it will rhyme but not so soon

how recent episode make investor biased:

  • to think that lockdown has happened again so nifty will go down 40% like last yr – dumb
  • to think that small and mid-cap will crash because they crashed in 2018 after huge run up (dumb because both run up were on different base of valuation)
  • I am moving my entire portfolio to quality because I lost money in small caps. – dumb to think same companies keep making money like 20% annually and other businessmen are fools
  • Pharma and metals don’t do well, and IT is just a dividend play, i will own fmcg and financials like bajaj and hdfc for life – no performance since last 2 yrs of latter two sectors
  • to think that pharma and chemical are doing well so I will keep them for life –chemical might do badly for 2-3 yr from today
  • momentum investing always works because it is buying rising names. – reality is it falls the hardest too

when I started as investor I had a similar thought process. But reading /questioning/tracking advisors/fund manager taught me to think different than others. I am no expert but better investor than before. 

 if something that worked recently even the pedestrian knows it. because everyone has already jumped into it, it will stop it from working. there are patterns but they don’t repeat so frequently. They do repeat in distant future. Look for older patterns not recent ones.

value investors don’t buy any cheap company

what is value? value is durability, something that sustains over period of time. Value investing is just about of searching for such durability.

let me use a metaphor, why do we buy iphone, oneplus and Samsung at high price vs mi, oppo, gionee? or why do we buy branded products on amazon, it is because of durability aka value

many equate value investing with owners of cheap stocks, but that not true. value investing is defined as low price to book and low price to earning by morons. every bankrupt business will have a low price to book and price to earning just before it declares bankruptcy. does it mean value investor will be buying these stupid businesses?

On behalf of value investors let me write what value investors look for.

value investors genuinely wish to benefit from acquiring a sustainable business at cheaper price, cheap price -> often caused by shorter term asset managers.

(short term asset managers= to gather assets, most fund managers chase short term performance. if I had a limited experience, I would invest in funds showing QUICK return, so its natural why PMS , MF chase short term performance to attract amateur investors)

the amount of time spent by value investors to find strength & sustainability of a business is much more than short term speculators. Companies like glass lined reactors or graphite electrodes or dyes do not have sustainable profit stream, these are obvious avoid for a value investor. also, companies with government incentives/regulations are an avoid as they do not guarantee sustainable profit stream. Such hard filters help value investor to reduce losers if he were to buy and hold them for LONG time. value comes from sustainability of a profit stream.

Say api pharma in current environment with great pricing from shortage. All api companies are rising as if they are moated and resilient to price erosion. api might have been good buys at a price where they were expected to earn modest profit for long period of time. today api are priced for VERY high profitability, an avoid. pharma companies that spend millions in research and complex manufacturing may earn high profits for a sustained period will be sought after by a value investor, but api not so much.

Ignoring what warren buffett says for his own marketing, focus on his analysis on sustainability of profits in companies. He would never buy a tech company, unless consumer oriented ones that promise sustainability, as tech faces easy duplication or superior product offering from new companies.

its fancy to mock other process assigning it a reason when that style is out of favour, i do it too. If iphone 12 fails, we will say that loss of steve jobs cost apple dearly while ignoring that Apple is 6 times bigger today since steve jobs’ death. during 1975-1995 people in US called quality companies are an avoid as they are fully priced most of the time, peter lynch recommended selling them at every 20% profit. similarly people have been calling a bubble in FAAGs even at 20 pe since 2010 as tech companies were bubble in 2000 causing a bust.

when people call names to a particular sector due to treacherous past but ones with sustained profit, consider that sector interests a value investor. a value investor laps up such companies for sustainability. value investor doesn’t buy every falling stock nor he buys every cheap stock. he buys sustainable companies at marked down prices.

to conclude a real value investor buys a stock that a short term speculator would buy after 3 years at 100% higher price than today.

value investing is not….

