Super Investors of India – Our Personal Takeaways

In this report:

» Kenneth Andrade

» Aswath Damodaran

» Chris Mayer

» Sanjay Bakshi

» Akash Prakash

» Sumeet Nagar

» Late Mr Parag Parikh

» Late Mr Chandrakant Sampat

# Super Investor Kenneth Andrade

When we revisit our notes from our meeting with Kenneth, we are reminded of the Mark Twain quote: 'The secret to getting ahead is getting started.'

Kenneth got started at the age of 16. Like many investors, he was drawn to the idea of making big money in IPOs (this was the late 80s and the early 90s).

His first investment was in the IPO of a company called Digital Equipment India. Although it was his first foray into the stock markets, he was clear about why he invested in this company.

We covered a lot of ground in our interview - Kenneth's investment philosophy ,his professional career, his outperformance over a long period (Kenneth outperformed the benchmark indices by a factor of almost 3:1 over a decade).

Picking the brain of an unconventional stock picker can provide you with a powerful and alternative way of thinking about businesses. Here are our key takeaways…

Takeaway #1 – Business quality first, then valuations

Analysts tend to look at valuations first and then research further. However, that approach will only help find cheap bargain stocks. It misses multibaggers like Asian Paints, Kaveri Seeds, and MRF.

That's because it fails to consider the inherent quality of the business. Kenneth sees himself as a business analyst first. His job is to understand quality businesses, not to worry about valuations in isolation.

Takeaway #2 – Capital allocation matters

'You have to buy businesses that are efficient allocators of capital and you have to decide how much money you would pay up for such a business.'

The idea is to partner with a promoter who cares about returns and does not misallocate capital.

Takeaway #3 – Buying into the leaders when the entire industry is depressed

One of Kenneth's most powerful ideas is to invest in a market leader when the entire industry is struggling.

• I go for an industry that is consolidating (the number of players are shrinking), where 65-70% of the industry participants are losing money. And you probably got the bottom of the cycle there. I want to allocate my money to the leadership in that segment. A leader who has survived with the highest return on capital in a down cycle. Return on capital of 8-10% is fine. And when you are doing that the valuations are always in your favour. So, you don't lose much, and risk-reward is in your favour.

Takeaway #4 – How to think like Kenneth?

One of Kenneth's most successful bets was Asian Paints . In 2008, he observed three key trends playing out in the paint industry:

1. Sector consolidation (low profitability throwing weak players out)
2. Low future capital needs (enough capacity to fulfil demand and healthy cash flows for future investments)
3. Improving industry profitability (the shift from unorganised to organised)

In an interview with Forbes, Kenneth shared his investment thesis:

• In 2008, profits of Asian Paints were flat though the topline growth was 20%. During the same time, other companies saw sales as well as profits fall. Asian Paints gained market share by holding its pricing. Today, Asian Paints has twice the profitability of the entire sector and thrice the distribution strength.

Over the last ten years, Asian Paints has given a CAGR of 30%, revenues grew at 18% CAGR, and profits grew 23% CAGR.

If you can train yourself to evaluate businesses through Kenneth's lens, you could find opportunities like Asian Paints.

I hope you took something from our takeaways from our interview with Kenneth Andrade . We would love to hear yours.

Meantime, you can find more of my personal notes from our interviews with superinvestors here.

# Super Investor Professor Aswath Damodaran

Professor Aswath Damodaran teaches a popular course on corporate finance and valuations at the Stern School of Business at New York University.

He believes the value of an asset may be very different from its price. It is thus crucial to identify factors that affect the real value of a company. Doing so can help you identify mispriced opportunities.

We have been the beneficiaries of Professor Damodaran's pearls of wisdom in the past. However, this time around, we covered more ground.

Here are our key takeaways…

Takeaway #1 – Knowing what you don't know

When we asked Professor Damodaran the most difficult part of investing, this was his response: 'Learning what you don't know and what your blind spots are in investing. We all have our weaknesses, and often we are the last ones to recognise those weaknesses.'

In investing, it is critical to evolve continuously and to be aware of our shortcomings and biases.

Takeaway #2 – The only thing constant is change

An open mind will help you evaluate a stock objectively. As investors, it's extremely important to always check own beliefs. After buying a stock, we become susceptible to endowment bias. That is, we tend to get attached to the stocks we buy and fail to look rationally at new information.

Here's where Professor Damodaran nailed it:

• That we live in a world where change is the only constant, that you have to keep an open mind, learn from everyone around you, and be willing to say the three most difficult (and freeing words) that anyone can say, 'I was wrong'.

