The Making of a Value Investor

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To my father, Ashok Kumar Baid

Disclaimer
The views expressed in this book are the personal views of the author, and do
not reflect the views of the author’s organization. Any recommendations,
examples, or other mention of specific investments or investment
opportunities of any kind are strictly provided for informational and
educational purposes, and do not constitute an offering or solicitation, nor
should any material herein be construed as investment advice. Readers should
consult with a professional where appropriate. The views expressed reflect
the current views of the author, as on date, and the author does not undertake
to advise the readers of any changes in the views expressed herein. In
addition, the author assumes no duty to, nor undertakes to, update forward-
looking statements. No representation or warranty, express or implied, is
made or given by or on behalf of the author, the author’s employer, or any
other person as to the accuracy and completeness or fairness of the
information contained herein, and no responsibility or liability is accepted for
any such information. By purchasing this book, the recipient acknowledges
this understanding.

Pain + Reflection = Progress
—Ray Dalio1
The market is a great leveler. A sudden crash puts everything in
perspective, cuts your ego in half, and makes you realize your
shortcomings and blind spots. Most important, the fundamental
lessons on durability of individual business models, quality of
earnings, prudent diversification and management integrity are
reinstated.
—The Joys of Compounding

Contents
Introduction
The Bear Market
(1 January 2018–24 March 2020)
Notes
Index
Acknowledgements
About the Book
About the Author
Copyright

Introduction
The genesis of this book lies in the response to a tweet of mine:2
I found the suggestion very helpful and interesting. Shortly thereafter, I
started work on this book.
I spent ten dollars on a journal in late 2014, and I consider it to be one
of the best value investments I ever made. Since that day, I have been
keeping track of my investing decisions and subsequent developments
in a journal. This habit has helped me a lot in learning about myself
and improving as both an investor and an individual. I receive a lot of
valuable feedback and use it to correct my biases. I also have
maintained a personal archive of the media commentary and investor

behaviour during various episodes of market panic … I find that it is
highly beneficial to refer to this information whenever the market
undergoes its periodic steep corrections. Human behaviour in the
markets has not really changed much over time.
My writing frequency in the journal witnessed a sharp rise from 2018. I
experienced a brutal bear market in India from January 2018 to February
2020, followed by a pandemic-induced market crash in March 2020. By the
time the bear market ended, I had evolved from being a highly concentrated
portfolio investor focused on statistically cheap securities, to one focused on
quality and prudent diversification. The entire experience ingrained in my
mind the significance of resilience and longevity—the key to compounding.
This book covers the journey of my evolution as an investor during a bear
market, and my reflections and learnings along the way.
A bear market teaches one the reality of the harsh math behind
compounding in reverse, with fraudulent management teams or weak
business models. This is when we realize the deep wisdom, in Andy
Grove’s words, that ‘bad companies are destroyed by crises; good
companies survive them; great companies are improved by them’.
And this is the catalyst for the transformational phase when investors
can take huge strides and begin to rebuild their portfolios to include
strong high-quality businesses. The key, then, is to not succumb to
greed in future bull markets.
My learning curve as an investor began accelerating from June 2018, as the
bear market in India gained steam. I started taking copious notes in my
journal, and there was an important reason for it.
The greatest learnings always come from a bear market, and these
lessons bear fruits for an entire lifetime. Never let a bear market go to
waste.

Readers of The Joys of Compounding will recall the following important
graph from the beginning of that book, along with my message in its
footnote.3 This is compounding in action. This illustrates what I experienced
in 2018, after many years of determined efforts amid repeated setbacks.
Resilience is a superpower.
Having equipped themselves with the fundamental principles of investing
through my previous book, those readers are now about to step on the
exponential part of the J-curve, and experience the power of compounding
knowledge in action, just like I did from mid-2018. While most of the stock
names and case studies are from the Indian market (where my personal
portfolio is primarily invested), the bulk of the learnings and investing
principles are universal, timeless and applicable globally.
I wish all my readers great success in their lives and investing journeys.

The Bear Market
(1 January 2018–24 March 2020)
After the roaring bull run in mid-caps and small-caps in India between 2014
and 2017, investors were in for a nasty shock. The gut-wrenching bear
market that began in mid-cap and small-cap stocks from January 2018 lasted
an agonizing twenty-seven months, and concluded with the COVID-19
market crash of March 2020 (see Figures 1 and 2).4
Figure 1: Huge price erosion in mid-cap stocks
Figure 2: Decimation of stock prices in small-caps

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By the time the bear market ended, there was a widespread sense of utter
hopelessness among most investors as the mid-cap and small-cap indices had
collapsed more than 45 per cent and 55 per cent respectively from their
January 2018 highs. Thousands of listed stocks in India crashed more than
60–80 per cent during this period. Panic in the market started being witnessed
from June 2018. That’s where we begin.
3 June 2018
As cheap keeps getting cheaper in this market, there is an increasing
perception among investors that a stock that is cheap isn’t ‘quality’.
I am noticing that the frustration index has shot up everywhere, and
people are becoming very aggressive on social media. We need to stay
calm and keep progressing in this journey, and social media is not helping
many, as I can see.
Apex Frozen Foods looks interesting. Manufacturing capacity will rise
from 15,000 tonnes to 35,000 tonnes, of which 5,000 tonnes will be in the
higher margin value added (ready to eat) category. This should lead to
profit growth outpacing revenue growth. Shrimp export prices in India
have fallen by about 14 per cent in May. But Indian rupee (INR)
depreciation should support revenues and help the company absorb some
of this realization fall. Unfavourable base effect of high realizations of
last year should last till the end of this month, so Q1 may be impacted
slightly, but Q2 onwards, it should be back to business as usual.

