The concept of Buy & Hold

Ok, we have all have heard it , buy and hold stocks for a long time. The usual logic is any of the following or a combination of :

  • Businesses cannot change overnight (weeks/months).
  • Power of compounding
  • Short term is speculation , long term is more rational
  • Average through pessimism and optimism
  • Some other stuff like save taxes, make it simpler etc etc

Lets take the first reason. Businesses cannot change overnight hence be patient or be invested for a longer term. Problem with this argument is that on certain occasions the stock price is not reflecting the business state. So there maybe a re-rating of the stock or a de-rating and the stock price movement can be spectacular. Lets say you buy a cheap stock at 100. You identify a business trend that can alter the current state of business for the company before the general market does. Market realizes a bit later and the stock can run up, even to 300 within a period 6 months. Now you ahave 200% return in 6 months and nothing has changed in the company fundamentally. Will you sell? Or will you wait for the comany’s fundamentals to change and compound the stock price from 300 till say 1000 in the next 5 years. Which is a 10x but only a 3.5x from 300, which would take 4.5 years. A 10x in 5 years is great no doubts but its actually a 3.5x in 4.5 years which is more reasonable. Where am I getting to? Stock prices move non-linearly especially mid and small caps where my interests are. It hardly moves in a systematic fashion. Plus there is another important factor. Will a 3x become a 10x in the first place. What if your initial premise is wrong about sustained fundamental change in the company. Shouldnt you be content with a 3x in 6months or 1 year. Its an interesting question for which there is no right answer.

Now lets consider the next reason ,Power of Compounding. I understand this but isnt the power of compounding is only for your own wealth and not a particular company that you are stuck to? What if in the previous example , you can jump after the initial 3x to another stock that can compound better now that your initial pick has already gone up beyond reasonable/logical explanations? Are we mistaking power of compounding to a company’s fortunes rather than our own wealth. Its another thing to ponder about.

Next is the reason, short term is speculation and long term is not. This cant be farther away from the truth. Everything in the capital markets is speculation right from value investing to trading. Yes I said it. Dont we in value investing try to assign a value to an asset as though its a science ! Far away from science. In growth investing we try and speculate future trends and in trading i dont need to say much. Atleast the traders know that they are speculating whilst the investors think its a science.

Finally the reason of averaging through market cycles is bullshit. This is the MF manager sales pitch. Does this mean that the fund manager does not to value a stock to predict whether its over valued or fairly valued. The fear of drying up of inflows invents concepts like this. The SIP is a good process for the average joe but not for a person who calls himself a professional fund manager. Reasons for being mediocre and plain greedy.

My only piece of advice is that its your money, you know what needs to be known. Dont seek invented concepts from so called experts. Happy bull market !!! ( Dont worry, everyday someone will be calling a top, and get it right one fine day. He will become popular all because of luck ).

 

Constantly Contrarian

This post is about holding. Holding stocks is a real nightmare, especially with the information glut that is thrown at you constantly. You are on twitter, whatsapp, moneycontrol etc and people write their views in 140 characters. We get perturbed, and start getting psyched out. Information is a double edged sword, you cant be without it and at the same time it can kill portfolio performance.

So one needs to be a constant contrarian, to hold stocks for a very long time. Being contrarian is not just important while buying or selling, one needs to be contrarian while holding. Typically any reasonably successful investors can boast of a 2x,3x or even a 5x. Very few can boast of 20x. The simple reason is our minds get sucked in to trending go-go stocks from our long term picks as we think the story might be over. Stock price movements are in general non-linear with the business story. Therefore sticking to a 5x stock is a contrarian approach as most of the market is out after the initial burst. So a long term stock pick feels like this:

  • You buy the stock when nobody likes it. It hovers around your buy price for a while
  • Then if the business does well as you predicted, the stock moves handsomely, maybe a 3x in 3 years
  • stock does not move after the initial 3 year move. Probably even corrects 40%
  • Now this is where most of us sell out, thinking the story is over
  • Business picks up again, stock continues to move

One needed to be contrarian after the initial upmove. The rest of the market would punish a good business because of unreasonable expectations but this is unfair. Being constantly contrarian would mean an independent assessment of the state of business without the prejudice of price movement. This is tough but logical. One could argue even for averaging up at the point when the rest of market sells out. Thats even tougher.

