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How does this little known investor make big profits?

May 27, 2015

In this issue:
» Is India puffing less?
» Why retail investors are taken for a ride...
» The twin problems of rising debt and ageing population
» ...and more!

That Warren Buffett is one of the world's best investors is probably inarguable. Reams and reams of articles have been published over the years charting his success story. Books have been written elaborating on his investment philosophy. Even, we at Equitymaster have written a lot on his nuggets of investment wisdom and followed Buffett's approach in stock picking.

But despite Buffett's legendary status, there are other lesser known investors who are also successfully managing stock portfolios. And in the bargain, notching up healthy profits. One such name we came across was Thomas Gayner.

Thomas Gayner is not a name that many would have heard of. But that does not make his investing track record any less impressive. Mr Gayner is the chief investment officer of Markel Corporation, a financial holding company. As mentioned in an article in the Wall Street Journal, over the past 15 years, Mr Gayner's stocks have returned an average of 11.3% annually. In contrast, the S&P 500 index of big US stocks has returned 4.2%, counting dividends. This is indeed something to sit up and take notice of.

And how was his track record when the stock markets were in a meltdown? Still good. When the 2008 global crisis unraveled, the S&P 500 racked up losses to the tune of 37%. Mr Gayner's portfolio lost ground too. But at a 34% loss, his portfolio outperformed the S&P 500 index.

These are the statistics. So the next big question really is what has made Mr Gayner a successful investor?

For starters, he is a patient and humble investor and knows his limitations. This is what he has to say, "I tell investors, 'You're smarter than I am, but I'm managing your money. If you see me doing something I shouldn't be, tell me.'"

The other point to take note of is how he has gone about picking his stocks. And in this regard, we agree wholeheartedly with his approach to investing.

Indeed, these are the five things that Mr Gayner focuses on when choosing companies:

  • Profitable operations
  • Little or no debt
  • Good management
  • Plenty of growth opportunities to reinvest profits, and
  • Available at reasonable valuations
The Indian stock markets have been euphoric since early 2014, and the valuations of many companies, both good and bad, have reached unsustainable levels. Such has been the run up in prices that even after the correction seen in the last couple of months, the valuations of many stocks still look quite rich.

During such times, reading up on the success stories of investors such as Mr Gayner, only highlight how important it is to be very patient when investing in equities. For the value investor, there will be long periods of time when there is hardly anything that he can invest in. It is a scenario that my ValuePro team and I are certainly facing. But opportunities do come up, and when they do, they become the springboards from which to generate healthy profits.

Do you agree with the process that Thomas Gayner follows while picking his stocks? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
"Giving up smoking is the easiest thing in the world. I know because I've done it thousands of times." - Mark Twain. While this quote may make it seems as if smokers will never be able to quit or give up tobacco, this does not seem to be the situation in India.

Tobacco consumption in the country is on a decline - a trend that is going as desired for the government. As reported in the Mint, the government had set a target of reducing tobacco consumption by a fifth by 2020 and by a third by 2025.

To do the same it has been asking consumers to cough up more dough by levying more excise duty for years. Last year itself, the Finance Minister has increased excise duty on cigarettes in the range of 15% to 25% on various lengths of cigarettes.

But the irony here - as stated in the article - is that while overall tobacco consumption may have increased by more than 40% in the past three decades, the share of legally manufactured cigarettes has come down from 21% to about 12% in recent years. This just goes on to indicate that consumers have moved on to cheaper forms of tobacco - which could possibly be more detrimental to health if not less.

Nevertheless, from what it seems is that India's craving for tobacco is coming down - which is a positive sign. Today's chart of the day indicates the tobacco output in the fifteen months up to March 2015.

Is India puffing less?

Here's an interesting stat! At the end of March 2015, retail investors held 21.35% of the Indian companies' shares. In comparison, foreign institutional investors or FIIs held only 6.44% stake in Indian companies. However, when it comes to the value of holdings of retail investors, the same stood at Rs 8 trillion as compared to FIIs' holding value of about Rs 19.3 trillion - more than twice that of the value of retail investors' holding.

The key difference here is the universe which these classes of investors stick to. FIIs typically focus on large caps given their stability and liquidity that their shares provide. The same may not be the case with retail investors who would be willing to compromise on these aspects. However, this is precisely why they are usually taken for a ride more often than not. You see, aspects such as promoter pledging, and quality of business and earnings are usually not given very high importance. Also the flawed focus of investing in penny stock to make crazy returns is something that should change. A share trading at Rs 10 is not cheaper than one trading at Rs 15,000. Expectations should essentially be made after gauging the valuations.

Another key mistake that investors tend to make is that of 'averaging out'. While this concept may have its pros, the same is suggested to be followed only when one is fairly confident of the upside in the stock. Else looking at other opportunities would not be as bad option. This option is also known as 'opportunity costs' - the cost of an alternative that must be forgone in order to pursue a certain action.

Soaring sovereign debt is a huge problem for the developed world comprising the US, Europe and Japan. Since the global financial crisis in 2008, most of the central bankers in these regions have resorted to reckless money printing policies in the faulty hopes of boosting growth. But growth has largely remained sluggish and the only impact of the stimulus programs has been the bloating of debt. So much so that many countries, particularly, in Europe such as Greece have been on the verge of a big default.

But massive debt is not the only problem in these countries. The demographics are also working against them. Indeed, the proportion of aged population is only rising. Older people and a reduction in a young, working population mean that the ability to bring this debt down only diminishes.

Japan is a classic case in point. As reported in an article in Moneynews, the gross government debt has gone above 200% of GDP, and an aging population is only piling on the pressure.

It is obvious that the governments in these countries will have to find better ways of bolstering growth and paring debt down rather than solely relying on loose monetary policies.

Indian markets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the Sensex was trading lower by about 17 points. Losses were largely seen in IT and auto stocks, while banking stocks managed to buck the trend. Both the midcap and smallcap indices also fell marginally.

 Today's investing mantra
"Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit and Devanshu Sampat.

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3 Responses to "How does this little known investor make big profits?"


May 30, 2015

It is not correct to say FIIs invest only in largecaps. They are more comfortable with MSCI stocks (incl. midcaps and small caps). Earlier also I requested EM to give me the link where the list is available. EM can also mention this in the detailed note of recommendation .



May 27, 2015

For us small-fry retail investors, one of Mr. Gaynor's principles, and indeed that of Buffet and anyone else u care to name, is good management with integrity. Sadly most of us small-fry have not the faintest idea how to go abt chking this out. Cld EqM write one or a few pieces to enlighten us.


Rajagopalan Ramesh

May 27, 2015

Thanks for the nice and informative article.
Mr Thomas Gayner's stock-pick notions are no doubt commendable. The notion of a stock's continuous potential for reinvestment could lead to high subjective assessment. It is difficult to find objective evidence to confirm the notion. Equitymaster's ERM valuation covers almost all the major areas and is really more broad-based than Gayner's notions. I would like to add my point of view regarding ERM. The company's utilization of free cashflows and its shareholder's friendliness could also be covered - though these aspects can be thought to be included in Quality of Management. I request a detailed research article on Free Cash flows and its impact on the company's operations.
As regards NIFTY Dogs, I already started investing in NMDC, ONGC, Coal India and others. As dividends are tax-free, the real yield would be much greater to an Investor depending on his tax-bracket. My view is that the downside risk for these NIFTY dogs is minimum when compared to others.
Tks and regards,

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Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
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