point we have seen that if these three things are good growth is very important growth on the top line as well as bottom line and some of our multi Baggers we have seen had grown gagger for the 78 year period consistently by 18 to 20% or 22% so I think that's broadly uh the fourth point and fifth is that most of the companies which are bigger in size today they were smaller in size so small is beautiful they started small and over a period once they executed they kind of did well so I think this 56 point formula butl check difficulty and if you can follow the process consistently over a longer period of time and not compromise on promoter because 0% trust me 10% the promoters will execute over a period of time and you need to find promoters which are cre option value option value create next it'll take it will take them forward and they are they are progressive in nature they are open-minded in nature and most of the other guys are very open to feedbacks the guys who are not open to feedback they're living in a Coco sure so let's dive deeper into each one of the points that you've talked about you know uh entrepreneurs of course you use terms like um honesty which you know is is very generic can you zoom in on what does it mean what are the parameters you look for in an entrepreneur um of course leverage you said I think an important takeaway is the leverage of the mar of of the company and the promoter uh you need to you know they are they are connected and you have to avoid both are there any parameters that you uh look at I mean what exactly do you mean because uh what we know is capital allocation policy of a promoter is the Paramount determining the return uh that they create but apart from that is there anything else what exactly do you uh see so uh clearly I think U honesty is a relative term right how do we kind of look at into a lens which is more scientific in nature right so I think past always gives us a lot of indication hisory people Equity guys are more obsessed about future but so we see that had we be unfair to shareholders in the past and what were the things which he kind of not did in the right in the right previous Cycles so that's very important assessment second I'll give you a small examples uh so I think that the one 2hour meeting which we do with the management is the most crucial meeting wow well uh you could see a lot of things during the response during the that two hour period uh I'll give you a small example so in one of the chemical companies which we were invested in midlevel we had a call with the management the motor himself and they said and obviously we didn't have the data W which was more of a heay w so we said let's deep deep dig deeper into it we went to LinkedIn and just the ex and that company name we searched upon and we saw about 15 of them who have left in last 12 months and ledin update and that's a great source and that use of technology to we touched Bas with five six of them who agreed to speak to us and uhr start we all have left and then the next meeting we gave the 15 names there could be more also yeah but he was shocked but the point was that he was not being honest to us right and that made our image of that promoter very low and every next meeting we used to have a pinch of doubt and slowly we exited the position so I'm just trying to say that these are the instances where you gge the Integrity honesty of a person whether he is true to the shareholders or not the bad news should take elevator wow and the good news should take stairs wow we really appreciate company the bad news is first communicated to the stakeholders right and good news automatically people will come to know over a period of time and we are trying to bring Art and Science to it through a framework period of time another question on management because um you know Buffett for example says that when you weigh the you know reputation of the business versus the reputation of the management always go with the reputation of the business and you offer find situations where you don't get both right and that to at the right price so uh do you ignore opportunities where the business or the economics let's say a commodity cycle so you know that the business can have a fantastic you know return profile over the next two three years but you don't really trust the management how do you navigate those things see it's a tough call uh but I think uh at least in my two decades I have not gone with a cook promoter even the cycle is looking great no because cyle music stop you never know when the Music Stops but you will be then left with that promoter and you will hit yourself that why did I did that mistake in identifying the right set of management and promoters but we were early on to at least realize so I think uh uh I think uh I will I will probably miss that opportunity but not dilute the process which which has paid handsome dividends over a period of time right so what are some of the mistakes by entrepreneurs that you are willing to ignore you know because you don't get 100% so some concessions you will make based on something Capital allocation promotors make mistake u a g acquisition uh maybe uh some dividend payout policies uh for a couple of years is not right so I think those are few things where you have to give that benefit of doubt that probably it's once and we we we like guys who are honest about it to accept their mistakes in but right so we have to avoid and I think if you can do that over a period of time that's that's something which is okay and then there are smaller smaller things which probably is okay because everybody is a human finally at the end of the day so