“value investing means buying low ROCE stocks at low pe”, one of the biggest lies spread by people whose styles are in fancy (quality/growth at any price). especially the ones who buy at high price and come on tv/twitter.

value investing is nothing more than buying cheaper than present value of future cash flows.  (you don’t need to compute, just understand the concept).

a low roce company will have poor cash flow growth in future as it will reinvest bulk of its cash flows into the ground. There is no way this stock would be cheap even at 10 pe. Perhaps pe of 5x is fine for such companies. From 5 pe if it goes to 6-7 it can give decent returns + dividend. But since growth of stock price is ALWAYS linked to profit growth , one wonders why someone would just buy a stock for one time 20-30% pop over 2 y. Too less a reward for investing into equity. I aim for atleast 2x in 4-5 y in a bluechip stock and 3x in 4-5y in a decent co.

where will you find value stocks? if its track record is great but no one is looking at the company today. Its future is going to be bright but current performance is down due to temporary recoverable problem. 1 y ago, lot of pharma companies started to come out of stress. Case in point ipca labs. It had gone through its pain of usfda ban, prior to that it earned health ROCE and growth (I was just kept staring at its performance then). but growth got derailed. But as the growth started coming back, roce were likely to go back to their historical levels. The business continues to have same edge (low cost mfg) and the mgmt is the same. Same happened with divis, dr reddys (not so much sun pharma lupin yet) all these stocks were available at 15 pe with expectation of 15% cagr in profit. Global and domestic pharma growing at 8 (in inr) & 12%.

same case with IT in 2017. IT companies didn’t grow in 24 m and even large cap were at 14x pe. As compared to mkt, these stocks were bargains with low downside. Mindtree could report 14-15% cagr growth as even large cap were growing at 10-12%. It was available at 12-13 pe. (after removing one-off expense)

value investing doesn’t mean low pe, asset play or buying holding cos. It means buying at price lower than discounted cash flows. High roce and high growth will have high present value. But since their stock price will also be high (in terms of pe) they don’t offer much comfort in safety.

didn’t ben graham just look at pe? value investing is wrongly inferred as low pe because it was an old definition when only companies that existed were railroads, industrials and steel. Low pe worked beautifully as all companies had similar & lower roce. Now with better business models, the value of cash flows far exceeds asset value. (read bruce greenwald value investing book).

finding a value is not so easy -one has to wait for right bargains once in a while. Value stocks were hard to come by from 2015-2018. They started emerging off-late but not so many yet. in such environment, you just need PATIENCE

now imagine if fund managers start practicing value investing. They won’t be able to buy enough stocks so can’t charge fees. so they justify buying expensive shit and defame value investing by equating it with junk stock investing. If you see ppfas and quantum mf . both have been holding cash for last 2-3 years. only now they have invested fully. Same is true for many advisors/pms who believe in value investing. Some pms returned money to investors because they didn’t find opportunities and some pms held 30% in cash

value investing is never about finding multibagger. it doesnt mean buying next hdfc bank or identifying hdfc bank in early years. value investing more like tortoise than hare race. slow and steady wins the race.

value investing doesn’t mean beating mkt every yr. buffett has underperformed many yrs in his heydays as well (post 1970). so has charlie munger. so no wonder less mortals have no chance of beating mkt every yr

value investing doesn’t mean not losing money. stocks can lose money. but over time, if stocks are bought well (quality and price) they will together make good return. if you have bought well, you don’t need next best pick, you need PATIENCE.

value investing doesn’t mean no volatility. it is not fixed deposit. it is equity afterall. it will have more or less same volatility as index mostly. but why get all the goodies without negatives? are you god?

whenever you come across anyone laughing at low pe stocks (without looking at roce/growth) or defaming value investing –he either doesn’t understand value investing or promoting his ‘fund/pms’. stay away from such a pompous salesman. he will learn his lesson soon…

p.s. and beware of those petty intraday traders who look at cup and crow and owl chart pattern to convince you value investing doesn’t work. forget value investing, index fund itself beats 99% of traders. value investing may beat even more than that.