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Author’s Note
In India, the financial year for most companies is from 1 April to 31
March. Q1 thus refers to the April–June quarter; Q2 refers to July–
September, and so on.
Initial Public Offerings (IPOs) of some good companies in the shrimp
processing sector are expected in future, so the scarcity premium enjoyed
by the currently listed players like Apex Frozen Foods and Avanti Feeds
should come down over time.
It’s very difficult for me to understand the financial reporting of
infrastructure companies in India. I have always tried to avoid such stocks
to the maximum extent possible.
Author’s Note
If you do invest in infrastructure stocks in India, try to avoid them
ahead of an upcoming national elections year. In 2018, infrastructure
stocks should have been completely avoided since 2019 was expected
to witness a tightly contested national election. In most cases, one
should avoid politically sensitive stocks as they are not conducive for
long-term investing.
Read a very informative thread on ValuePickr Forum5 about the current
bear market in mid-cap and small-cap stocks. There are many great
insights in it. Essential reading for all investors.
Hearing bullish commentary from a textile company which I have studied
in the past. I would be cautious. Their goalposts keep shifting a lot.
Previously, the company’s 2020 vision got shifted to 2022, and now, it’s
been moved to 2023. It’s very important to be aware of the history of
individual companies. This company just keeps making capex

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announcements and piling on debt at a time when competition is
intensifying in its industry.
4 June
Fall in indices from January highs:
Nifty—3.9 per cent
Mid-cap—14 per cent
Small-cap—20 per cent
Broader market is in real pain. Sentiment is pretty bearish among most
investors. Many stocks that were retail investor favourites have lost more
than 50 per cent in the past four months, and include HDIL, HCC,
Kwality, Strides, Manpasand Beverages and Punjab National Bank
(PNB), among many others.
Meanwhile, the expensive blue-chip stocks continue to do well amid a
flight to safety. In the last four months:
Bajaj Finance—up 21 per cent
Mahindra & Mahindra (M&M)—up 18 per cent
Kotak Bank—up 18 per cent
Tech Mahindra—up 16 per cent
Hindustan Unilever—up 14 per cent
Asian Paints—up 12 per cent
Some analysts are recommending the stock of Munjal Showa by stating
its low trailing price-to-earnings (P/E) ratio of 9x and debt-free balance
sheet without considering the fact that nearly 75 per cent of this
company’s sales come from one single customer (Hero MotoCorp).
Markets don’t give good valuation multiple to single-client companies.
The fancied micro-cap stocks of 2017 are now being termed by investors
as ‘operated stocks’.
In this bearish environment, it is best to stay with stocks having earnings
growth visibility. When the market sentiment improves in future, these
stocks will be the ones to recover the fastest.

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During a bear market, even if you buy good stocks cheap, you need to be
mentally prepared for further drawdowns.
Sudden crash in the broader market. What a bloodbath in small-cap
stocks! So many of them are hitting lower circuits—Rain Industries,
HEG, Graphite India, Himadri Speciality Chemicals, Goa Carbon,
Butterfly Gandhimathi, Venky’s, NELCO, Associated Alcohols, IOL
Chemicals, Future Consumer, JBF Industries, GVK Power, Prakash
Industries, Bhushan Steel, Tinplate, India Glycols and many others. The
list is endless.
Market ‘experts’ are saying a further 10–15 per cent fall is possible in
mid-cap and small-cap stocks. They have been saying the same since
February with each passing fall. Best to focus on individual stocks and
ignore the noise.
5 June
There is complete panic going on in small-caps. Bhansali Engineering,
HEG, Graphite India, Prakash Industries, Rain Industries and Goa Carbon
have hit lower circuits.
Sreeleathers is down from Rs 340 to Rs 240. There is serious damage to
share prices. Even KEI Industries is down sharply today.
For the first time this year, I am getting a feeling that mindless selling is
taking place, irrespective of valuations. This small-cap carnage has been
triggered by rising US interest rates. It’s sucking liquidity like no
tomorrow. If the US Federal Reserve (Fed) doesn’t slow down, it may
lead to a continued free fall in emerging market stocks.
Now it’s the turn of mid-caps to crash. Capitulation is happening fast and
furious. I didn’t expect it to occur so quickly. I thought stocks in the
broader market will consolidate after their recent sharp fall until the state
elections in December are over. But rising crude oil and US interest rates
have hastened the collapse.