we try to weigh that what's the intensity of that mistake from a medium to long-term perspective but fing of accounts red flag cash flowet those are non-c compromisable things uh you want market cap at any expense who this is not something which is which is to be forgiven uh but right right okay and uh give us some examples of you know entrepreneurs uh uh you know your favorite entrepreneurs and what is it that really worked in their F in your investing in them so uh there are many right uh so couple of them a uh there's one company called uh Supreme Industries PVC pipe guy um the promoter Mr taparia is 87 years old wow but before that let me give you a disclaimer that all these names which I'm discussing is just for illustrative purposes there's no recommendation to buy and sell uh if you look at guy that person he's 86 years old still very active in the business uh and always thinking about longetivity of the business how to grow the business s on the top of the things so when you meet such persons you understand that they have survived for 40 50 years W it's not by FL longetivity in India is underrated or in a corporate world is underrated and they have a value system where the first value system is integrity uh non-c compromisable then when you align with such companies as shareholder stakeholder you know that they are not making things just out of blue they are thinking it over doing it and that's what is giving them longetivity and you are aligning with the right Partners at the end of the day great person right and we have seen the kind of Val creation the company has done and the leader in the sector and Distributors not everybody can say that so you get a lot of comfort that business but promoter you know I'm just trying to give you a thought process that that uh why is it important to choose the right person uh as as when you look at a company uh and there are many others for example uh there's a company which again was very strong in my portfolio was a company called persistent system uh and uh Mr Anand Deshpande great person uh the way he ran the company as a first generation entrepreneur technocrat uh build it over but you know one thing which I loved about him if you go into the history of the company last 3 four years the company has done well wow because growth because he was a technocrat he was not a business person right he needed a management team who could run the show and he could just Mentor them over a period of time once he got sandep kalra into the company the entire texture of the company changed they pressed on the lever of growth all basic hygiene was in place balance sheet cash flow return ratios and once growth started coming in Market gave a crazy multiple so the Magic in in in stock picking as I have seen if you can get the right uh company at a decent valuation uh and growth starts coming in at that top of that market goes bizerk and rates the multiple so you get upside on earnings growth and you get the upside on multiple reating It's a combination which creates magic sure so another great company great promoters uh and still I am telling you being a largest shareholder of the company he's not interfering uh we keep checking on from time to time with different people but he's hands off he's just at the board level mentoring people making sure things are okay and if management team needs to come back they will come back so this is what classical thing is that just up delate and the owner operator model if you can em it well right I think that's creates the Magic in the in the company right indan promoters delation or power they have to understand the power is not in in writing vouchers every day the power is in shareholding shareholding then you will run the company in a very different model and I am a great fan of owner operator div model look at Bajaj sanjie what he's a owner but he got Rajiv Jan as the classic operator right and that combination has worked wonders for what Bajaj has created at value for everybody so I think there are many examples and I think I follow one other example that CH toal 40 to 55 years to 60 years is the right spot to identify a great promoter um and early on in my career Manish shukh wrote a great piece on this and this has gone very deep inside into me and it has worked wonders for me in stock picking by 40 you have seen Cycles right you have fire in the belly to prove something by that 40 to 55 60 is the fantastic itic age where you create value and there are you know number of examples to prove that look at Naran morti nand nen in the entire infosis batch they created the maximum value at this that age wow look at Mr UD kotak maximum value got created look at Chandra now when he was in part of TCS maximum value get created Rajiv baj Sanji Bajaj maximum value get created I'm not saying that uh there are no outliers both sides lower and upper as well but I'm just just trying to give you a thought that why finding this age bracket is so important because you have seen Cycles you have the experience you have the fire in the belly to do a lot of things and if you can get this com combination right you create Magic when you talk about management you know uh um businesses can go up like for example you were saying that in persistent growth did not come but you knew that the ingredients of what can create growth would come in so for you do you first filter saying that yes this is a business that that I really love and then go and say should I invest in this management or not or is the starting point that first let me be assured that the management is great then I will look at the merits or economics of the business go hand in hand