Takeaway #3 – Mistakes are a part of investing

Professor Damodaran advocates maintaining balance when evaluating stocks. You'll never have all the necessary information to make a decision, so it's important to diversify and spread your bets to avoid getting hurt by your mistakes.

I hope you took something from our takeaways from our interview with Professor Damodaran . We would love to hear yours.

Meantime, you can find more of my personal notes from our interviews with superinvestors here.

# Super Investor Chris Mayer

I was reading an intriguing out-of-print book. The author, Thomas Phelps, was writing about using stocks to multiply your money by a factor of 100 to 1.

I shared the book with my colleague Kunal Thanvi, who instantly saw the connection with a more recently published book.

Phelps' work was in fact the inspiration behind Chris Mayer's book on 100 baggers . Indeed, Chris picked up where Phelps left off - in 1962. He focused his research on the period from 1962 to 2014 and found 365 stocks that had returned 100x during that period.

Talking to Chris broadened our views on compounders - i.e. stocks that go on to become multibaggers.

Here are our key takeaways…

Takeaway #1 – CODE

This is the acronym that Chris uses to identify potential 100-baggers. Here's Chris:

• C is for Cheap - I want to buy stocks that are undervalued. O is for owner-operator. I want to buy stocks where the people running them have skin in the game. D is for disclosure, meaning the public disclosures should not raise any red flags. And E is for excellent financial condition. I look for companies with great balance sheets.

I think of stocks as representing ownership interests in businesses and I aim to hold them for a long time.

Takeaway #2 – The most difficult part of investing

• Selling. Nobody is a good seller.
• Waiting can be hard too. It's hard to be patient and give your ideas time to work, to allow the power of compounding to work for you, and sit through the crazy ups and downs of the market - and your own emotions.

Takeaway #3 – Stick to quality

Once you've identified a quality business, it is important to hold on to them. With rising markets, however, there is always the temptation to book profits. But that could mean missing out on further gains. Chris' advice is to…

• Stick to businesses where time is your friend. There will be lots of ups and downs, but if you buy quality assets that you think are a near cinch to be worth a lot more money in five years or ten years, you'll be fine.

I hope you took something from our takeaways from our interview with Chris Mayer. We would love to hear yours.

Meantime, you can find more of my personal notes from our interviews with superinvestors here.

# Super Investor Professor Sanjay Bakshi

'Tell me and I forget. Teach me and I remember. Involve me and I learn.' - Benjamin Franklin

Professor Sanjay Bakshi is a renowned teacher and practitioner of value investing. He has more than three decades of investing experience and is a firm believer in accelerated learning from experience - your own and that of others.

He also believes persistence and a bit of luck have the potential to change your life forever.

Here are our key takeaways from our interview with the professor…

Takeaway #1 – Seek success patterns and avoid failure patterns

During the interview, the professor referred to stock picking as 'a creative pursuit'. He also told us he is essentially a 'pattern seeker': 'I am a pattern seeker. I seek success patterns and avoid failure patterns.'

Identifying patters can give you an edge in the markets.

'These patterns can be found in annual reports, magazines, and where not. One needs to be alert to recognise these patterns and act on them.'

But you have to be open enough to reject your own idea and adapt accordingly. The mindset you want is that of a detective or an investigative journalist. In fact, the professor recommended Peter Bevelin's book on Sherlock Holmes.

Takeaway #2 – Own quality

When we asked superinvestors about their investment philosophies, we got plenty of insights, though some were rather long winded.

So the professors two-word investment philosophy came as a delightful surprise: 'Own quality'.

We had the privilege of meeting the professor again at a conference where he delivered a talk on 'what happens after you buy a stock'.

Even here he iterated his philosophy with economy: 'Super patient, long-term Buy and Hold investing in high quality businesses.'

Takeaway #3 – Averaging up

As value investors, we are trained to consider adding to our positions if the stock price falls below our initial buy price – i.e. to 'average down'. This comes naturally because often we are anchored to our initial purchase price.

Professor Bakshi, on the other hand, says it's good to 'average up'.

When would you do that?

For example, the stock of Eicher Motors traded in a range of Rs 200 to Rs 350 in 2006. If you bought the stock at Rs 210 with a target price of Rs 400, you would probably have been hesitant to add to your positions when the stock crossed Rs 350 since it was close to your estimated target price. Perhaps you would have even sold out.

However, that wouldn't have been the best thing to do.