p.s. genuine momentum investors know pros & cons of their strategy too. they would not disrespect value investing unless they have ulterior motives

media and analysts are rationalizing animals

i am often seen as critic of media and sell side analysts. they promote what’s in fancy and demote what’s falling off the cliff.

no, they don’t have any foresight, they rationalize what could have led to the outcome. if stock is doing good, they write the management is fabulous, if its doing bad the management lacks ability or even never had any ability.

their opinion on every small event rust our brains and influence our decision making. decision making should be simple. buy low and sell high. but when its low they give 50 reasons why not to buy. arre bhai already cheap hai, kya hi bura hoga? when its expensive they write 10 reasons to buy. if its expensive what’s left for me?

best time to invest is when its not in the news or its there for temporary pressure in business. (corp misgovernance should be avoided in good or bad times)

media often gets paid to promote some companies. don’t fall for that trap. check companies roce, debt and margins vs industry roce, debt and margins.

analysts work very closely with promoter, particularly small caps. brokerage head might be drinking together. i know 2 analysts who received 10L for giving buy on a small cap company. its shady world out there. be wary of what they recommend. its better to buy established cos like hdfc bank or tcs or cipla rather than spotting next hdfc or next tcs which is risky. leave that job to smart ppl like damani. you don’t need to mess around if you’re employed in some other field and have basic need of growing money at above inflation rates.

i have been also sceptical of recent advisors who started shop in last 3-4 y and recommend hidden gems. bhai, 2-3 saal mein tune kya seekh liya? so many from masterclass investors go wrong in small caps, why recommend portfolio full of small caps? just 1 bull market makes them feel “saala apun hi bhagwan hai.” hence i advise people to go to such advisors who stick to bluechips because equity investing is not just about bull markets. treacherous markets are yet to start. it’s a long journey. they are hell boring. 2-3-4 y of no returns or negative returns. in those times to chug along you need support of bluechips. (you may punt in select small caps but try to find established cos within small caps too)

i personally follow news but for fun and tweet. not to act. they need sensation, i keep sensation in twitter app, not in brokerage app.

i read brokerage report just to understand business better. i have never bought on brokerage buy or sell. rather i have sold on their buys.

Don’t exhaust yourself. dont read every news and every report. read your favorite business only. hire an advisor/mutual fund/index and manage 50% through them. rest 50% buy your favorites. loss will happen along the way but dont stop at losses like you don’t stop at winners

so to conclude “kabhi kabhi toh lagta hai apun hi retail investor ka bhagwan hai”

In equities & life: There is never a free lunch

Many people start equity investing thinking its SO easy to get rich. They consider it a free lunch.

Equity carries risk and hence you get higher return. in shorter time periods, risk looks absent completely and in some periods, risk looks more imminent.

many fools jumped into equity investing thinking following a couple of twitter handles will make them tons of money. They forgot to ask “why me” when they were making money. Advises poured in each day into junks, hope stocks and inflection points. I had even heard some idiot promising 35% CAGR. What is the cost an investor pay? They lost 30-40% of their hard earned money.

irrespective of what all these people say, buy the dip and all sham, most small caps aren’t coming back. DO NOT AVERAGE JUNK.

I repeat, most of the small caps won’t come back. you money is lost for real. More money would be lost if you don’t take action. You need to act now and act right.

Someone profit is someone’s loss. An aggregate investor can’t earn more than a market return. Given there are smart people on the street who deserve to earn disproportionately; plus brokers and advisors eat into your corpus, an aggregate investor doesn’t earn even market return. Hence an aggregate investor is a LOSER. Atleast start making average market returns first.

