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Day 2 IAS Summit @ias_summit
Session 8 - Puneet Khurana, Stoic Investing - Insights, Evidences & Multibaggers
1. Number of companies that did 25% CAGR in a 5 year period in their trading history?
Most of us would guess it would be a single digit or single number percentage, but!
Correct answer is 3077 (47%)
622 companies gives such 25% cagr every year for the previous 5 year period!
Message: opportunities are in front of us, we are just not looking
2. How to improve? Reduce mistakes, errors, and uncertainty PLUS increase insights
3. How to generate insights?
Knowledge funnel - market wisdom, strategy of allocation, personal epiphanies, folklore etc. (all noise around you, books, WB’s letters etc.)
a) Take all the noise, then look at source (should be authoritative) and proof behind that narrative and/or stories and then differentiate the story whether it’s global or domestic.
b) Then test the thesis, formulation of hypothesis. For ex, quality stocks makes money, then do back testing, or cyclicalities gives great returns etc, makes sure there data backed hypothesis and then it becomes part of your belief system
c) now, translate these hypothesis into ideas thru screeners or filters start defining if and what if scenarios
d) Pillars (quality, financials, valuations, turnarounds, market caps, industry/sector) that help in identification process
2003 alone had given 1500 multibagger and even 2008 had given 150 such opportunities!!
About 50% of multibaggers come from 0-50 cr market cap
But then we need to remove the junk because there will be lot of volatility
What is junk!?
Companies that have not traded consistently and those that are extremely volatile
70% of multibaggers come from 0 to 250 crores. 11% from 250-1000 crores bracket.
Very rarely you will find a multibagger after it crosses 10 market cap, mind you definition is 25% cagr for a 5 year window.
Good zone to find multibagger is 100 to 10,000 crore.
Why!? Because, post 10K, hardly any and less than 100, too many failures plus volatility.
Once you apply quality checks, 50% of the multibaggers can be found from 100 to 1000 cr market cap.
Quality checks (profitability, cash flows, cash conversion, capital structure, incremental ROICs, valuations)
75% multibaggers weren’t actually fundamentally strong!! That’s why perhaps Vijay Kedia once said don’t look at ROE and ROCE!!
At lower level market cap, historical fundamentals had no role in they becoming multibaggers!
At higher market cap, Fundamentals have a role to play in identifying multibaggers.
So, based on which market cap you are playing, you need discount the fundamentals. But then, lack of fundamentals might also hurt you bad!
Welcome to catch 22!
Out of 37 sectors, only 7 contributed to 60% of the multibaggers (Chemicals, Financials, Auto ancillaries, Healthcare, Textiles, FMCG, Construction)
Bigger driver that ends multibagger journey is valuations.
So, identify the “genuine” stories before they become fundamentally good and exit when valuations become expensive
Ignore too small and too large - sweet spot
Be in profitable industries where profit pool is high
Starting valuation and growth are paramount
1/n
Session 8 - Puneet Khurana, Stoic Investing - Insights, Evidences & Multibaggers
1. Number of companies that did 25% CAGR in a 5 year period in their trading history?
Most of us would guess it would be a single digit or single number percentage, but!
Correct answer is 3077 (47%)
622 companies gives such 25% cagr every year for the previous 5 year period!
Message: opportunities are in front of us, we are just not looking
2. How to improve? Reduce mistakes, errors, and uncertainty PLUS increase insights
3. How to generate insights?
Knowledge funnel - market wisdom, strategy of allocation, personal epiphanies, folklore etc. (all noise around you, books, WB’s letters etc.)
a) Take all the noise, then look at source (should be authoritative) and proof behind that narrative and/or stories and then differentiate the story whether it’s global or domestic.
b) Then test the thesis, formulation of hypothesis. For ex, quality stocks makes money, then do back testing, or cyclicalities gives great returns etc, makes sure there data backed hypothesis and then it becomes part of your belief system
c) now, translate these hypothesis into ideas thru screeners or filters start defining if and what if scenarios
d) Pillars (quality, financials, valuations, turnarounds, market caps, industry/sector) that help in identification process
2003 alone had given 1500 multibagger and even 2008 had given 150 such opportunities!!
About 50% of multibaggers come from 0-50 cr market cap
But then we need to remove the junk because there will be lot of volatility
What is junk!?