uh so first when we are screening the companies obviously the reputation of the management is not known in financials that's what uh is very clear to us right financials will tell you only the numbers right you have to dig deeper to find the reputation of the management so once the screener throws you a list of companies then we start deep diving into it uh speaking to the network of CA the local people the suppliers and other things and most of the time what happens is that when you have invested in a company uh sometimes during conversations they talk about their supplier base they talk about their customers who are good and in that you can see respect of one promoter towards another and that makes you think also at times those are where some of my ideas have also come that uh we have gone deeper into it but generally uh it's not that we start with first management because we don't know there are hundreds of companies hundreds of management who we how do we know but we know that these are the companies which have run with 15% 18% return on capital for donkey numbers of years there's something which is a m in them uh either it could be distribution product whatever baby thing then we Deep dive that what is the gross margin of this business right if they are at 45 50% above gross margin there's some more sitting inside the business then you look at the cash flow conversion then you look at other hygiene factors and then you think that this business is to businessman let's Deep dive into promoters now and then you start seeing and asking ke these are the right guys or not to partner with so I think that's the process we should follow but initially financials and then you move ahead on that right and what is your checklist with respect to valuations so valuations uh are important I think very very important a great company may not be a great investment um but I have learned the hard way out error of omission error of commission error of commiss Val Visual and eventually I realized that growth is the horse valuation is the cut not the other way around so if growth continues in a great company valuation will sustain over a period of time but if growth falters valuation falters but uh in many companies like for example baj uh at least my fund which I was managing earlier we exited very early because valuation time book time book right but growth kept on surprising us and and I think uh valuation then uh kind of sustained um so I think uh uh many stops I have learned that error of commission is costly error of omission is costlier because error of omission W error of commission zero that's also a costly error and capital protection is my style of management of portfolios but 100 so that I have learned what most value investors see but I'm saying that valuation is important uh you should keep an eye on valuation but also keep an eye on growth if the company keeps on going and keeps on developing new optional you should not ignore that oh okay and uh uh tell me some examp examples of things that you got wrong you know for example entrepreneurs that you uh you know where you misjudged or you know were proven wrong and what was that on on account of so couple of my mistakes have happened in financial sector and I think choosing the wrong entrepreneurs or business model and not knowing what's inside that book which they lending uh I had uh cost mistakes and couple of stocks actually went down by 40 50% uh but thankfully there were smaller weights in my portfolio but weight down is a well loss is a loss so the learning was that in financials uh the the choosing of the right person is very important uh there I made a mistake in choosing the right person uh the person got carried away by growth wow and then made mistakes so I think financials then INF early on in my career I still remember a company Road sector uh and uh we invested uh and quarter quarter cash flow was negative operating cash or we were surprised negative wow then I sent one of my analyst to the site w and the GU said we have not been paid salaries for one month they showed us the alarm wow and God was kind to us there was a blessing purchase price and there were buyers who were Scouting For It Lock Stock Barrel today it's a penny stock so but that was a mistake cash flow uh on the hindsight we exited not at loss is a different ball game but analysis mistakes and I think uh on the hindsight when you reflect back yeah uh every mistake is a learning and learning till you don't repeat it again correct so important ands uh for example one promoter where he is fantastic understanding is Shri cement Mr bangard wow the way he taught the entire cement industry grinding unit cement and with the same internal ACS he kept on expanding from 2 million T now to 50 million tons so those shows that power of compounding with the same internal approvals and how you can create value is fantastic the other company which became a very big multibagger for my portfolio was solar Industries uh the company That's a classic example of how you create opties over a period of time when they create came for ipu in 20056 uh we saw them as a small company supplying explosive to mining sector but over a period of time they went from coal India to private mines to uh Global entire mining housing infa everybody and they became the leader in India and second largest player in the world now well you know so the opportunity is there but how do you tap it was and all through internal acrs you know and through internal cash flows uh and I think uh at that time in 20112 if I still remember annual profit quarterly profit wow mistakes mistakes May in assessing managements meth so a