Transcript of "DHANDHO Global Equity Investment Strategy"
DHANDHO INVESTING Re-Imagine Active-Value-Investing to buy ‘Growth at Reasonable Price’ ( G.A.R.P ) Varun Goenka JM Financial Group. [email_address] +9004670600
<ul><li>Age : 28 ( kid ) </li></ul><ul><li>Education : BBA , CFA I , NCFM , CAT ~93%tile , ISB-UCLA Financial Engineering & LBS VC - Program. </li></ul><ul><li>Work Experience : 6yrs. </li></ul><ul><li>- Anand Rathi Group ( 2 years ~ Worked one-year in sync with Rathi ji , the only junior member to attend monthly day-long organization strategy meetings , First transaction in career - 10crs in ADS arbitrage , highest sales-trader revenue ’06. ) </li></ul><ul><li>- JM Financial Group ( 3.5 years ~ First transaction 50crs Open offer arbitrage , Highest revenue ’07 , Highest IPO Funding & Margin Funding for 2 years , Aggregate cumulative revenue approx. $2mn , Aggregate cumulative volume $50mn+ equities , $2bn+ derivatives , IPO Funding $200mn+. ) </li></ul><ul><li>Research Indulgences : </li></ul><ul><li>Ø - INDIA HYDROCARBON Sector: Perspectives, Potential, Insights, Economics, Proxies, Impact, Bourses. </li></ul><ul><li>Ø - RELIANCE INDS. – World Scale & World Class, Vision 2010 & Beyond. ( Operational Integration, Divestiture, Fiscal Impact, Valuation, Fin. Performance, Benchmarking EM/Chevron/Petroplus & Saras, Potential Scalability. ) </li></ul><ul><li>Ø - SPECIAL SITUATIONS : Divestitures [ Perspective from Developed Markets, Experience of Previous Divestitures, Divestiture Structures, Current & Potential Divestiture Plays. ] ; Screener Portfolio’s ( Liquid Assets / Market Cap. ) ; Open offer & De-listings. </li></ul><ul><li>Ø - DA N-I-F-T-Y Code – Concept of ‘Index – Change Mgmt.’ ≈ Composition, Reorganization & Impact. </li></ul><ul><li>Ø - Selected Mid-Cap Research : Stable & High MOAT businesses , Capex Beneficiaries. </li></ul><ul><li>- Derivatives : Market Neutral strategies , Long-term Options. </li></ul><ul><li>Have experienced client losses ~$30mn. Have made conscious effort towards reading about the experiences of institutions , institutional-investors in capital markets in the last few decades. ( ~300 Sovereign defaults in the last 200years ,169 in last 50years ) </li></ul><ul><li>Reading Influences ~ Fundamental ( Warren Buffet , Charlie Munger , Benjamin Graham , A. Damodaran , Joel Greenblatt , George Soros , Connie Bruck , Janet Lowe , Roger Lowenstein , Peter Bernstein , Monish Pabrai , Eric Beinhocker , Alan Greenspan ) ; Trading Psychology ( Nasim Taleb , Jack Schwager , Steven Drobny ) ; Quantitative ( Paul Willmott , Charles Cottle , Guy Cohen , Richard Tortoreillo ..) ; Management & Strategy ( Mckinsey , CK Prahalad , Tom Peters , Bill Gates , Jack Welch , Ayn Rand , Robert Green ,Jim Collins…) </li></ul>“ In Search of Morpheus , to dive the rabbit-hole “
Pursuit “ Predicting rain doesn't count , building ARKS does “ <ul><li>To manage large amounts of capital to bid for G.A.R.P. ( Growth at Reasonable Price ) </li></ul><ul><li>To appeal to Large Investors, from the perspective of process, sustainability, transparency and potential vs individual competence. </li></ul><ul><li>To be process oriented and simple, so as to maximize emotional quotient & control any self-defeating behavior. </li></ul><ul><li>To be able to scale to multiple products & strategies from a core-template. </li></ul><ul><li>To get the Maximum ‘ Value ( fundamental performance ) per unit of Market Cap. & Debt ‘ ~ substantiate cause – effect. </li></ul><ul><li>To align portfolio based on ‘ Endogenous factor ‘ and let ‘ Exogenous factors ‘ generate the alpha. </li></ul><ul><li>To realign our stakes vs the house so as to : A. Minimize our odds of irreversible losses amidst black swans & B. Maximize our odds of above-average gains in euphoria. </li></ul>“ In physics it takes 3 laws to explain 99% of data , in finance it takes 99 laws to explain 3% of the data “ ~ we’ll address the 97% “