Moving out of a multibagger stock should be only because of the lack of confidence in the current business. Moving out because of portfolio concentration can be detrimental and often a fund managers problem. As an individual investor, you have the advantage of  having a concentrated portfolio. One of the easier things to know with a winning stock in your portfolio is how money was made in the past as you were actually part of the initial journey. So inherently you know the managements capability to deal with a blip in the growth story.

Holding creates money and not buying,selling. The art of holding means the art of staying contrarian always. Hope you liked my thoughts!

Psyching out? There maybe a way out!

I have understood one thing about myself with respect to investing. The importance of buy price and how much away your stock price is away from the purchase price. I have a stock that I have bought at 200 odd , now at 1400. I really dont care what it does every day, every week, every month. In fact I dont even mind holding it for life (in the sense till the company does reasonably well). The stock infact hit 2400 a year back and corrected upto a 1000. All this did bug me but did not force me to sell.

On the other hand, I recently purchased a stock at 290, which is now at 335. I am constantly looking at the ticker everyday as I have decent part of my portfolio on this bet. Its a great company, has delivered great growth over decades. But my investment is mine, not a thing of the past. I get panicky whenever it touches my buy price or goes below. My conviction is well tested, I become a doubting thomas. But if the same stock goes well past 700, the price movements will stop affecting me.

Though this may sound trivial to most of you, but the buy price and the short term (<1 year) price movement plays a huge rule in my happiness. Even though my heart and soul is towards growth investing, value investors and chartists can greatly help in understanding price and its discovery.

A value investor friend can guide you what he/she thinks about your proposed investment price. Is it much higher, lower and fully priced?  A good thing about value investors are that they are not bearish or bullish. They are emotionless, number crunching geeks. So they are not biased in any way or form. So its good to have friends and colleagues from this domain..

A technical analyst on the other hand can tell you the current supply demand scenario of the stock and can advice to wait or enter now. This will negate short term euphoria, buying at tops etc. Again you need to have friends who know the basics of charting. Its important to respect the power of chartists to understand price discovery.

In conclusion, what is more important is the associations and friends you make in the journey of stock picking , holding and selling. You need that set of people who you can talk about your doubts, fears and anxieties. So go ahead, network today !

What is it that we do when we buy a stock ?

Stock market is a place where experience is under rated and learning is over rated . I am not against learning, not one bit but I feel one needs to look at what the market does to you rather than what you can do with the market . 

I am sure most of you would agree that a company with a  perfect set of numbers along side a sector tailwind and with an impeccable management will quote at reasonably high valauations to an underperforming peer. But is exponential wealth made with such stocks . Can be a steady grower but won’t probably change a small investors fortune . The classical methods are good for high net folks needing to protect capital .

Guys like you and me need to get into companies before the tide is about to turn . It’s between the formation of the tide and the completion of the tide that the so callled multibagger is made . Of course with this concept you cannnot risk a large amount of capital . The tide may never turn. It’s a double edged sword. But what the hell, you are in the market to make money ! 

That doesn’t really mean we buy bad businesses with bad balance sheets . It can kill us as well. But it is worth looking at macro trends and micro trends to identify sleeping Kumbhakarna. Some of the potential themes that can play out in the future are : 

A. Agri FMCG 

B. Organised branded players in a highly unorganised sector 

C. Product and experience design 

D. Luxury brands and associated products 

E. Logistics 

F. Nutrition 

G. IOT

H. Genetics and Biology 

I. AI and robotics 

K. Material science : substitutes 

L. Renewable 

M. Wellness and fitness

N. Baby care

O. Fertility and procreation related industries

P. Dating sites and relationships 

Q. Adult entertainment 

R. Travel and tourism -highly under rated 

S. Currency – Bitcoin type

T. Education- new age ! Not sure what though

U. Sport science 

W. Autonomous vehicles 

Of course we won’t have listed companies  in India for all these themes . They may be in the US .

It’s a matter of perspective as well but I think we need to keep thinking about the future while trying to pick stocks . The balance sheets matter , the management matters but the future holds a bigger place . 