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Author’s Note
India imports nearly 80 per cent of its crude oil requirements. History
has shown that mid-cap and small-cap companies in India are highly
vulnerable to an oil price shock (and the resultant surge in interest
rates), and their stocks tend to do poorly in such times.
Many retail investors who entered the markets late are now running for
cover. A painful phase of vicious selling is going on, where people think
any rumour must be true, so they try to exit at any price they can get.
I am waiting for quality large-caps like Bajaj Finance and DMart to
capitulate. The blue-chip stocks need to crash for a durable market
bottom to take place.
It was a day of mayhem on Dalal Street with more than 400 stocks hitting
a lower circuit, primarily triggered by the recent Additional Surveillance
Measure (ASM) rules put in place by the stock exchange. Massive margin
selling was witnessed in mid-cap and small-cap stocks. I had not studied
the implications of the ASM before today’s crash. In hindsight, I should
have.
The stock exchange introduced the ASM mainly for controlling
speculation (intra-day trading) in individual stocks. The ASM has two
key points—a daily circuit filter of 5 per cent and a 100 per cent margin
on open positions of the stock (it is like how trade-to-trade or T2T stocks6
work in the Indian market). You cannot do intra-day trade in the stock.
The rules mean that you have to pay full amount when you buy the stock,
and you can sell it only if you have it in your demat account. No
speculation is allowed in the stock. Some brokers used to give credit
facilities to their client by keeping 35–40 per cent margin. Now, it is
compulsory to keep 100 per cent margin. If you have paid the full amount
for your purchase of the stock, then no margin is required. This 100 per
cent margin concept is most relevant for speculative traders who do not
pay full amount for the stock, and avail credit facilities from their brokers.

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The stock exchange has introduced ASM to control this speculation.
Market participants are confused about the rules because they are new,
and this is leading to the panic sell-off. A big regulatory change is usually
disruptive in the short term. In future, ASM will become familiar like
T2T.
All major falls (greater than 20 per cent) in the history of Bombay Stock
Exchange (BSE) small-cap index:
2005—24.09 per cent
2006—43.51 per cent
2007—22.59 per cent
2008—79.92 per cent
2010—55.24 per cent
2016—22.13 per cent
2018 (till date)—24.5 per cent
Author’s Note
As investors, many of us are hopeful optimists by nature. The period
between 2003 and 2007 saw a big bull market in India, so we attempt
to reassure ourselves by looking at such statistics during a bear market
to give us hope that the fall may just be a routine sharp small-cap
correction within a larger bull market.
Fall in indices from January highs:
Nifty—5 per cent
Mid-cap—17 per cent
Small-cap—24.5 per cent
The worrying aspect of the current market is that panic-selling has not
even begun yet among institutions. The Nifty is still only 5 per cent from
its highs. Investors are very nervous about what a 10 per cent cut in the
Nifty from here would do to mid-cap and small-cap stocks.

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One important lesson for me over the last decade is that if you want to
make it big as an investor in the stock market, you need to be detached
from stock price fluctuations. In bad times, it gets extremely tough for
one to endure such severe notional losses. Market cycles will come and
go, but good-quality businesses bought at reasonable prices will
eventually make you money, sooner or later. India will grow at a healthy
rate; Nifty stocks could have earnings growth of low double digits; but
there will be a few mid-cap and small-cap stocks which will grow
earnings at 25–30 per cent compound annual growth rate (CAGR) for
next three to five years. They are bound to create wealth in the longer run.
You just need to have the confidence and the conviction to back them. In
the long run, what ultimately counts are earnings. Sanity will eventually
prevail, like it always does.
6 June
Some investors are advocating Asian Granito on the basis of its much
lower P/E compared to its peer Kajaria Ceramics. They are overlooking
the higher working capital intensity and high debt levels of the former.
Author’s Note
The P/E ratio in isolation tells us nothing about a business’s capital
intensity, cash flow generation, management quality or balance sheet
strength, or about the expected duration of its competitive advantage
period. There is a lot more to making money in the stock market than
just looking at P/E ratios in isolation.
The Miglani family, promoters of Uttam Galva Steels, has agreed to
repay the entire dues of the company and its subsidiaries to lenders, thus
saving it from going into auction in the National Company Law Tribunal
under the Insolvency and Bankruptcy Code (IBC).7 The IBC has truly

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been a huge reform for the banking system in India.
Author’s Note
The ownership structure in Indian companies is characterized by
‘promoters’ and ‘non-promoters’. In principle, promoters refer to
founders or controlling shareholders, while non-promoters refer to
other shareholders, including minority shareholders.
A micro-cap Non-Banking Financial Company (NBFC), which recently
completed a preferential issue to some marquee investors, is giving
hypergrowth guidance for the next five years. I am wary of such lenders;
they tend to eventually blow up in their pursuit of market cap
maximization.
7 June
A big learning for me this year—be very conscious of the quality of
companies entering your portfolio during a period of euphoria in small-
cap stocks. It is very difficult to exercise discipline at such times, but
those phases are the most important in our long-term investing journey.
Ten-year bond yield in India is at the highest level since May 2015, at
7.96 per cent. Many investors thought higher interest rates would sound
the death knell for NBFCs, and today, the stock of Bajaj Finance has hit a
new high. One needs to be cautious, though. Small NBFCs may not do as
well amid rising interest rates as their large established peers with pricing
power.
Author’s Note
Bajaj Finance is regarded as the gold standard among NBFCs in
India.