Is it a ZERO SUM Game : Can “ Real World Complexities “be measured / quantified….. Approximately Right VS Accurately Wrong Under-estimating Exogenous Forces VS Humble judgment of a reasonable value deal. [ 500+ Stocks ] * MOVING VARIABLES [ Global ( Currencies / Interest Rates / Liquidity / Inflation ) + Macro. ( Commodities , Credit-flow , Demand-Supply , Consumption , External Trade ) + Regulatory ( Taxation , M&A , Primary & Secondary Markets , Transaction Costs , Company's Act ) + Industry ( Regulation , Global Linkage , Competitive Landscape / Earnings vs Consumer Power , Economies of Scale vs Capital Structure ) + Company Specific ( Management , Leverage , Cost Economics , Contracts ) ...etc ] + Diverse Expectation & Sentiment of Investors / Analysts towards above = Price vs Value
“ The ZEN of Portfolio Strategy “ <ul><li>Sum-of-Portfolio-Potential = </li></ul><ul><li>Timeless / Perpetual ‘ AAA ‘ Bonds + Embedded Equity Option </li></ul><ul><li>+ </li></ul><ul><li>Positioning for ( Earnings & Multiple Expansion ) </li></ul><ul><li>+ </li></ul><ul><li>Averse to ( Multiple contraction , Sentiment / Liquidity & Event-outcome lead - reversal ) </li></ul><ul><li>+ </li></ul><ul><li>Mr. Market is the boss ( Market Cap. is non-negotiable ) </li></ul>Education required: Grad. School Finance + Well Read + Common Sense + Exceptional EQ + Avg. IQ VS Other Assets : The only Asset class to be relatively recession proof , deliver operating performance in line with AAA Bonds even during the worst periods.
A Simple , Stupid , Suave (‘ 1-2-3 ‘ & ‘a-b-c ‘) answer –to- a riddle Complex , Crazy, Cryptic (‘ xyz ‘ & ‘ αβγ ‘ ) <ul><li>There is nothing so dangerous as the pursuit of a rational investment policy in an irrational world & The Markets can stay irrational longer than one can stay solvent. </li></ul><ul><li>Every Strategy / Process or Fund would have its under-performance periods – however sustainability and confidence is in the PROCESS, which ought to hinge on strong-basics vs anything esoteric and complex. </li></ul><ul><li>‘ An old-wine in a new bottle ‘ – the process subscribes to pure value-investing principles written & spoken time and again. It believes and practices that ‘ Mota Hisab ‘ is better than ‘ Linear xls ‘ & that ‘ Old School thought done the New School way ‘ goes a long shot. </li></ul><ul><li>The process would not be to pick stocks, but portfolio(s) which would be relatively more robust & defensive than the benchmark aggregate and would seek to relatively out-perform. </li></ul><ul><li>The process does not understand : Market timing , stop-loss , sentiment , liquidity , potential impact of visible or invisible future events or anything beyond the fundamental -character of the process and the resultant portfolio. </li></ul><ul><li>In Investing , in the long-run EQ wins over IQ . To iron-out personal biases , preferences and judgment – the process works with ‘ Scrip Codes ‘ vs ‘ Names ‘ till the point of final portfolio output. As its said ‘ Good Investing is Boring ‘ – the process is objective vs judgmental , intuitive vs calculative. </li></ul><ul><li>The process with all humility respects Mr. Market and thus seeks to avoid conformist-tenets of Fund Management - Forecasting , Management Guidance , Fair Valuation , Target valuation multiple , Consensus Estimates , Global Macro Influences etc. </li></ul><ul><li>The Key Question the process attempts to answer is not : What will happen or what is the expectation or What would be the impact – but ‘ How much is in the price ! How is the portfolio positioned in the like of Earnings expansion and/or Multiple expansion or vice versa , black swans or sentiment reversals. What does the price imply, over-rides what are the expectations ! </li></ul><ul><li>Markets are not ‘ Efficient ‘ so to say , but smart. The objective is not to challenge it but be an ally thru positioning ourselves in a sweet spot of both ‘ Earnings & Multiple Expansion ‘. </li></ul><ul><li>The process does not take Cash-calls at any point in time , does remains fully-invested at all times ( Nonetheless the process so re-aligns the portfolio periodically so as to keep to its character of ‘ margin-of-safety & growth-play ‘ ). </li></ul>