Companies that have not traded consistently and those that are extremely volatile
70% of multibaggers come from 0 to 250 crores. 11% from 250-1000 crores bracket.
Very rarely you will find a multibagger after it crosses 10 market cap, mind you definition is 25% cagr for a 5 year window.
Good zone to find multibagger is 100 to 10,000 crore.
Why!? Because, post 10K, hardly any and less than 100, too many failures plus volatility.
Once you apply quality checks, 50% of the multibaggers can be found from 100 to 1000 cr market cap.
Quality checks (profitability, cash flows, cash conversion, capital structure, incremental ROICs, valuations)
75% multibaggers weren’t actually fundamentally strong!! That’s why perhaps Vijay Kedia once said don’t look at ROE and ROCE!!
At lower level market cap, historical fundamentals had no role in they becoming multibaggers!
At higher market cap, Fundamentals have a role to play in identifying multibaggers.
So, based on which market cap you are playing, you need discount the fundamentals. But then, lack of fundamentals might also hurt you bad!
Welcome to catch 22!
Out of 37 sectors, only 7 contributed to 60% of the multibaggers (Chemicals, Financials, Auto ancillaries, Healthcare, Textiles, FMCG, Construction)
Bigger driver that ends multibagger journey is valuations.
So, identify the “genuine” stories before they become fundamentally good and exit when valuations become expensive
Ignore too small and too large - sweet spot
Be in profitable industries where profit pool is high
Starting valuation and growth are paramount
1/n
Session 9 - Aashish Somaiyaa , WhiteOak Capital - Why Do Winners Rotate
1. Generally, retail money flows into the sector/theme that was popular an year ago. But chasing recent performance leads to accidents!
2. The best performing fund from 2009-2011 was ranked at 162 between 2012-14. Likewise, number 1 fund from 2012-14 ended up at 20 between 2015-17.
Past performance is not an indication of future performance fund. It’s a fact!
Remember, the title - Winners rotate!
3. It’s not possible to forecast macros and even if we did, we can’t forecast how markets will perform. Look at last 4-5 years, anything that had to go wrong, had gone wrong. Yet, most made decent returns!
4. Best way to filter is a) superior ROIC, b) scalable opportunities and c) strong execution and governance
5. Number of unique stocks in mutual funds now is at all time high!
6. If we look at past 20 years, Best performing sectors and best performing market caps, domestic vs exports, defensive vs growth, no matter which characteristic you look, they rotate.
7. Play rotation, that’s emphatically true!
@ias_summit
9/n
1. Generally, retail money flows into the sector/theme that was popular an year ago. But chasing recent performance leads to accidents!
2. The best performing fund from 2009-2011 was ranked at 162 between 2012-14. Likewise, number 1 fund from 2012-14 ended up at 20 between 2015-17.
Past performance is not an indication of future performance fund. It’s a fact!
Remember, the title - Winners rotate!
3. It’s not possible to forecast macros and even if we did, we can’t forecast how markets will perform. Look at last 4-5 years, anything that had to go wrong, had gone wrong. Yet, most made decent returns!
4. Best way to filter is a) superior ROIC, b) scalable opportunities and c) strong execution and governance
5. Number of unique stocks in mutual funds now is at all time high!
6. If we look at past 20 years, Best performing sectors and best performing market caps, domestic vs exports, defensive vs growth, no matter which characteristic you look, they rotate.
7. Play rotation, that’s emphatically true!
@ias_summit
9/n
Session 10 - Ishmohit, SOIC - Learning P2P Analysis
1. Fundamental framework - Capital cycle. Capital will always chase higher returns. Now, so many micro finance IPOs coming in coz it’s the current cycle. Two years ago, it was Chemicals.
2. Technical framework - Stage analysis. Playing capital cycles with stage analysis gives you the best outcome
3. If you look at gear companies, RACL Geartech, Bharat Gears and HITECH Gears, the margin profile is totally different. That’s how you do P2P analysis and differentiate the superior players. Then, you start reading concalls and identify how the superior player is able to do that and see if it’s sustainable
4. Look at Pellets - it’s commodity, but has few players are selling at premium. Again you can differentiate by realisation or margins
5. 90% small caps have volatile margins. Identify opportunities in small cap where margins are stable. Ex: printing company. Another one is a casting company that has incremental margins.