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In the long run, markets rise, then fall, then rise again, then fall.
Meanwhile, individual stocks become 10x–100x along the way.
14 June
Analysts are now applying a 10x P/E multiple to Avanti Feeds in their
research reports, stating that it is a commodity business. Six months ago,
they were justifying multiples of 25x for the same business by
highlighting its negative working capital and sector leadership. Price
drives perception in markets.
Some red flags to take note of while analysing stocks—low tax payout,
large number of overseas subsidiaries, revenues of Indian entity that has
previously raised money are shrinking rapidly, debt has not reduced,
receivables are up sharply, cash flows are weak, all money is routed to
overseas subsidiaries, and dilution after dilution takes place. One small-
cap information technology (IT) stock that has been catching favour with
investors of late has all the above characteristics.
One thing has clearly come to light in this bear market—not many
investors understand the difference between accrued net profit and
operating cash flow. If you want to identify ‘inflated sales’, they show up
in debtor days. Whenever you find receivables of more than six months
with negligible creditors, be very careful. Ricoh India is a good case
study. Over the last decade, it had Rs 400 crore cumulative net profit, but
Rs 500 crore negative operating cash flow, and debt ballooned 3x funding
its stretched working capital. Once you understand the concept of cash
conversion cycle, that’s half the battle won as an investor.
15 June
Finding an ethical promoter is a necessary but not sufficient condition for
wealth creation. One needs to take opportunity cost into account. There
have been several good companies in India before investing in whom I

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waited a long time. The potential was always there, but with opportunity
cost attached. I would rather buy on some development and
materialization than do hope-based investing. The next time you hear
someone saying ‘buy this stock because X is going to happen or Y is
going to happen’, you should simply respond by saying, ‘I will buy it
when X or Y does actually happen’.
In the market, every stock has its own set of investors who find it
attractive to buy; P/E is not the only measure. A low-quality steel
producer at 10x P/E may be thought of as expensive, while a high-quality
discount retailer (such as DMart) at 100x P/E could be thought of as
reasonable by different categories of investors. There are investors for
every stock. For instance, I am sure most investors will look at Bajaj
Finance’s high P/E and price-to-book (P/B) ratios and say it’s ridiculous
to buy at this price, but I am pretty comfortable with it in this bear market
environment. Similarly, there are investors who think DMart is a rare
retail company in India that has done extremely well in the past, has had
amazing same-store sales growth, healthy return ratios, a great promoter,
among other factors . Additionally, the stock’s low public float and
resultant liquidity premium keeps its valuations high too.
I have learned to respect the market’s wisdom over the years. There is a
reason everything trades at the level it does. There are multiple yardsticks
of valuation. For example, in India, there are stocks of consumer
franchises, such as Titan, Page Industries and Bajaj Finance, that have
always remained expensive, and still have given good returns over the
last decade. But the P/E parameter will never tell you to buy them.
21 June
Read a great article on Morningstar, titled ‘Capitulation of the small-cap
investor’.8 I could relate to many of the points mentioned in it, since I had
personally committed similar mistakes during the 2017 bull market
mania. Bookmarked this article for future rereading.
P/E is not a good valuation indicator for a services platform company, as

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investments are expensed and not capitalized. Amazon is targeting 40 per
cent revenue growth on an existing base of 200 billion US dollars. If you
take out the investments for that, the P/E will become very low. The
visionaries don’t want to stop to milk profits; they want to keep
reinvesting—a nuance I didn’t get until recently. This is the reason why
Berkshire Hathaway does not pay dividends—it can reinvest. And
Amazon has a float that’s even better quality than an insurance company,
since there are no black swans in a marketplace. Its incremental return on
capital employed (ROCE) is super high as it’s a marketplace—someone
buys, someone sells, and you make money on both sides. Many
technology companies in the US are in winner-takes-all businesses; that’s
why it’s so important to keep reinvesting. It’s either an Olympic gold
medal or nothing. Tech-enabled low marginal cost distribution is one of
the best business models ever—highly enduring and underestimated.
Very difficult for most to understand a winner-takes-all business as no
conventional metric applies.
24 June
The market tends to initially discount the best-case scenario in new, high-
growth industries, and their stocks trade at very high valuations. Once the
fundamentals begin deteriorating and growth starts slowing down, the
elevated stock prices fall hard.
25 June
It is very important to be aware of the history of as many companies as
possible in the stock market you invest in. This helps avoid getting bad
quality into the portfolio. A building materials company which is being
touted on WhatsApp groups for its cheap valuation has a poor track
record. The promoter just keeps rolling stories. Previously, he did a
qualified institutional placement9 (QIP) while stating he will reduce debt
with the proceeds. Instead, he announced big capex post the QIP.

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28 June
I was reviewing my old trade reports and contract notes today, and I came
across a startling observation. If I had just held on to my shares of high-
quality businesses like Page Industries and Eicher Motors, which I bought
originally in 2013, I would have made almost the same money that I have
made by jumping in and out of so many stocks over the last five years. In
both cases, the results are almost identical in terms of total portfolio
returns. But the hyperactive approach I adopted has meant too much
stress and sacrifice of personal and family life. Stress-adjusted returns
matter a lot. They really do. By the time most of us realize this as
investors, we have already exhausted many years and shortened our
remaining lifespans due to weakened mental health. Old too soon, wise
too late.
With every further fall in its stock price, Avanti Feeds is now changing
from a fast moving consumer goods (FMCG) company to a generic
commodity business in the eyes of investors. Meanwhile, after a 10x rise
in its stock price, HEG has transformed from a commodity stock to a
strategic materials business in sell-side brokerage reports. Price changes
perception.
29 June
Lending businesses should be valued on P/B ratio only if there is a danger
of the book value getting eroded. If the lender has an impeccable track
record of low non-performing assets (NPAs) and great execution across
interest rate and economic cycles (like Bajaj Finance and Gruh Finance),
it should be valued on P/E. For instance, P/B is a wrong valuation
measure for Gruh. It has a return on equity (ROE) of over 30 per cent,
grows at 20 per cent along with a high dividend payout, and doesn’t need
capital for growth (since ROE is higher than growth). So, it never dilutes
equity.
Without growth, high ROE may be a value trap. But a sustainably high