( Simulation * Munger’ism ) * 2 <ul><li>10yrs . ( Abs. & Rolling ) * 2 Templates > 110 pt – to- pt returns. </li></ul><ul><li>40 Qtrs. ( Abs. & Rolling ) * 3 Templates * 2 Portfolio > 4920 pt – to – returns. </li></ul><ul><li>Top few Volatile Months of last 10yrs. </li></ul><ul><li>No. of Portfolios ( across Yearly & Quarterly analysis ) : 2515. </li></ul><ul><li>Over 200 Excel sheets. </li></ul><ul><li>Indices & MF Yearly & Quarterly return data ~ 3500 pt-to-pt return. </li></ul><ul><li>Evidence : BSE 500 > Output Universe > Testing ( Top 100 stocks by Market Cap. , Bottom 100 stocks by Market Cap. ) </li></ul><ul><li>Multiple Dynamic ~ Valuation & Return metrics. </li></ul><ul><li>Both Equal-weight & Value-weight comparisons. </li></ul><ul><li>Both a Portfolio Valuation positioning & Return perspective to substantiate cause-effect </li></ul>
Are we colored by Suits & PPts : Are the right Questions being asked !! <ul><li>HOLY GRAIL ~ Index Benchmarking / Out-performance </li></ul><ul><li>Are we Benchmarking VS the Right Benchmarks : </li></ul><ul><li>Market Cap. and thus Liquidity is the ‘ Cardinal ’ concept world-wide in the construction of Indices vs Earnings or an Earnings Metric ; which is the primary reason to buy the Index or Index Components in the first place !!. </li></ul><ul><li>If Stock picking is an illusionary science and Passive Investing a Hobson’s choice : </li></ul><ul><li>Can Index picking make a material impact on performance , given the wide range of World / Country / Thematic Indices available to both Institutional & Non-institutional investors. </li></ul><ul><li>Indices being Market Cap. weighted , Will it Increase or Decrease the portfolio volatility !! </li></ul><ul><li>Given Market Cap. Is a far more volatile over Earnings or an Earnings metric , should the portfolio be Market Cap. Weighted or Earnings weighted to decrease volatility. </li></ul><ul><li>Fallacy : Portfolio of Stocks form an Index or Vice-versa !! </li></ul><ul><li>If a stock has delivered and/or is expected to so in the future , it would inevitably attract liquidity. Eventually, the increased visibility would move it towards a relevant Index-Eligibility , which is mere the Effect and not the Cause. Thus a stock’s life in the index has a high-correlation to its fundamental performance, for it to sustain the interest in itself. ( even though this is applicable only from a larger picture perspective vs shorter-term influences ). </li></ul><ul><li>EMH : Having Circularity ! </li></ul><ul><li>If Market Cap. is the foundation for Index construction , it implies market is perfect in pricing stocks and all related information & expectation. Nonetheless Market Cap. is volatile and thus continuously adjusts to changing expectation ,estimates and new information. Thus further substantiating that Market Cap. is the dependent variable to fundamentals. </li></ul><ul><li>CRITICAL –to- RETURN Rhetoric ; </li></ul><ul><li>If Active mgmt. is an illusionary skill and index investing a hobson’s choice – given the diverse range of indices available across countries/thematic/style etc, does INDEX-Picking alter return-performance drastically !! </li></ul><ul><li>Given the perpetually-increasing breadth, depth and complexity of secondary-equities; Is an increased research-team size the answer to scanning opportunities, having an ariel view of markets and aggregating understanding, estimates & expectations !! </li></ul><ul><li>Can the same team / templates / conventions serve different and/or extreme ‘ Investor expectations & requirements ‘. ( Pure-Long Only DII’s with differing value vs price perceptions – Eg. MF / Insurance Co.s / Treasuries, Multi-Strategy Funds, Shariah, Large Non-Institutional Investors etc ) </li></ul><ul><li>Typical portfolio holds 30-100 stocks; thus can there be several portfolios in the market that can match or beat the Benchmark performance, giving ample space to construe unique compositions. </li></ul><ul><li>“ SIMPLICITY is to GENUIS :: CONFUSION is to COMPLEXITY “ </li></ul>