6. If a company posts good improvement in ROE, you should look at seriously and check if it’s business improvement or one off.
7. Aarti Drugs vs Aarti Pharma - you just do P2P analysis, you can see the difference in gross margins. Look at what markets they are operating in
8. GAEL versus its peers (Anil, Riddhi Siddhi, Cargil, Sukhjit, Gulshan etc..) and when you compare these, you know what stands out. It’s of course cyclical but you know which company to look at when cycle is turning on if you have done the P2P analysis
9. VIP vs Safari - look at which business grew faster in last 5-6 years. Simple P2P analysis would have told us 5 years ago that there is something that’s happening good in Safari.
10. Message is whenever you are studying any company, do P2P analysis, it will help you understand the opportunity size, allocation target, growth triggers etc.
11. Volume growth is holy grail in consumption sector. Just look which companies doing double digit volume growth. Look at Mrs. Bectors or ADF Foods and how they have differentiated themselves.
12. Forging companies - you can differentiate the growth
13. Navin vs SRF - simple P2P comparison and check cash flows. There is a clear leader.
14. Wires and cables - look how KEI and polycab are way ahead in their EBIT compared to rest
15. Identify the parameters that you should use to do P2P analysis. For ex: excess provisioning/AUM makes sense in financial whereas earnings per bed in hospitals. Similarly Greenfield vs brownfield expansion. Or compare ROE between HCG and Rainbow, both super specialty hospitals
16. EPC Companies - it’s capital intensive, so check debt/equity and compare between Ahluwalia and Dilip Buildcon.
17. Message is pick a strong horse to ride the sector. To know which is the stronger one, you should do P2P
18. Reverse is also true. Best players also will fall apart when sector is doing bad. Packaging films or MDF etc.
19. Key learnings - For P2P, compare sales growth, product segments, margins, cash flows, relative valuations, value added vs commodity, etc plus some unique metrics in respective sectors. Ride with better player in a sector that’s in stage 2.
@ias_summit
3/n
1. Fundamental framework - Capital cycle. Capital will always chase higher returns. Now, so many micro finance IPOs coming in coz it’s the current cycle. Two years ago, it was Chemicals.
2. Technical framework - Stage analysis. Playing capital cycles with stage analysis gives you the best outcome
3. If you look at gear companies, RACL Geartech, Bharat Gears and HITECH Gears, the margin profile is totally different. That’s how you do P2P analysis and differentiate the superior players. Then, you start reading concalls and identify how the superior player is able to do that and see if it’s sustainable
4. Look at Pellets - it’s commodity, but has few players are selling at premium. Again you can differentiate by realisation or margins
5. 90% small caps have volatile margins. Identify opportunities in small cap where margins are stable. Ex: printing company. Another one is a casting company that has incremental margins.
6. If a company posts good improvement in ROE, you should look at seriously and check if it’s business improvement or one off.
7. Aarti Drugs vs Aarti Pharma - you just do P2P analysis, you can see the difference in gross margins. Look at what markets they are operating in
8. GAEL versus its peers (Anil, Riddhi Siddhi, Cargil, Sukhjit, Gulshan etc..) and when you compare these, you know what stands out. It’s of course cyclical but you know which company to look at when cycle is turning on if you have done the P2P analysis
9. VIP vs Safari - look at which business grew faster in last 5-6 years. Simple P2P analysis would have told us 5 years ago that there is something that’s happening good in Safari.
10. Message is whenever you are studying any company, do P2P analysis, it will help you understand the opportunity size, allocation target, growth triggers etc.
11. Volume growth is holy grail in consumption sector. Just look which companies doing double digit volume growth. Look at Mrs. Bectors or ADF Foods and how they have differentiated themselves.