company I I still remember sepco uh that was one of my mistakes I can cannot forget uh this was in 20134 somewhere like that uh promised a lot of things uh uh during the IPO they used to be in bodybuilding stuff and all that and Railways and all that and IP they started kitchen shanking wow all the things which were hidden in the skele all the skelet which were there started coming out one quarter after another we tried to reach the management they kept on giving wrong assurances quarter after quarter uh and it used to be a surprise to all of us so I think that was a very wrong selection wow uh in judging the wrong promoter wow eventually the company got sold off I think to somebody else but I'm just saying that on my part it was a wrong judgment on selecting the wrong promoter so so it was the promoter or was it not visible in the financials or what fin visible but uh promoter key Integrity I mean my sense was it was not right uh over a period of time but who am I to judge anybody but I'm just saying that uh you have made mistakes in identifying also no and uh mistakes are always there you cannot have a bullseye in investing right there are mistakes which have been made right okay uh in your Fable note again you said that you know about 16% of your you know stocks that you picked uh were 10 Baggers right uh 10 Baggers plus so what are those ingredients I mean uh you know you obviously are not estimating that it'll be a 10 bagger you can correctly otherwise I mean if you pick stocks then thinking that it is a 10 bagger but um what are those ingredients that you think have really worked um in your case I mean when you look at your list of multi bers was there a certain kind of uh theme that emerged for you I think clearly clearly cash flow balance sheet compromise that was the first thing second is return ratios compromise don't buy inferior business which generates return on Capital below the cost of equity and companies which can generate cash flows and reinvest back that cash flows into the business at higher returns creates huge value for the sh stakeholders so that was another point which was clearly visible across the pic which did well cash flow generate cash flow buloy higher rates of return and they created a compounding machine over a period of time that was third so uh when you look at the average holding period for I'm just looking at your multi Baggers right now if you look at the average holding period for them what would what do you think would be the average Sal and that's why I say hindsight but there are periods of time when the many of these talks so I was just coming to that so how do you navigate construction which the another point I mentioned in my fairwell letter that one of the biggest learning is thatly Champion you don't want to be a yearly Champion winning top of the charts trust me you will destroy value for the unit holders because you will take excessive risk no so your portfolio should be having 50 6as Kong because execution will finally decide on the hindsight smart think we identifi that right as they execute as Market starts giving them value you come to know they are multi bagers so I think portfolio construction is extremely important portfolio construction don't take extreme calls uh sizing is very important portfolio construction across the portfolio is very and it may differ from person to person temperament is there but and when you're in fish responsibility trust me the biggest fear I have I should not lose capital for the client and I think with that thought process you create a portfolio which is quite Diversified well Diversified and making sure that during draw Downs you protect the capital and your portfolio gets balanced out and you're not under pressure random it happens right right you will have some stocks doing well not doing well butur patient and that's why remember the portfolio turnover used to be in single digits managing a daily nav fund uh daily Redemption and subscription fund having a single digigit uh you know turnover ratio means that you're patient with your investing companies for a longer period of time no during down cycle because of headwinds in the industry are they doing things which will make them stronger once the headwind turns into a Tailwind they strengthen the process in they just kill it and and that's how you get uh multiplier returns so patience perseverance is very important in fund management so while you hold these stocks for you know 8 10 years do you trade in them yes uh your Market is Market goes euphoric also yeah and try to extrapolate near term into the future and you don't agree with that right to excess holding similarly in a down cycle people want to throw the towel out or company you get at very cheap valuations despite of knowing the company NeXT quarter s day maybe nothing will happen you live with it because you know that basic hygiene is not diluted right now cash flows balance sheet down they will kill it when they write on the upside so you buy it right uh and then take your holding slightly up and average it out so those are things we have to do it slightly smartly also and what if the stock uh as it always happens you buy the stock and it goes down I love it what do you do I love it because I believe it's it's a myth Market doesn't understand that you have bought it right so I think it's a myth so I think it gives me an opportunity to buy at lower pricing provided my research is right uh and I have to keep an eye open I call the sell guy stock per sell why you sell on this stock am I missing something and there are many times where we kind of ignored or missed out few facts and that analyst because