“ DJIA grew from 65 –to- 11500 in the 20 th century ~ i.e 5.3% CAGR. At the same CAGR , Dow becomes 20,00,000 “ EFFECT OF INDEX PICKING Which Index gives u a better VALUE / MCAP. INDEX (180D) (365D) (2Y) (3Y) (5Y) Nifty (S&P CNX) 6.8 67.4 -7.0 12.7 131.6 BSE Sensex 6.1 71.3 -8.8 8.8 143.5 CNX 100 9.0 76.7 -5.5 15.6 BSE 100 8.4 80.3 -8.5 14.8 140.6 CNX 500 11.7 86.5 -5.7 16.5 127.4 BSE 500 11.6 88.9 -9.4 14.1 130.5 BSE 200 10.0 85.3 -7.9 15.3 130.0 BSE Mid-Cap 18.8 123.1 -15.8 4.2 BSE Small-Cap 33.5 149.8 -17.4 7.1 PORTFOLIOs ~ Emailed Date Type Benchmark ~ Relevant periods Portfolio Return BSE100 BSE200 Bse MidCap BSE SmallCap 15th May 46 MidCaps. ( 300-2000cr Mcap. ) 133% 36.70% 40.50% 69.10% 91.60% 22nd Dec. '09 9 Quasi Large Caps 0% -4% -4% -1% 3% 8th Dec. '09 10 MidCap. & Quasi MidCap. 8.90% -7% -6% -3% 3% 17th Sep. '09 32 MidCap. & Quasi MidCap. 11% -2.40% -1.20% 4.70% 11.90% 18th Jan. '09 Large & Quasi Large Cap. 8% -9.7% -9.7% -9.2% -9.2% 12th Jan. '09 37 stocks of Bottom 300 of BSE500 0% -8.5% -8.3% -7.10% -6.30% 12th Jan. '09 42 stocks of Top200 -6%
Client & Product Scalability <ul><li>1. A diversified large-cap Institutional Portfolio VS Nifty/CNX100/BSE200 ~ 100 stocks. </li></ul><ul><li>2. A Concise Non-Institutional Portfolio VS CNX100 / BSE 200 ~ 40-60 stocks. </li></ul><ul><li>3. A Medium-term Quasi Large-Caps & Mid-Caps Portfolio VS Short Long-term CE Option. </li></ul><ul><li>4. A Long-term Small Cap. - Individual / Employee portfolio’s. </li></ul><ul><li>Quarterly Reporting : </li></ul><ul><li>1. An Ariel Map of Markets with composite scores. ( Indices & Sectors ) </li></ul><ul><li>2. A concise table on how our portfolio is positioned relative to key benchmarks in terms of valuations & return ratios. </li></ul>
The End of Beginning : Possible Starting point! <ul><li>Allocated Initial Capital ( or Eg. Rs. 20 contribution from custodian for every Rs.100 investor money , Self Capital – Allocated stock options ) </li></ul><ul><li>Followed by a Spoke Fund : Willing contributions from willing personnel. </li></ul><ul><li>Assumed Market downside potential : 15-20%. </li></ul><ul><li>Deployment : Fund to be deployed in 4-5 tranches with pre-agreed fall %age level. </li></ul><ul><li>Re-balancing of portfolio : At every +/-10% move or monthly. </li></ul><ul><li>Reporting of Portfolio on Monthly basis with “ cause-affect reasoning “. </li></ul><ul><li>No. of stocks in the portfolio 25-60 from the BSE500 Universe above 500crs Market Cap. </li></ul><ul><li>“ Higher the return potential ( Earnings & Multiple expansion ) , lower the taken risk. Lower the taken risk , higher the propensity to preserve capital . Higher the preserved capital , higher the ability to stay invested. Higher the ability to stay invested , more the time given for compounding……….” </li></ul>
S&P 500 ( Evidence from ~ The People , Experience value-Investing ) The S&P 500® has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index has over US$ 3.5 trillion benchmarked, with index assets comprising approximately US$ 915 billion of this total. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities.
THE VALUE People… Certainly not perfectly LINEAR…in the game of Yearly Index-Out Perf. ; but way ahead in their own frame of time…
What really drives Long-term Equity Returns !!
Is there just one solution / perspective !! “ The problem is never to get new , innovative thoughts into our minds – but how to get the old ones out. “
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