12. Forging companies - you can differentiate the growth
13. Navin vs SRF - simple P2P comparison and check cash flows. There is a clear leader.
14. Wires and cables - look how KEI and polycab are way ahead in their EBIT compared to rest
15. Identify the parameters that you should use to do P2P analysis. For ex: excess provisioning/AUM makes sense in financial whereas earnings per bed in hospitals. Similarly Greenfield vs brownfield expansion. Or compare ROE between HCG and Rainbow, both super specialty hospitals
16. EPC Companies - it’s capital intensive, so check debt/equity and compare between Ahluwalia and Dilip Buildcon.
17. Message is pick a strong horse to ride the sector. To know which is the stronger one, you should do P2P
18. Reverse is also true. Best players also will fall apart when sector is doing bad. Packaging films or MDF etc.
19. Key learnings - For P2P, compare sales growth, product segments, margins, cash flows, relative valuations, value added vs commodity, etc plus some unique metrics in respective sectors. Ride with better player in a sector that’s in stage 2.
@ias_summit
3/n
Session 11 - Nitin Mangal, Games promoters play
While all the previous sessions were about identifying opportunities, this is about identifying frauds!!
1. Pre 2008, narrative was look at P&L, nothing else matters
2. Post 2008 with all the damage done back then, narrative included that B/S is also important, Cash Flows are also important
3. Games promoters play. - 1) India Vs global, 2) promoter vs analyst, 3) key ingredients to most critical ratios
4. Expensing key assets at an early stage instead of capitalising
5. Beauty of deferred tax assets
6. Managing Assets/Liabilities and make ROCE look better. A footwear company did it. A chemical company did it in the past.
7. Change in depreciation policy - one company randomly changed the life of assets to 8 years from 4 years. That naturally saved the depreciation expenses and made EBIT make look good.
8. Deviation between RoU assets and Lease Liabilities - if gap is wider then, things are wrong.
9. Borrowings being under-reported
10. Cheques in hand of 179 days - common frauds are high cash in current account and high number of checks in hand
11. Including acceptances in operating cash flows and make OCF look good
12. Including short term borrowings in operating cash flows
13. Including non-current investments in OCF
14. Including payables on behalf of third parties (receivables factoring) in OCF
15. High inventory in transit to show high gross margin
16. Inventory movements affecting EBITDA
As many say, if you can filter out bad apples, then that automatically reduces potential major drawdowns of your demat account.
Message is when things look good, we usually get carried away with stories instead of validating the underlying reason.
So, next time cash flows or margin improvements are seen in your businesses, validate the underlying and see if it’s meaningful and sustainable.
@ias_summit
11/n
While all the previous sessions were about identifying opportunities, this is about identifying frauds!!
1. Pre 2008, narrative was look at P&L, nothing else matters
2. Post 2008 with all the damage done back then, narrative included that B/S is also important, Cash Flows are also important
3. Games promoters play. - 1) India Vs global, 2) promoter vs analyst, 3) key ingredients to most critical ratios
4. Expensing key assets at an early stage instead of capitalising
5. Beauty of deferred tax assets
6. Managing Assets/Liabilities and make ROCE look better. A footwear company did it. A chemical company did it in the past.
7. Change in depreciation policy - one company randomly changed the life of assets to 8 years from 4 years. That naturally saved the depreciation expenses and made EBIT make look good.
8. Deviation between RoU assets and Lease Liabilities - if gap is wider then, things are wrong.
9. Borrowings being under-reported
10. Cheques in hand of 179 days - common frauds are high cash in current account and high number of checks in hand
11. Including acceptances in operating cash flows and make OCF look good
12. Including short term borrowings in operating cash flows
13. Including non-current investments in OCF
14. Including payables on behalf of third parties (receivables factoring) in OCF
15. High inventory in transit to show high gross margin
16. Inventory movements affecting EBITDA
As many say, if you can filter out bad apples, then that automatically reduces potential major drawdowns of your demat account.
Message is when things look good, we usually get carried away with stories instead of validating the underlying reason.
So, next time cash flows or margin improvements are seen in your businesses, validate the underlying and see if it’s meaningful and sustainable.
@ias_summit
11/n
Session 12 - Vivek Mashrani, TenchnoFunda, 12 point framework combined into 6 Thinking Hats
Best case scenario: excellent earnings growth + longevity + PE-reratibg
Avg case: earnings growth + longevity or short term tailwinds + no rerating
Worst case: combination of degrowth of earnings or very short term or PE de-rating
12 Rules
1. Never blindly focus on earnings or margins growth in isolation.
2. Searching for perfect valuation is illusion. Companies never stay at fair valuations. They keep oscillating between extremes. Fair value at pessimism will result in bad outcome. Expensive valuations in a optimistic or sectoral tailwinds will make money
3. Participant in bull market and minimise in bear market. Don’t try to estimate the market swings, rather go along and participate. There is no perfect top or perfect bottom.