we called the sell analyst we could know a lot of more things before we acting on that uh uh you know script so I think it helps as a process it helps that don't call the guy who's already a Buy on the stock or call the sell guy you know he will come to know yeah so you buy on the way down also and you we buy on the way up also and uh is there uh when do you cut your position I mean if it goes down uh at what point do you lose Fai see see art of selling is a very important art and we all have till now also spoken about art of buying but art of selling to be honest with you I'm not 100 out of 100 I maybe 60 or 65 only and that's my one weakness which I have to overcome over a period of time I'll be honest and and candid in accepting that um normally there are three four non-c compromisable things one as I mentioned about that infra company clearly balance sheet cash flow problem noed we didn't blink our eyes we stole Lock Stock Barrel non- compromise then we don't go and ask why you're not giving this there's some problem right uh any red flags corporate governance issues uh you know we we don't even blink our ey just out of it third as I said my error of uh Omission on valuation uh whenever we think that market is extrapolating too much and we do something called reverse DCF right reverse Market imped implied growth is too high what Market is pricing the company won't be able to deliver more than this there will be a mismatch of expectation please uh trim your positions if not exit the position so which you closely watch out to make sure that up selling be but I think I still learning yeah because you know uh while buying uh you can easily say that you know this is my fair price and I want so much safety you know 20% 30% whatever also depends on the market what it offers you but uh on the on the higher side you never know when the top is going to happen not that you know the bottom but top is a lot uh more GE trick right so uh so do you still go with some Fair uh fair price of the stock yes we go with the fair price of we go with the fair price of the stock but you know that you know when the when the wind is markets may be mispricing the stocks both on the downside and on the upside there's never a fair value where the market is always right uh for example today Market is I think in my view in all humbleness is extrapolating things which may not happen or discount I think one needs to be careful there uh and uh finally temperament gets tested out uh and over the cycle what I have learned is that as investor you are the biggest enemy of yourself uh up stop picking you will we will have tough time and I I this got tested in four Cycles now 20078 2013 2017 2020 and it was also now and different reasons uh 2020 Co in March we went all in and for the first time I had almost one one and a half% cash only right people were not right but because I did my analysis and said that even if they don't deliver one year any company the impact is just 78% on the fair value but stocks are down 40 50% opportunity hindsight but when you're going through that movement it's not easy and similarly in 20 17 I underperformed for 78 months continuously but I couldn't buy all those names and 2018 when the Crackdown started Alpha automatically so I think temperament is underrated in live view and uh I have seen good uh managers over period of time locally globally they have a fantastic temperament uh and I think that's the biggest asset a portfolio manager can possess well uh would you highlight uh two or three things um to develop a temperament like that so I think uh the first one is knowing yourself uh I think KY s is more important than kyc right knowing yourself is extremely important what are the situations which makes you anxious uh how do you respond to situations can you see draw Downs in your port portfolios your companies how well researched you are so I think there are two three things you can do one I think meditation is something which clears the noise around and I've been practicing it for almost 17 18 years now every morning starts with that so it gives you a composure a temperament and you don't react to things W see in life uh it's very important to understand that whatever good is happening is not because of you wow whatever bad is happening is not because of you wow if you can have that understanding you will not fly when things are going right and you will not go drain down when things are not going your way you will maintain a composure and a balance I think it's it comes with practice it comes with knowing yourself more and I think meditation helps a lot and anybody who's listening this I would strongly urge that that da it will work wonders for you the second one I think is research how deep you go inside a company because no company goes this way linear companies will have its ups and downs and during those down phases it's your own research and conviction which will come handy bed conviction will never pay off intern research or conviction and that will decide your temperament again so I think research your Deep dive your conviction is very important in choosing the right company so over a period of time and portfolio construction to you will never get swayed up by ups and downs in the market too much sure um one last question which is you know you have always managed small cap and midcap funds now there is a lot of uh like you also said exuberance in that uh category there is a lot of retail app appetite for those kind of stocks now if you were not a fund manager and you didn't have access to management and I what I take away from what you said is that management is a very is very Central