Judging management quality

I have been thinking lately about my current way of stock picking, and it is quite clear I am probably over estimating my abilities. Not only that, I have realised I over estimated the strategies accepted in the investing community. The market is a weird place, you can get easily pulled into ideas laid out by others seeing their success. It is pretty much like the spiritual guru phenomenon. A potential follower hears the gurus teachings about alleviating suffering, giving life lessons. He/she is easily drawn to the aura of the guru, before they know they are fanatic followers. Not casting aspersions, but the moment you get into the follower mode you lose the creativity of the self.

The stock market has no rules in reality. Take for instance Management quality. I was the typical budding investor looking at ROE, ROCE, Industry trends, scuttle butts etc. Value investing! I wanted to be a value investor and then turned towards growth investing…Crazy. But now I have settled to one thought. Management quality is not any metrics a set of people generate. It is not being an “Intelligent Fanatic”. In fact I am scared on fanatics in India. They seem to be intelligent enough to be fanatic about the bottom line that they end up misleading investors for short term gain. So I have decided management quality cannot be judged by you and me. Period. If we are lucky we can gauge management quality by judging them in avenues not related to their stock price movement. Most Indian managements will paint a rosy picture and no point in trying to identify a smart alec in that crowd. Part of the problem lies with us. Blind following of Mungerisms, Grahamism, Warrenism is like trying to play the straight drive like Sachin looking at his video. Its just fatal. In other we want to think like the Mungers of the world, which will never get us anywhere. We need originality. Name of the game.

Coming back to management quality. Please hear this speech by the MD of Sundram fastners. The man is all about integrity, hard work and honesty. The whole of the Sundaram group is like this. This is management quality. Not ROCE! Not a fanatic! Good old integrity, respect, patriotism and above all compassion. A fanatic might make you money in the short term but end up burning your money in the long run. Lets not confuse a spell of genius for long term wealth creating abilities. Its the organisational culture that should be the sign of management quality.

I encourage you the reader to think in a simple manner while picking stocks. Do not try to fit in models of men into your thought process. You probably will never meet the man/woman who will run your company. So accept this and use it to your advantage. Its more important to be in this game rather than run fast in the start and injure yourself while trying to be too fast.

The leadership in this company just changed..Take Notice!

Most of us, including yours truly look at a business in a very one dimensional way asking the usual questions:

  • Whats the potential market size of the company
  • Whats the valuation
  • Whats the promoter integrity etc etc

All these are well known and researched. Mostly the good companies are discovered even before your eyes see them. These are static info that does  not change anytime you see them except ofcourse valuation that change with stock price.

There is another unexplored dimension:

  • Change in executive leadership.

Unfortunately this is not well tracked but probably the strongest reason why businesses turnaround. Hind sight is the proof:

  • Varun Berry : Brittania
  • Eicher: Lal
  • Ajanta Pharma
  • Force Motors: Prasan
  • List goes on

But we dont buy the stock looking at who is changed at the top, rather the we go by the effects they have on the bottom line. By that time we are late. So can we bet purely on a change, answer is a qualified Yes. Yes if we know the past pedigree of the new executive. This leads us to the change I wish to bring to your notice. This is only an academic discussion on a blog and not a stock reco. We only try to bring to your notice a change, its up to you to decide what to do and not to.

Marksans Pharma is a company promoted by Mark Saldanha, erstwhile from Glenmark. Infact he is the brother of Glen who is the promoter of Glenmark. Lets not get into why they split into 2 businesses, as it is a personal one.The business is export of drugs into regulated markets with some niche in soft gel. I am not getting into the business as I personally have not studied in detail.

The exciting news is the appointment of Dr. Vinay Gopal Nayak as ED. This can be a huge game changer for the company as the guy is a pharma regulatory stalwart. He has lead turnarounds in alembic, emcure and others. He is an expert in getting regulatory approvals and quality checks. A small check on his linkedin profile has amazing comments on his abilities and his leadership skills. This fact is reinforced as recently Marksans reced FDA approval on Metformin.  Please do check out his LinkedIn profile here

The stock has tanked and maybe at better than before valuations. I am eager to see if my premise of management change to a stalwart works or not. But personally not invested as I dont have any cash now 😛

 

 

How to better macro economists & still make money on cyclical sector company?

Off late, I’ve been noticing some or other news about steel companies. Be it government action on Minimum Import Price (MIP) or inventory flush down across globe or uptick in demand in next cycle. And so on.