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ROE with high growth and low NPAs is simply remarkable. HDFC Bank,
Bajaj Finance and Gruh Finance, all huge wealth creators from the
lending industry in India, had common parameters—high ROE, high
growth and low credit losses. The last one is most important. If a lender
messes up on NPA, its stock will be severely punished. Markets can
tolerate a bit lower ROE or slower growth, but not a sharply rising NPA.
Author’s Note
HDFC Bank and Gruh Finance are regarded as the gold standard
among banks and housing finance companies respectively in India.
Equity capital raise for lenders is like capex for manufacturing
businesses. After a lender raises equity capital, operating leverage comes
in the form of net interest margin (NIM) expansion.
Leverage for lending companies is like raw material. It’s not comparable
to a non-financial company raising debt. For lenders, since debt is a large
part of capital employed, the return on assets (ROA) is an important
financial metric. Here, it should be noted that looking at only the current
ROA may lead to the wrong conclusions. What one should consider is the
cross-cycle ROA. For example, microfinance companies in India are
showing great ROAs right now due to lower-than-normal credit costs, but
if you observe their historical credit costs over a seven-to-eight-year
period, their normalized ROAs are a lot lower than what we currently see
in them.
4 July
Whenever there is a bad business segment and a good business segment
within a company, it’s the valuation of the bad business that prevails over
the entire company. For the market, a combination of a good business and
a bad business is considered a below-average business overall (unless the

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bad business is a negligible portion of total revenues and is not a major
drag on the overall profitability of the company). This is the key rationale
behind why companies do spinoffs/demergers—to unlock value and
improve their valuations in the market.
12 July
As of June-end, the median fall in stocks within the Nifty 500 Index was
a steep 35 per cent, so bounces could be strong in individual names. A lot
of that is already evident in the last few days. But this time, it’s important
to be selective in what to buy. Stocks of both good and bad businesses
had fallen, but only the good ones will recover soon. The bad ones won’t
see their 2017 levels for a long time.
13 July
Investors are suddenly praising large-caps as being the best quality stocks
to invest in. That’s not quality investing, but momentum investing. That’s
where the flow of money is going, so investors are chasing that. Many of
these stocks weren’t touted as high-quality until six months back, before
they started rallying. These are just phases of the market. People are
hiding behind such stocks at 70x–80x P/ E and saying these are high
quality. Things can change quickly with a small change in sentiment.
Perception changes very fast with change in price momentum. Can Fin
Homes, a small-cap housing finance company (HFC), was widely hailed
as being high quality, with all kind of arguments justifying it’s 5x P/B
valuation at the top, and now, it’s regarded by investors as a very average
business at half the price.
18 July
Analysts are justifying Bandhan Bank’s huge valuation premium by
pointing to its high growth, high ROE and low float. No one is talking
about the geographical concentration risk in it. Also, one should note that

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Bandhan’s current ROA and ROE are at peak levels, and will decrease
going forward, as management wants to reduce the proportion of high
margin, unsecured microfinance loans in its lending book, and increase
the share of lower margin, secured loans.
20 July
Between Bajaj Finance and Bajaj Finserv, I will stick with the former.
Bajaj Finserv will do well too, but its insurance business is average. What
the Bajaj group is really good at is lending, so why should I dilute my
exposure? I want exposure to the best NBFC, and not a mixture of great
and average businesses.
Author’s Note
Bajaj Finance is the lending arm of Bajaj Finserv, which holds a
majority stake in the former and operates in the insurance industry.
So many people on social media are suddenly talking about Bajaj
Finance. I wonder why they are surprised with the sharp rise in its price.
The stock spent most of last year consolidating between Rs 1,600 to Rs
2,000 while many junk stocks were running up rapidly. Bajaj Finance is
just moving up after the consolidation. If this move had happened in
2017, nobody would have bothered about it. This year, it is moving up
when most mid-caps and small-caps are going down and that is what is
bringing attention to it.
21 July
In my humble opinion, the days where one could take a five-to-ten-year
view on a stock are gone. I believe two to three years is the maximum
feasible period in today’s fast-changing, highly disruptive environment.
Better to just latch onto ideas with good growth visibility for the next two

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to three years, which are available at reasonable valuation. If the future
business prospects continue to look good at the end of that period, then
we can hold on—this is how multibaggers actually happen for investors.
Bandhan Bank’s public float data is very interesting—promoter holds 82
per cent, institutions hold 16 per cent and retail holds only 2 per cent.
Even a relatively small amount of delivery-based buying, and the price
could rise very sharply. This stock could soon go to bubble valuations.
I keep seeing the same cheaply valued, low-quality banking stocks being
recommended on WhatsApp groups and social media. People need to
realize that once a bank reaches 5–6 per cent NPA due to poor asset
quality, it stops getting interest from institutional investors.
A hard lesson for many (including me) in this bear market—it really pays
to stay with quality in lending businesses. If you are not comfortable with
the high valuation of the best lending franchises, then don’t invest. But it
is not a good idea to go down the quality curve. Not everyone is capable
of good lending, and the adept managements have to be valued highly
here.
22 July
Bandhan Bank’s cost-to-income (CI) ratio is very low. It has the best CI
among listed peers, but that’s because it was primarily operating in a
single state (West Bengal) till date. The CI will increase post expansion to
other states, diluting ROE.
23 July
I see investors talking about how they will be absolutely disciplined
during future bull markets, and not go down the quality curve to chase
quick returns. Easier said than done. When you will see 2x–3x being
made by others in quick time in front of your eyes while you wait on
sidelines, you will almost surely get seduced back into your old ways and
end buying some junk stocks. You just can’t resist it. One way to
minimize the damage is to keep booking profits in such stocks by riding