Considering the fundamentals and growth trajectory of the company, here's what the professor would advise:

• If they have paid Rs 100 for the stock of a great business with long runway for growth, they will refuse to pay Rs 200 to buy more. But the reality is that it may be cheaper and more attractive at 200 than it was at 100.
• When it was at 100, it was perhaps a much smaller and riskier businesses. Perhaps the moat was just getting established. At 200, it may be a larger, stronger, and more resilient business with a wider, and deeper moat.
• And the expected return, conservatively estimated, over the next 10 years may have become very attractive again. So, it's foolish in my view to anchor to sunk costs.

I hope you took something from our takeaways from our interview with Professor Sanjay Bakshi. We would love to hear yours.

Meantime, you can find more of my personal notes from our interviews with superinvestors here.

# Super Investor Akash Prakash

Akash Prakash is the founder of Amansa Capital. His investments incorporate value-style investing, yet mainstream analysts often ignore his picks.

Which is too bad, because Akash Prakash has ridden many multibaggers in his investment career.

He prefers companies that trade at a reasonable price, have strong growth potential, and are well managed and financially disciplined - companies he can hold for many years.

• Our emphasis is particularly on mid-cap companies that have minimal or no sell side research coverage, and we embark on a rigorous research process that spans the entire ecosystem in which the company operates before making our decision.

Takeaway #1 – The importance of an independent thought process

We were inspired by how Amansa Capital identifies potential businesses to invest in. Among fund managers and investment firms, there is a great deal of pressure to fail conventionally rather than succeed with unconventional picks.

At Amansa, however, Akash takes a less trodden path and often comes out with stocks mainstream analysts haven't even heard of (stocks that aren't actively covered). This is, of course, the result of the company's in-depth research.

We believe having this independence of thought in the markets is crucial and rewarding.

Takeaway #2 – A very long time horizon

Akash expressed the need for a long-time horizon: 'Investors should remain invested and just fill it, forget it and look at it after five years. They will have very strong returns.'

We though this resonated with the famous Buffett quote:

• Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years. If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes

Takeaway #3 – Absolute returns matter

Competition puts fund managers under immense pressure to outperform each other. However, their priorities are misplaced. Over the long run, we invest for absolute returns, not just to do relatively better than others.

Ankit Shah nailed it when he wrote about the importance of focussing on absolute returns:

• […] 'absolute returns' are not compared with any benchmark. Managers focused on absolute returns have a long-term orientation and therefore are able to take contrarian bets and not be index huggers. And this is the orientation that Akash follows.

We believe this is what makes Akash a great manager.

I hope you took something from our takeaways from our interview with Akash Prakash. We would love to hear yours.

Meantime, you can find more of my personal notes from our interviews with superinvestors here.

# Super Investor Sumeet Nagar

'We like to invest in companies where we can get an edge.' - Sumeet Nagar

It's always a treat to find successful investors who follow the same approach we follow here at Equitymaster. Well, Mr Sumeet Nagar, co-founder of Malabar Investments LLC, is certainly very successful. He's picked some of the best performing businesses in the mid and small-cap space.

His investment philosophy to a great extent mirror's ours. In fact, we even recommended some of the same picks in our small-cap recommendation service, Hidden Treasure.

Takeaway #1 – Contrarian and right

Sumeet has a very elegant stock-picking style and never shies away from going contrary to the broader markets. He believes one of the best ways to find a bargain bet is to look for the sectors and businesses that are currently out of favour:

• I think today is an environment where there is a lot of optimism around. So you are not going to find great bargains like that, but I think as Warren Buffett said if you want to fish, go where the fish are, not where the fishermen are. So go where investors are not looking today. Things which are unloved so perhaps things like IT and pharma and maybe there are some great opportunities there for a long-term investor.

If executed properly, contra bets can help you find stocks at great bargains.

Takeaway #2 – Edge

Sumeet believes management quality is one of the most important factors in investing in small and mid-cap business. Sumeet looks out for exceptional managements. People who have the drive and the capability to take the business to a whole new level.

He is known for his extensive due diligence. He talks to competitors, regulators, suppliers, distributors, and retailers and visits factories, depots, and retail outlets.

He believes this gives him an investing 'edge'.

Turns out, we follow the same approach when evaluating mid and small-cap stocks.

Takeaway #3 – Concentrated bets

The common assumption about small caps is that they are risky. Thus, it's wise to spread risk by diversifying widely.

But Sumeet Nagar does not diversify. He runs a concentrated portfolio. According to an article in Economic Times, he has about fifteen core holdings. The top five are about 35-40% of the total portfolio.