You want to hear more arcane arguments how Steel companies  turning for good in India, read this article. I felt it was mad soup of economic statements and it’s beyond me. Let me be honest on that.

And by the way, don’t take title of this post to heart. 🙂

But how can we miss if there’s money making story underneath all this mind cracking economic theories? What to do in such situation? Of course, read companies bottom up. As a retail investor, it is fairly good expectation to stick to good mid cap or small cap companies. That would give good return potential and at same time you keep your sanity of not running through very large insane numbers of Large caps. 🙂

Okay, I picked up one midcap steel stock. I read bottom up. I am still not able to make decision. Because, it’s entirely dependent on macro factors, which I am not an expert or I can get expert advise. Now what to do?

I got a simple technique. Okay immediate disclosure: this is not proven technique. Rather I use it for personal investments. I don’t have any stats to prove higher chances of successes with this technique. So please don’t try it with real money until you experiment with virtual buy & sell and get a knack of it. Okay enough of my warnings. Let’s take an example.

I ran through Kalyani Steels numbers. Here are my short notes. To start with, some analyst report intro of the company:

Kalyani Steels Limited (KSL) is a part of the Kalyani group. KSL is a leading manufacturer of forging and engineering quality carbon and alloy steels using the blast furnace route. KSL caters to engineering, automotive, seamless tube, foundry and casting industries and the primary aluminium industry. KSL is a quality supplier steel to engine components like Crankshaft, Camshaft, Connecting Rods, Axle Beams, Steering Knuckles, & Bearings. In the Energy space it caters to players which manufacture seamless Tube applications for High Pressure Boilers, Oil Lines, Casing and Tubing Pipes for Oil Exploration. KSL is also a certified supplier to the Indian Defence and supplies steel for bomb shells and barrel applications & components for heavy vehicles.

During FY 12, Supreme court banned iron ore mining in Karnataka and later allowed limited iron ore auctioning through NMDC. This has forced many good players to re-look at cost cutting strategies. Kalyani is one such player and went for ways to increase operational efficiency having learned about weak demand forecast and expensive raw materials (supply constraints).

 

  • Instead of calibrated iron ore, looked for low cost iron ores fines to be used in Mini Blast Furnaces
  • With help of Sinter plant, increased overall productivity.
  • Pulverized Coal replaced the costlier Coke.
  • Usage of Kalugin stoves to improve temperature in hot blast furnace.
  • Further saving by replacing expensive fuel oil by using blast furnace gas as fuel.
  • And so on…
This has worked awesome for the company despite poor topline growth for nearly 4 years. Look at some stats here.
First, let’s look at major product Rolled Steel volume vs per unit price realization:

 

Production vs Price Realization
Volume & Price realization marginally increased. Have a look at second chart Gross Sales vs Net Profit

 

Gross Sales vs Net Profit

 

Sales is marginally good. But net profit simply zoomed! All operational efficiency tatics worked for Kalyani Steels. This is despite gloomy steel demand outlook. This is awesome work by the management & employees.

 

At cmp 176.5, Kalyani steels is cheap. It has debt in foreign currency. So interest coverage is good there. They have good clientele. Parent Bharat Forge can keep providing some order cushion. I didn’t get much information on capcaity expansion. But hopefully, it should be comfortable.

 

What about its growth? Tied up with steel cyclicality. Which in turn depends on economy growth. And all macro economy stuff.
Well, identified bottm-up it’s good company. Relatively cheap. Now how do I make a decision?
Enter my technique. Actually, it is not a technique per se. 🙂

 

What if there is a metric that captures the essence of steel forecast observations of experts, insiders, investors & traders condensed and shown as a flow over period of time? If we track such metric and smartly bet on it’s trend, we hit home run. Right?

 

That metric is our humble price action. That is price movement. Look at Kalyani Steels weekly price chart below.

 

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It is forming crude form of Cup & Handle pattern with a dip equivalent of 74 points. If price breaks out & trade above Rs. 180 price band for a good one or two weeks on closing basis, we can see the stock price move to much higher levels.Probably, Rs. 250 levels.

 

Remember this is probability game. There’s no guarantee this would happen. And no one can accurately predict this would happen in so and so time. So have a heavy does of sanity check before taking a decision.