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them with stop losses, and making sure to follow that discipline.
For a forensic analyst, triangulating data points that are within a
company’s control is pointless. At least one data point has to be an
external source that the company can’t control, like LinkedIn or
Glassdoor, which are harder to fudge.
25 July
In infrastructure companies, it is the new order wins that drive the stock
price rather than the executed or booked orders.
27 July
The stock price action of Muthoot Capital is very impressive. Great rally
first, hardly any correction in a big small-cap drawdown, and promptly
made new highs when the market stopped falling. Stock fell briefly post
its quarterly earnings, but that fall was reversed the very next day, and the
stock started moving higher back to its all-time high. It hardly fell during
the sharp market correction, and promptly rallied whenever the market
stabilized or attempted a bounce of the lows. This indicates very strong
hands in the stock.
29 July
Some colleagues have been asking me whether, in my view, the high
valuation of Bajaj Finance is justified. It’s best to let the market decide. I
have learned this big lesson over time—during the high growth phase of a
company, its valuation goes from cheap to fair to expensive to insanely
expensive. It hardly ever comes down until there is high growth. So, I
would rather focus on getting growth and longevity right, and then the
valuation. If and when growth guidance is revised down sharply by the
company, valuations will severely contract. One needs to watch out for
that.

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31 July
There is a structural market change taking place in the NBFC lending
space in India. Capital is getting more and more commoditized.
Understanding risk is the key differentiator. The model may move from
interest income to fee income—have sector expertise, understand risk,
underwrite prudently, and parcel the loan and sell down to capital
providers for fee income. Three companies are getting very active in this
space—Indiabulls Housing Finance, L&T Finance and Piramal
Enterprises. Companies like Edelweiss and IIFL will most likely act as
conduit between these entities and capital providers.
2 August
When you are investing in a newly setup lending company, always check
whether the promoter has experience in how to scale up a loan book. If
the promoter is from a non-credit background and talks about
hypergrowth in the loan book in the initial years, an investor should be
wary of the company. You need to get credit right first. Every good
lender in India went through at least one big, painful cycle. Only an
inexperienced investor will believe otherwise.
In lending businesses, the jockey is more important than the horse. It’s all
about management, management, management; one that has been tested
across at least a couple of cycles.
3 August
An important lesson for me in my investing journey—if it is a good-
quality business with high growth prospects for a long period of time,
then it is okay to pay a high P/E and sacrifice the first-year return. The
returns from the second to fifth years will compensate for the flat return
in the first year.
5 August

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HDFC Asset Management Company (HDFC AMC) is about to come out
with an IPO. Doesn’t look too impressive compared to its peers. Over the
last five years, its profits and revenues both grew at approximately 20 per
cent CAGR, despite assets under management (AUM) growing at
approximately 27 per cent CAGR. ICICI AMC has been growing at over
35 per cent CAGR, and has much higher return on equity too. But I have
often seen in the Indian markets that if it is a new listing with the right
mix of good-quality promoter, long business-growth runway and low
float, the stock tends to keep surprising you on the upside.
Investors who use technical charts shouldn’t give too much weightage to
a single-day price movement in an illiquid stock. The lower the stock
liquidity, the longer the time horizon you should look at in its chart.
6 August
A sharp improvement in the working capital cycle can signal a positive
change in a company’s trajectory, and vice versa.
The massive premium accorded to quality stocks is unique to the Indian
markets, given that corporate governance is a big issue in many listed
companies. That’s why comparing the valuation of companies in India to
global valuation standards is a bit pointless.
9 August
Rather than adding to a portfolio stock after a fall, it is better to average
upwards after seeing management execution. The exception to this is
during a market crash, when all stocks (good and bad) fall.
There are many ways to analyse a stock while deciding to buy. Valuation
is not the only metric. The investment opportunity has to be looked at in
the right context. For instance, if a company has done big capex and is
selling its non-core assets for debt reduction, I would consider investing
in it, even though the trailing P/E might look very high, because the
current earnings are temporarily depressed.
It’s not prudent to dismiss a real estate stock from consideration based on

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one quarter of reported numbers. Real estate companies can’t post great
numbers every quarter. Here, the revenues would be lumpy depending on
project handovers. Rather than revenues, look at bookings and cash flow
from operations (CFO) when analysing real estate stocks.
11 August
For high-growth NBFCs, the reported NPAs can look low. So, one should
look at the NPAs on the seasoned portion of the loan book. For instance,
IndoStar Capital Finance’s reported net NPA for its retail book is 1.7 per
cent in the most recent quarter, but if we calculate it for loans older than
twelve months (current net NPA divided by previous fiscal year loan
book), it comes to almost 5 per cent.
When good earnings are coming in repeatedly for a stock during a bear
market but the price isn’t going up, such a stock becomes a ‘coiled
spring’ and rises quickly once markets recover.
If you are willing to pay an expensive valuation for a stock, then invest
only in a high-growth business with great financial metrics. High
valuations with slow growth—these stocks are a strict ‘no’ for me. For
this very reason, I don’t look at the large-cap FMCG stocks in India.
Since they are so limited in number, the handful of businesses in India
that can demonstrate strong execution and scaling-up capabilities
eventually get sky-high valuations.
14 August
Today, a big insight dawned on me after many years of investing in the
Indian markets—I missed many multibagger opportunities in the past,
thinking that the stock in question is expensive. The P/E always looked
high enough to make me hesitant to buy those stocks. But what I have
observed is that P/E ‘rerates’ if underlying business offers ‘visibility of
growth for a long period of time’. The market continues to discount
earnings in that case to many years ahead, hence the P/E expands. For
example, Titan always looked expensive based on P/E at any point of