Everyone wants higher returns than the market. They seldom ask “WHY WOULD I GET HIGH RETURN SITTING AT HOME WITHOUT ANY EXPERTISE OR EXPERIENCE?” and why in the world will advisor make you high returns? won’t he charge you high fees for his expertise? OR why he runs an advisory when he can earn such high returns for himself?

Now that markets barely down but individual portfolios are bleeding more, people started realizing that stupid Anonymous account was doing a better job without fees to help them, warn them, caution them.

Let me highlight some key points to help you sail through equity investing

1) equity is not a free lunch. You can’t get more than what company’s earnings growth over long term. So given earnings are likely to growth 12-13% on aggregate in long term, chasing returns more than 14-15% is a FOOLISH thing. Some years will have single digits returns but some years will have returns in twenties. So longer you hold, better it is.

2) use mutual funds wisely. They are just simple products to ride equity investing along with fellow investor. it’s not a secret sauce to richness. So Never fall for the best fund. EVEN A FUND MANAGER DOESN’T KNOW HE WILL BE THE BEST PERFORMER SOME DAY. Fund manager’s aim is to avoid risk and/or generate better returns with same level of risk.

3) Don’t fall for “since inception” returns. If starting point is a market crash, CAGR looks quite high. if inception is in 2003/2013, returns are misleading as Nifty PE was less than 15-16x i.e. very low valuation. luckily even I started investing in 2003. Even my CAGR looks very HIGH since the start. Always trust people who highlight rolling returns. Offlate, DSP black rock and Motilal Oswal have started showing rolling returns.

4) Advisory is a service NOT A FRIENDSHIP. Use it wisely. Profits are shown in public domain. Losses happen in private.  if someone promises high returns, ask him his strategy. Is he also venturing into private equity or distress debt. If he is investing in equity market only, given there are so many smart people competing, it impossible to earn a lot more than average market returns over 3-5years. Warren Buffett used to earn very HIGH ALPHA in initial years due to very few people practicing fundamental investing. Later his alpha fell and he admitted that its tougher for current generation to beat market by such huge margins.

5) advisor’s job is not to scare you out of investing. VERY VERY FEW humans can manage to see large fall from peak. only experts and experienced can survive that.

6) for most advisors value investing or Multibagger investing is a marketing campaign and not an investment strategy. Very very few stocks become multibagger. Since probability is low, you have to buy and hold 40-50 stocks. Since small amount is spread across many stocks, a few multibagger wouldn’t have large impact to overall portfolio. Besides there will be some which would lose 70-80%. It is better to hold 10-12 stocks in good quality companies. Outcome will be similar vs multibagger. Even if 5 turn out to be profitable, remaining 5 wouldn’t lose lot of money.

7) past returns could be an outcome of high skill or one off if he doesn’t have a style. many advisors & mf don’t have a style. They buy what is looking good today. How can you be sure that his judgement of “what’s looking good today” will turn out right everytime? Hence better to trust index funds or atleast someone who has a style. i am sure some fund/advisor from “what’s looking good today” school might showcase a stellar show and he will make headlines, but WHY should I risk my money on his intuitions? Always ask what is your style & under what condition it doesn’t work. Some styles are value, momentum. Value mostly underperforms in prolonged bull market. Momentum performs very well in prolonged bull market.

8) always invest for 5-10 y even if its ELSS. equity is not a 3 y product even if occasional 3 y returns would look very good. If you are not willing to invest for 5-10 y, prefer govt bonds or fixed deposits. Mutual funds are there to make money. They will sell crap too. So keep choices simple. Mutual funds have lobbied to make ELSS a 3 yr product when they know equity investment should be done for longer term than that.

9) mutual funds are friends with distributors, not you. So distributors will sell anything not right for you but mutual funds won’t stop that. Distributors shamelessly sold equity oriented balanced funds with dividend promise to retired people. Mutual funds didn’t stop them from doing that. Distributors sold small cap funds to you when fund managers knew they were risky & overvalued but Mutual Funds didn’t stop them (except 2-3 fund houses like black rock, Motilal & mirae that stopped accepting money). You are responsible for your money, they are “for profit” enterprise.