I found this very interesting. It's rare to find an advocate of concentrated investing in small cap stocks.

In contrast, the portfolios of the top performing small-cap mutual funds in India are all very diversified.

I hope you took something from our takeaways from our interview with Sumeet Nagar . We would love to hear yours.

Meantime, you can find more of my personal notes from these interviews here.

# Super Investor Late Mr Parag Parikh

• Many people drank the nectar of this contrarian value investor's generosity.
  – Professor Sanjay Bakshi in an obituary for Mr Parag Parikh

PPFAS mutual fund organises October Quest every year. The annual event brings together great minds and practitioners of value-style investing under one roof.

In 2013, the late Mr Parag Parikh was very generous in extending me an invitation to attend October Quest. The conference and meeting changed the course of my life.

Of course, Mr Parag Parikh is one of the most respected value investors in India.

We regret not being able to interview Mr Parikh for our super investor project (sadly, he died in 2015). However, Kunal and I both believe he is a super investor.

Both of his books - Stocks to Riches and Value Investing and Behavioral Finance - are gems.

Investment success comes from following the emotionally difficult path. – Parag Parikh

Mr Parikh was a firm believer in understanding the disastrous role emotion and human psychology can have on individual investors.

Our Key Learning from Mr Parikh – Loss Aversion and Sunk Cost Fallacy

What do we mean by loss aversion and sunk cost fallacy?

Loss aversion refers to our tendency to strongly prefer avoiding losses over acquiring gains.

While, per economics, a sunk cost is any cost that has already been incurred and cannot be recovered. It is our tendency to irrationally pursue an activity, even if it does not meet our expectations, just because of the time and money we already spent on it.

Mr Parikh offered a simple test to understand if you suffer from these biases:

1. You prefer fixed income securities over stocks
2. You are tempted to move out of the markets when prices fall
3. Your portfolio consists of a few winners followed by a long list of losers
4. You sell your winners fast and hold on to losers
5. You make important spending decisions based on your past spending

If any of these are true for you, you indeed suffer from loss aversion and sunk cost fallacy. However, there is a way out.

Here are several suggestions from Mr Parikh:

1. Understand you risk appetite before investing
2. Diversify within and across assets
3. Have a total portfolio vision in mind
4. Don't anchor yourself to your past decisions
5. Be a passive investor - don't follow the stock prices daily

This means understanding the behavioral side of investing. Controlling our human biases and emotions is the toughest part of long-term value investing.

We would love to hear your thoughts on Mr Parag Parikh.

Meantime, you can find more of our personal notes from our interviews with super investors here.

# Super Investor Late Mr Chandrakant Sampat

Late Mr Chandrakant Sampat was often conferred with the titles like - India's original value investor, India's Warren Buffett.

Mr. Chetan Parikh, a renowned value investor held reverence for him on a website called Capital Ideas Online. This is what Mr. Parikh wrote:

Starting almost from scratch, simply by picking stocks and companies for investment, Chandrakant Sampat has amassed an enormous fortune. He is often referred to as guru, at least by all of us here at 'Capital Ideas Online'.

No doubt he is one of the Super Investor of India. With a very little information available about one of India's oldest Value Investor, Kunal and I were very curious to know his approach to investing.

He was a visionary investor who placed his bets on companies such as Hindustan Unilever (then Hindustan Lever) and Indian Shaving Products (now Gillette India) in the 1970s and 80s. Mind you, this was before these were favorites among everyone.

Like Mr Parikh, we regret not being able to meet and interview him in person since he passed away in early 2015.

However, we wish to share some of his most critical learnings that have shaped our thoughts on investing in stocks.

Our Key Learnings from Mr Sampat – Seek Capital Light Compounding Machines

Look for companies with the least capital expenditure, where the return on capital employed should not be less than 25 percent. – Chandrakant Sampat in a Forbes Article

Mr Sampat had a very simple investment philosophy. He sought companies that could grow without needing much of the firm's capital. These companies also have a long term track record of earning a high return on capital employed.

Below are some of his thoughts that resonate most with us.

1. Find companies that require the least capital to grow.
2. Look for companies with a high return on capital employed. Preferably 25 percent or higher.
3. Companies are paying consistent and good dividend payouts.
4. Avoiding seeking too much action and let the power of compounding do its wonders for you.

Being disciplined with a simple investment philosophy and avoiding too much action and letting compounding take over are the two key powerful messages that we take away from our reading about Mr Sampat.

We would love to hear your thoughts on this Super Investor of ours.

Meantime, you can find more of my personal notes from our interviews with super investors here.