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time. I have been tracking Bajaj Finance since its P/E was around 25x,
and it’s now elevated to over 50x. If earnings sustain, then it could
possibly quote an even higher valuation. The key to long-term investing
success is to spot such consistent, secular growth stocks, and rebalance
the portfolio towards them, especially if such businesses are available at a
small-cap or mid-cap size. But the challenge is to do the right analysis, to
arrive at safe conclusion—that the growth trajectory will continue for a
long time. That’s why we only have a select few people getting rich from
the stock market, not everyone.
Over time, one realizes that in some very special businesses, valuations
are a permanent concern. The market values these stocks very differently.
When the Nifty P/E is 15x, they will trade at 30x P/E. When the Nifty P/E
is 30x, they will trade at 50–60x P/E. It’s all relative. In the long run, a
business’s sustainable growth rate matters most to the market.
For a successful long-term investment, you need a trinity of growth,
durability and a healthy ROCE.
Author’s Note
A very high ROCE business (>50 per cent) with significant dividend
payouts and little room for reinvestment may be good for preserving
purchasing power of investors, but a reasonably healthy ROCE
business (>20 per cent) with large and prolonged reinvestment
opportunity is the one that creates significant wealth for shareholders
over the long run and grows their purchasing power.
17 August
This bear market has proven once again that great companies find a way
out of every crisis. They are relatively superior performers across
business cycles. That’s what separates great companies from average
ones. The strong players keep becoming stronger with each passing crisis,

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as their weaker competitors fade away. The resultant market-share
capture by the sector leaders is a source of great value creation for
shareholders over time.
21 August
Some deep value investors are citing the example of Blue Dart Express,
and how that stock, which was trading at an expensive valuation, has
fallen 60 per cent from its high. For every expensive stock which fell like
that, there are expensive stocks which did very well. The same applies to
cheap stocks. There is no fixed theory. As long as earnings grow fast and
consistently, valuations don’t come down. In fact, they go up even more.
Different kinds of stocks in the market need different approaches for
entry, holding and exit. No single rule applies everywhere. I disagree
when people say only buying cheap or only buying price momentum
works. A lot of techniques work in the market, if executed with proper
discipline.
4 September
A great investment is made when the trade is not crowded, the
fundamentals are changing for the better, and people are in denial, even
though the stock/sector is hitting a life-time high. In such cases, it’s
usually the majority who are wrong, not the market.
In this market, which was in its fifth year of a bull run, and where
multiples had expanded well above historical averages, if one was
looking at places most overlooked in search of value, diligence was
required to understand that things were cheap for a reason.
5 September
Shoppers Stop’s stock did well this year, driven by multiple events—
management change at the top level, deal with Amazon, debt repayment
and closure of loss-making stores in the last six months. But most

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importantly, it looked like a bottom in all business parameters.
Author’s Note
In investing, it is all about delta; that is, the rate of change in earnings
growth and its underlying quality. When a business goes from
hopeless to bad to mediocre to good to very good, you get
multibaggers along the way. It’s all about the future trajectory of the
ROCE. It’s also the reason why special situations involving
promoter/management change can deliver very good results for
investors.
6 September
Most experienced investors will attest to the fact that it’s not about money
after a certain level. It’s about passion and love for stocks and investing.
You can’t really make it big if you are doing this only to get rich.
10 September
L&T Finance trades at a cheaper valuation than Muthoot Capital. In
lending businesses, markets prefer a focused retail book than a
combination of retail and wholesale.
11 September
Many promoters of questionable quality raised huge sums of money via
QIP by using the favourable market conditions during the 2017 bull run.
Earnings per share (EPS) makes money only for shareholders. For these
promoters, QIP money is the real money which they can take out once the
bull market is over and no one is looking at their books of accounts after
the stock has fallen off a cliff.

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12 September
One way to approach market corrections is to look at stocks that didn’t
correct when the broader market fell, and which are the first ones to hit
new highs when the market stabilizes. These stocks usually lead the next
market rally.
Author’s Note
Bear markets bring out relative strength. If you are a techno-funda
investor and you like a stock for fundamental reasons, add it to your
watchlist. And then within this watchlist, monitor stocks’ price falls
from the top during a market correction. The stocks which fall the
least should stay on your radar.
When any of today’s great startups in India list themselves on the stock
exchanges in the future, they will likely do so at an exorbitant valuation
and at a stage in the company cycle when the best of the supernormal
growth phase is behind. From there on, the stock would be a
compounding story. Exponential money would be made only for the
angel investors and venture capitalists.
Some investors are praising the high net-profit growth year-on-year for
Reliance Home Finance in its latest quarter. I beg to differ. It had flat net
interest income (NII) growth. The high net-profit growth showed up due
to low provisions. The company decided not to provide for NPAs, despite
the provision coverage being very low. Such profit growth isn’t rewarded
by the market. In contrast, in the recent quarter, Muthoot Capital could
have shown stellar results, but decided to use their windfall profits to
increase their provision coverage ratio. That’s prudent and shows a
conservative approach. Over the long run, conservatism is rewarded in
lending businesses.