4. Align yourself with powerful forces. Don’t fight with headwinds, switch to the sector that has tailwinds. Right now, Chemicals are facing headwinds and Pharma and IT is entering moving from pessimism to optimism.
Framework for selecting companies - If you want a company that would grow at 20-25%, then look for
1. Sector growth at 10-12%
PLUS
2. Strong companies with big and weak unorganised sector
PLUS
3. Able to gain market share consistently
Ex: Safari or wires & cables players
Once you find 15-20 names, then allocate highest to top 3-4 names based on fundamentals and technicals
5. Don’t ignore the base rates
Core portfolio (70%) - Satellites (30%). Satellite for cyclicals
6. Cyclicals can be extremely rewarding if we play it right
What turns cycle!?
Sales growth, operating leverage, margins expansion, Debt reduction
Zone of high risk - combination of peak earnings, peak valuations, and peak margins
Earnings growth plus PE rerating = secret for multibaggers. Pick stage 2
7. Winners needs to provide more capital but we will know only in hindsight. More than stock selection, riding winners with increased capitals makes the difference.
Three words - Never average down. This will save 90% losses.
8. Don’t take the risk of ruin, no matter how exiting the opportunity is. Don’t play bad companies
9. Don’t try to track all the companies, don’t disturb your winners/compounding
Two things that matter - Earnings and Price. All research and analysis should be towards that!
Instead of scanning thru 100s of companies trying to find winners, why don’t we take signals of price and look at the company fundamentally. That minimises the noise
10. Learn to sell based on alert mechanisms
End of the day, it’s all probability game, so, focus on minimising the factors to measure the probability. Define the process to catch the signals for entry as well as exits.
Do value investing or technofunda investing but don’t do hope investing.
Remember, Price is the leading indicator most of the times!
Longevity is RARE and cyclicality is PREVALENT. Asian Paints or Pidilite or Titan types are only few!
11. Never ignore opportunity cost
Blend technicals and fundamentals and time the entries and exits.
12. Always be humble and keep learning!
@ias_summit
12/n
Best case scenario: excellent earnings growth + longevity + PE-reratibg
Avg case: earnings growth + longevity or short term tailwinds + no rerating
Worst case: combination of degrowth of earnings or very short term or PE de-rating
12 Rules
1. Never blindly focus on earnings or margins growth in isolation.
2. Searching for perfect valuation is illusion. Companies never stay at fair valuations. They keep oscillating between extremes. Fair value at pessimism will result in bad outcome. Expensive valuations in a optimistic or sectoral tailwinds will make money
3. Participant in bull market and minimise in bear market. Don’t try to estimate the market swings, rather go along and participate. There is no perfect top or perfect bottom.
4. Align yourself with powerful forces. Don’t fight with headwinds, switch to the sector that has tailwinds. Right now, Chemicals are facing headwinds and Pharma and IT is entering moving from pessimism to optimism.
Framework for selecting companies - If you want a company that would grow at 20-25%, then look for
1. Sector growth at 10-12%
PLUS
2. Strong companies with big and weak unorganised sector
PLUS
3. Able to gain market share consistently
Ex: Safari or wires & cables players
Once you find 15-20 names, then allocate highest to top 3-4 names based on fundamentals and technicals
5. Don’t ignore the base rates
Core portfolio (70%) - Satellites (30%). Satellite for cyclicals
6. Cyclicals can be extremely rewarding if we play it right
What turns cycle!?
Sales growth, operating leverage, margins expansion, Debt reduction
Zone of high risk - combination of peak earnings, peak valuations, and peak margins
Earnings growth plus PE rerating = secret for multibaggers. Pick stage 2
7. Winners needs to provide more capital but we will know only in hindsight. More than stock selection, riding winners with increased capitals makes the difference.
Three words - Never average down. This will save 90% losses.
8. Don’t take the risk of ruin, no matter how exiting the opportunity is. Don’t play bad companies
9. Don’t try to track all the companies, don’t disturb your winners/compounding
Two things that matter - Earnings and Price. All research and analysis should be towards that!