Equities are fun and a very good way to compound wealth. But Financial industry may have intentions not aligned to yours. You are responsible for your money. since there might be some hidden agendas/advertising I am here to caution and warn people.

Don’t follow my views, atleast start doubting others


retail investors’ job is not to win but not lose

I often see people obsessed with research reports, next turnaround, next amazon and forecasting growth when they know they can’t be right. what should one do?

According to me, retail investors’ job is to find companies which *regularly* earn return on capital employed more than 20% and stick to good promoters. Another point is one should avoid firms going into obsolescence (Coal, newspapers) or highly cyclical. (steel, iron & their products). If you just follow these two things, you will ultimately build a good watchlist.

Coming to buying decision. Be honest to yourself that you ain’t Buffett and you need diversification because you will never know more everything about a business and volatility. So keep 20-30 stocks to start with. Go on reducing as you start understanding business very well (After 4-5 years)

What is a good price? It is subjective but anyone would know that if a business has high ROCE it may enjoy more than 15X PE. but after growth period is over, it tends to fall back to 15X PE. so it is not wise to buy any stock above 25X however bright the prospects. remember as a retail investor our job is not to win but not lose. These two mean very different things in stock market.

In past nifty 50, next 50 PE ratio has been 17-20X. Now these indices have one of the finest businesses on an aggregate. If these have enjoyed just 17-20X I wonder why you would pay stupid businesses like venkys, godrej agrovet and Avanti a very high PE.

Often in bull market, parasites brokers convince fund managers to pick stocks even at higher PEs. They together take the PE up. But reality is, every one knows if government bond earns 7%, an average business which earns just cost of capital will enjoy not more than 14X PE. But since fund managers are competing with other fund managers and not bothered about their investors, they keeping playing the game. Few shameless fund managers even pick stocks like reliance which has history of fooling investors. It is other people’s money, so who cares.

Following this strategy, you may underperform over short term when markets go into euphoria. But over 3-5 years, you will be leading everyone by huge margins.

We must time the market, because we can be emotional fools

equity tends to surprise us on upside and downside. But it never surprises on valuations. It doesn’t remain at high valuation or low valuations forever. so valuations can be used as a thumb rule. experts do have an opinion on valuations. But don’t listen to experts who are there to sell you ‘their services’ like SIP sellers and fund houses. They will always say ‘BUY’. I have not seen many investment advisors recommending SELL ever. For them I have a question, If BUY is what I have to do, why do I need an investment advisor? Very few advisors are honest. Just handful of them were recommending to hold some cash for last 6-8 months.

It is a myth that noone can’t time the market. Buffett wouldn’t have got rich without timing it. Not that we seek to perfectly time it and get as rich as Buffett. But protecting some gains, when we know markets are expensive, works.

But how much to time, I don’t believe moving out of equity beyond 20-25% makes sense. If you have bought right, you don’t have to sell entirely. Also, if markets are expensive, it better not to push fresh money in hurry. its not a perfect tool but using nifty 50/100 PE ratio of less than 22 and p/b ratio of less than 3-3.5x can be used for reference. Use this for fresh money. Don’t move out a hell lot of money just because it has exceeded, just remember you have bought it right, so doesn’t matter as much.

the fear of missing out is real but seeing correction on fully invested portfolio is atleast double the pain as per Daniel kahneman’s research. Psychological comfort you could have with that small portion in cash is underestimated. you may lose 1-2% upside in cagr, but lets not neglect the probability of selling the portfolio post correction in fear of market goes down further. i have seen very smart people doing it, in 2008, 2011 and 2013. Looking at profits of Motilal Oswal and other brokers/fund houses, you can be sure average investor returns are much lower than the market returns!