to the way you pick up stocks if you didn't have any access to management uh and put yourself in the shoes of a retail investor uh how easy or difficult ult is it to uh make excess returns in mid gaps management is important but that's not the only criteria I'm saying a great management turns a mediocre business into gold fair enough but we should accept the fact though this category is looking like a nirwana category Financial nirwana because last three year 5 year 10 year all returns look extremely good but don't forget thisy this category comes with its own volatility own risk and I don't know how many of people are aware in the last 22 years if you go back into time history uh only 12% of midcap stocks have become L small cap stocks have become mid Gap or large gap so the mortality rate is is very very high so you need to have a process in mind when you deep dive into this category no uh I have seen in 2020 when 3E sip return was negative 5 year was in single digit 10 year was in single digit 3 years changed the texture across the boat but resarch I think it's very important that you follow a process in this category because they are still companies which are evolving in size uh the mortality R is very high in this category in this category I would suggest go with good managers who have seen Cycles over a period of s the management because I'm assuming that you don't have access to S the management but other so some quick um uh questions which you can answer in a word or two or just one or two sentences sure are you a morning person or a night out uh depends on which day you are talking about okay which days are you on the week days on the week days I'm early morning person okay if you were to tell me a ratio of yes and no to all these stocks or deals that came to your table over the last three years what would that be how many STS yeah how many stocks did you say yes to and how many did you say no to 40% of the stocks I would have said yes 60 % no okay rejection list was very high okay okay okay um do you believe in luck absolutely 110% how much of your success do you attribute to luck maybe 100% you never know oh come on see I I see you need luck luck is is a vague term uh I think the blessing wishes and making sure you are on the right path uh is very important and I think there's something which I didn't discuss about visualization I think that's very important uh each individual has so much of brain power that if you visualize what you want trust me the universe combines it together to get it here and I have witnessed that uh for last many many years I've visualized few things and it has automatically happened so I would say it's nothing but luck keep doing your hard work keep your integrity question contributed to your own vision visualization the fact that you visualiz visualized and making sure that you don't compromise and dilute Integrity I think it's very very important which I have not touched upon it but I'm again saying for any portfolio manager or aspiring portfolio manager there'll be ample number of opportunities where you will be tested on your reputation on your integrity please don't dilute that that's the most or the biggest asset you can possess in your career in this industry over longer periods of time fair enough uh any error or mistake that you have been prone to valuation errors uh selling very early thinking evaluations have full and missing the bigger picture at times missing the growth which the company can surprise us more and often so I think that's something um I'm I'm consciously trying to see how I can Rectify that the stock that made you most money uh in the previous portfolios yeah um I think uh the biggest one was that Exclusive Company solar Industries I think then Supreme I talked about persistant I talked about Atul I talked about uh many of those names srf I talked about okay any investors who moves whose moves you watch uh not watch but uh certain people whom I respect um and uh you know who at least I believe that uh my money is safe and I watch them very closely uh obviously uh nimes B doesn't accept public money but keep him in a very high respect uh in public markets I think uh Von is one of SBI whom I who is who style I really admire stock picking I really admire uh then the third person whom I learned a lot on portfolio Construction how to balance things is a person called n surana of meay right uh great person again and what he has built over a period of time uh amazing um and uh there are many others um so whom would you trust your money with if you were not managing your own money two people I think um NES surana from meray and uh Von from SBI these two are good guys uh if I was not doing anything uh which will be rare in my view but but these are the two guys and uh I really uh you know admire their style their trust and the way they look at companies and pickup stocks I think uh quite quite happy with their approach sure on that note thank you so much P it was such a pleasure talking thank you thank you mahaki for having me here it's a pleasure [Music]

Channel: moneycontrol

Views: 136,206

Keywords: moneycontrol, moneycontrol news, business news, money control, stock market news, market podcast, moneycontrol podcast, n mahalakshmi, multi bagger mid caps, mid cap stocks, mutual fund investment, investment podcast, ikigai investment, pankaj tibrewal, pankaj tibrewal kotak, pankaj tibrewal ikigai, investment advice, the wealth formula, the wealth formula with mahalakshmi, ikigai investment manager, small cap, stock market, market ki baat, stock market podcast

Id: X-f-4Lp56Qw

Length: 64min 38sec (3878 seconds)

Published: Fri Feb 09 2024