Instead of scanning thru 100s of companies trying to find winners, why don’t we take signals of price and look at the company fundamentally. That minimises the noise
10. Learn to sell based on alert mechanisms
End of the day, it’s all probability game, so, focus on minimising the factors to measure the probability. Define the process to catch the signals for entry as well as exits.
Do value investing or technofunda investing but don’t do hope investing.
Remember, Price is the leading indicator most of the times!
Longevity is RARE and cyclicality is PREVALENT. Asian Paints or Pidilite or Titan types are only few!
11. Never ignore opportunity cost
Blend technicals and fundamentals and time the entries and exits.
12. Always be humble and keep learning!
@ias_summit
12/n
Session 13 - Ashish Kila, Perfect Research - Position Sizing
1. Right stock at right sizing - home run and same time wrong stock at wrong sizing is a disaster!
2. How to think of position sizing!?
An opening position in a stock should be”not insignificant” and should be increased up on a continuous process. Buying decision shouldn’t be one time decision.
3. Diversification should be seen as a probability of increasing the multibagger chances besides reducing the risks
4. How to think of initial sizing?
Management, longevity, industry structure, no headwinds, business economics must be good. Up to 3%.
For further allocation, we should be able to track the management thru concalls or management meet. Up to 5%
If the valuations are cheap, go up to 10%.
5. Stock selection should be based on upside potential and allocate based on downside probability
6. Play the allocation by business and valuations. Ex: good business at good valuations should be given at least 5%. Cross 10% for once a life time opportunity.
7. Investing is more like Poker than Chess. A good hand can do wonders! Same time don’t go all-in
8. Less than 1% won’t make much a difference unless it becomes a 10-15 bagger. But then the point is, if it “can” become 10-15 bagger, why are you allocating < 1%
9. When to average up!? Increased orders, Govt policies, valued added products to increase margins, mergers/acquisitions etc.
10. Average up on newer highs using V stop by 0.2% or 0.3%
11. When to average down!? If my stock is falling in a good market, then we shouldn’t average up.
Average down during market crash when everything is falling.
But a stock falling in isolation, not the time to average down.
@ias_summit
13/n
1. Right stock at right sizing - home run and same time wrong stock at wrong sizing is a disaster!
2. How to think of position sizing!?
An opening position in a stock should be”not insignificant” and should be increased up on a continuous process. Buying decision shouldn’t be one time decision.
3. Diversification should be seen as a probability of increasing the multibagger chances besides reducing the risks
4. How to think of initial sizing?
Management, longevity, industry structure, no headwinds, business economics must be good. Up to 3%.
For further allocation, we should be able to track the management thru concalls or management meet. Up to 5%
If the valuations are cheap, go up to 10%.
5. Stock selection should be based on upside potential and allocate based on downside probability
6. Play the allocation by business and valuations. Ex: good business at good valuations should be given at least 5%. Cross 10% for once a life time opportunity.
7. Investing is more like Poker than Chess. A good hand can do wonders! Same time don’t go all-in
8. Less than 1% won’t make much a difference unless it becomes a 10-15 bagger. But then the point is, if it “can” become 10-15 bagger, why are you allocating < 1%
9. When to average up!? Increased orders, Govt policies, valued added products to increase margins, mergers/acquisitions etc.
10. Average up on newer highs using V stop by 0.2% or 0.3%
11. When to average down!? If my stock is falling in a good market, then we shouldn’t average up.
Average down during market crash when everything is falling.
But a stock falling in isolation, not the time to average down.
@ias_summit
13/n
Session 14 - Pratik Kedia, Kedia Securities - Behaviour Investing
1. No matter how wonderful India story is, if our behaviour isn’t right, we still can’t make money
2. Have no regrets
3. When facts change, change your opinion
4. Don’t be out of the market. Staying in is the only way to make money
5. Increase mental models, keep learning
6. India’s decade, play it
@ias_summit
n/n
1. No matter how wonderful India story is, if our behaviour isn’t right, we still can’t make money
2. Have no regrets
3. When facts change, change your opinion
4. Don’t be out of the market. Staying in is the only way to make money
5. Increase mental models, keep learning
6. India’s decade, play it
@ias_summit
n/n
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