I have written this article in context of an average investor. If you are a james bond investor who sells his groceries and invests, feel free to re-finance your house and car also to remain fully invested. Not many prefer to become warren buffett. They just wish to retire rich. That’s it!

this article is for people with more than 5 year investment horizon

Moat is tough to build, tougher to identify

In recent past, many people were searching for Moats and calling every other company with high ROE as a Moat. Currently, forget moat, people are not even asking ROE or PE ratio.

what is a Moat? Buffett popularized moat. Pat dorsey made more money writing book on Moat and building website on Moat than investing in them (

jokes apart

moat means companies that can survive competition, business cycle and inflation. buffett was paranoid of competition as everything reverses to the mean in capitalism. also he was paranoid of inflation hence he liked companies with pricing power. since his capital base was rising his investment pool was reducing. hence he wanted a solution to park these long term assets (insurance float) permanently. he learnt from a small company “see’s candies” that companies can have pricing power and sticky customers due to brand and r&d. thats it!

advantage of a moat ? since business cycles, competition do not affect margins a lot, its ok to pay a high looking valuation for the same. you can be reasonably sure of compounding over long years.

assurance of a moat? very tough. very difficult to build a moat, it requires several yrs of investment in brands and r&d. forget indian trading mentality lala companies doing it.

does indian companies have a moat? 90% of indian companies have low cost as moat. having a low cost also gives you similar characteristics of a moat. stable margins over competition and business downcycle. eg. hdfc ltd., mahindra (tractor biz only), maruti, etc. TCS has a moat but longevity is an issue due to tech obs.

even if you see most of the companies owned by mr sanjay bakshi, a popular moat investor in India, most of them have low cost characteristics like ambika cotton, tvs srichakra, ccl products, symphony, accelya kale, relaxo, kitex, etc. most of them are low cost.

why people assume high ROE as moat? any business is supposed to earn ROE > cost of capital otherwise why start a business. don’t mistake it for moat.

pay sensible price of not more than 20x earnings (unless its very high growth).

take away: fuck brands, find low cost operators if searching for moat in India


Illusion of becoming a billionaire

Most often i see the financial/twitter advisors selling dreams of becoming a billionaire or crorepati.

what is equities? equity is an asset which compounds your wealth higher than FDs and inflation. this saved and invested sum takes care of your lifestyle after your income stops or you need money for your goals like travelling in my case.

now when you aim for becoming a billionaire you are constantly stressing yourself to find the next multibagger or trading strategy. this leads to taking bets very unusual in terms of quality standard or size of the company or illiquid positions. you have opened yourself for potential blow up. yes reward could be v. high and you may become a billionaire in 10 yrs but probability is quite low. since most won’t achieve success with this, they even lost an opportunity to compound money at simple 15-20% CAGR. for 90% of the people achieving market returns is also very fruitful.

Did you know there are very few people who have compounded their money even at 18-20% CAGR in INDIA in the past, future looks even dim as growth rates have been slowing. index returns have been 15%+

i am financially independent due to equities. this is not a show off but sharing even bigger fact. “i have taken least amount of risk obtaining it. almost 60-70% portfolio was in large to mid cap stocks at all times. i have not invested in single unproven story. (all had ROEs, existing successful model).”

hence i try to give head up on which business models are sold like diamonds and may fail. like Kenneth Andrade says “in investing don’t have blow ups“. i never had a blow up due to risk management. hence i always want to give you info on how to avoid blow ups. missing opportunity is better than holding a potential blow up.

so if you are new and want to learn fundamental investing, start with magic formula of Joel Greenblatt on some portion of your portfolio; put rest of it in index funds/good mutual fund.

with experience, atleast 10 yrs or one business cycle, graduate to identifying multibaggers like Jhunjhunwala, kedia and Damani because this requires different skills.

Don’t fall for becoming a billionaire from day one.

all the above assumes you have a behavioral edge. no one can earn even 10% CAGR over 10 yrs from equities without behavioral edge.