Thread by @Finalysis20

Takeaways from Clubhouse session:
"Investing Insights with Samit Vartak" @SamitVartak
hosted by @ishmohit1 @soic
along with @cautkarshpandey
@dadalife369 & other members of Delhi Investors Association

Thank you @Delhi_Investors & @soicfinance for the wonderful session!

A 🧵

How to select companies that can give high returns.

~ Look for companies that will double earnings in 3-4yrs
~ Avoid extremely cheap & poor quality companies
~ Ensure they meet the business standard

Role of valuation while selecting companies for investing

Valuations are secondary!

Really cheap companies are often at risk since they are not quality business.

You lose little if valuations are costly.

But you can lose everything if the business quality is bad.

Key criteria for filtering stocks that give growth of 20-25%

~ RoE (Return of Equity) should be 20-25%

~ Internal accruals should fund capex

~ Company must have control over profitability

Why investing in cyclical stocks is difficult?

~ They are highly volatile
~ Dependent on global commodity prices
~ The growth is not stable

Should you buy & forget?

No!

~ Keep evaluating till the time you are holding.
~ Hold till the time the growth story is intact
~ Nobody has the ability to predict business performance for that much long period

Have a probablistic mindset!

~ In investing there is no certainty.

~ A fast growth rate involves uncertainty & is a risk.

~ Neither promoter can predict how the business will evolve!

~ Always select companies where the chance of success is higher.

How uncertainty reflects in position sizing?

Type of business decides position size.

Higher risk, bigger portfolio size.
Lower risk, smaller portfolio size.

Out of 20 companies only 2-3 would give huge returns.

Understand certainty of earnings growth rate of the business.

An important mental model:

"Company's ability to gain market share from competitors"

~ Lifecycle of business survival is going down

~ There are uncertainties in the macroeconomic environment.

~ If macros aren't favorable, business can grow only by gaining market share.

What are uncertainties in macro environment?

~ Will economy grow
~ Will industry grow
~ Whether political will be favorable

If a company is gaining market share, then growth multiplies when macros improve.

Market share indicates competitive advantage & positioning of company!

Sectors that may do well in the near future?

~ Real estate sector
~ Building materials
~ Export oriented theme e.g. IT, chemical, CRAMS

Key drivers for probable boom in real estate

~ Rising salaries of the discretionary spenders

~ Steady or depressed prices of real estate

~ Falling prices of raw material

~ Low interest rates

~ Wealth created in equity market

How to invest in these emerging themes?

Play indirectly!

For real estate through building materials, housing finance or builders

For building materials through metals like steel or cables etc

What has improved in economic environment post Covid?

~ Companies have become lean
~ Have shrunk working capital cycle & generated cash
~ Have become debtfree
~ Corporate & banking balance sheets are strong
~ Govt balance sheet is strong due to increased tax & GST collections

Will the Financial sector do well?

~ Corporate lending would be less

~ Companies won't raise debt since they are now generating cash

~ Micro loans are affected since unrgoansied sector is hit by Covid

~ Promoters will invest in business instead of dividends, due to taxation.

Should you invest in startups that are listing

~ Remember that you are buying from experts i.e. angel investors.

~ High valuations mean little room for investors

~ Performance after exit of venture capitalists shall ulitamtely decide valuation

Biggest mistake by an investor:

Selling too early on bad performance!

~ Don't get out when there are issues
~ If results disappoint analyse in-depth
~ Wait for 2-3 quarters.

Check if:
~ Short term issue - Wait & keep evaluating
~ Structural change - Exit immediately

How important are valuations while selling?

Valuations shouldn't be a direct metric to sell as long as the growth story is intact.

However one reason could be:
If you get a better opportunity!

Why it's better to stay invested in markets?

~ Returns are always lumpy & never linear

~ It's difficult to predict markets

~ There are investing biases that come into play to enter/exit correctly

~ Emotions govern our decisions & hence we cannot get in & out accurately

Avoid these common mistakes of investors

~ Starting investment in the bull phase of the market.

~ Staying away from market during bear markets.

~ Panic & exiting when there is 30-40% loss in portfolio value.

~ Only see the numbers and ignore the actual business performance

An important advice for investors

~ Don't just read books. Think on what you have read.

~ Books, won't teach how to analyse the business

~ Read, understand & evaluate multiple sectors, industries, business

~ Think of various business scenarios

~ Learn from your mistakes

Match investment with your psyche!

The investment methodology should match your behaviour.

You need to enjoy the process.

Practice that investment style which works for you.

Can you generate alpha in Large cap space?

Very difficult!

Focus on:
~ High RoE on capital
~ Cash flow generation
~ Revenue growth

Doesn't help much if you:

~ Talk with management
~ Visit the company locations
~ Talk with supply chain

Three reasons why business becomes multi-bagger

~ They disrupt the market

~ They gain market share

~ They leverage existing business to grow in other verticals!

How to evaluate a business before investing?

~ Check financial statements
~ Read annual reports
~ Know it's history
~ Meet management
~ Request for plant visit
~ Talk with competitors
~ Understand advantage over competitors
~ Talk with supply chain
~ Check promoter background

How to assess management or promoters?

Check these:
~ History of their executions
~ Quality of past executions
~ Execution strategy
~ Capital allocation
~ Steps to disrupt the industry
~ Work culture: Micromanager or good delegator

How to continuously evaluate business performance?

Evaluate:
~ Competitive advantage
~ Performance w.r.t peers
~ Whether Margin profile is improving
~ Incremental return of capital (your own estimate apart from management guidance)

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