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18 September
Over time, I have learned that expensive valuations for NBFCs or banks
is an advantage. Naysayers of Bajaj Finance have always said that it is
expensive, and hence, shouldn’t be bought. But very high P/B valuation
of a lender can be its biggest strength if it can find buyers to dilute at that
level. Significant shareholder value gets created when a lending business
has high ROE and is able to raise equity at lofty valuations.
21 September
Sharp fall overnight in the US Dollar Index (DXY). Hope this sustains
today and gives a weak weekly close. That could lead to a further
breakdown, and should bring a much-needed relief rally for emerging
market currencies, equities and commodities. The most important driver
of global risk-on/risk-off sentiment in the short term is the US Dollar
Index.
Nifty Metal index is up 5 per cent. Its rally is on expected lines after the
fall in the DXY.
22 September
So many huge stock accidents in the market this year. Yes Bank, which
was once a favourite of Dalal Street, has crashed 32 per cent today! The
Reserve Bank of India (RBI) has curtailed the three-year term that the
bank’s board had sought for its MD and CEO Rana Kapoor, and there is
apprehension among investors that significant NPAs will be uncovered
after the end of Kapoor’s term. We have seen in the past how big bath
accounting10 takes place in such cases after the new leadership takes
charge. Whatever be the final outcome, we will get to know only in the
future. The market is mostly right in these situations. I hope there is not a
run on the bank by its depositors.
Looks like there is a contagion risk in India’s financial system due to the
IL&FS crisis.11 There is a sudden crash in many finance stocks! PNB

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Housing Finance is down 9 per cent; L&T Finance, Shriram Transport
Finance, M&M Financial Services, Edelweiss and Piramal Enterprises are
down nearly 10 per cent each; Indiabulls Housing Finance and LIC
Housing Finance are both down almost 15 per cent; Repco Home Finance
is down 12 per cent; Reliance Home Finance is down 18 per cent. Even
the mighty Bajaj Finance and Gruh Finance are down 19 per cent and 17
per cent respectively. I cannot remember when these two stocks ever fell
like this. Looks like the rally of the last five years in NBFCs is over.
There is panic-selling everywhere. Mid-cap and small-cap indices are
now down 6 per cent each. The stock of CESC is down 15 per cent;
Welspun Enterprises is down 9 per cent. HDFC AMC has hit a low of Rs
1,250.
The stock of Dewan Housing Finance Limited (DHFL) has crashed 59
per cent today! There are reports that DHFL bonds have been sold at a
high yield of 11 per cent in the secondary market by DSP Mutual Fund.
This has made equity investors of DHFL very nervous about the
company’s liquidity situation, and they have exited its stock en masse.
Other HFCs have sold off in sympathy with DHFL. Non-HFC NBFCs too
have joined in the fall. This is risk aversion at play after the unfolding of
the IL&FS crisis. Even entities having no direct exposure to IL&FS are
being sold off. The recent downgrade of IL&FS credit ratings is creating
a crisis of confidence. It could lead to systemic issues in the broader
financial system if money markets freeze up and NBFCs are unable to
roll over their short-term financing instruments like commercial papers
(CPs). This shows how deep interlinkages are in the financial system in
India, just like in the West. It’s similar to how institutions got directly and
indirectly affected due to the Lehman Brothers crisis in 2008. The
resultant forced selling in stocks due to margin calls created a ripple
effect all over. Any experienced investor will attest to the fact that debt-
market-induced pain on equity always causes bigger pain.
One should look at the borrowing mix of HFCs and NBFCs to better
understand their liquidity profile. Bank lines, retail non-convertible
debentures (NCDs) and fixed deposits are a stickier source of funding.

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But CPs and mutual fund debt instruments are relatively fickle, and
funding depends on how confident the market participants are to hold the
debt of the company. In the current market scenario, one needs to be wary
of lenders having high dependency on CPs and mutual fund debt. Banks
with strong current account savings account (CASA)12 franchises should
outperform in this tight liquidity environment.
Bajaj Finance and Gruh Finance recovered strongly by the close today.
Apart from Bajaj Finance, Gruh Finance too has been resilient amid the
sell-off in NBFC stocks this year. I am not surprised. It enjoys an
unlimited open line of credit with HDFC Bank. No liquidity issues, nor
any problems with tapping the bond market.
Author’s Note
Gruh’s parent company, HDFC Limited, itself has unlimited line of
credit with foreign institutional investors (FIIs), who love the HDFC
group with all their money.
My portfolio was down 7 per cent intra-day today, as it was heavily
overweight in financials. It finally closed down 4 per cent. Big lesson
learned. Never be overly concentrated in a highly leveraged sector like
lending, especially in a rising interest rate environment.
25 September
After the recent sell-off, I think it is an excellent time to book short-term
losses within one’s portfolio in order to book some capital gains later,
tax-free.
Author’s Note
Under India’s income tax laws, short-term capital loss can be adjusted

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against long-term capital gains as well as short-term capital gains.
Such loss can be carried forward for eight years, immediately
succeeding the year in which the loss is incurred.
Rule for investing in a business of average quality—buy when majority
thinks it is a dying business; sell when people think it is the best in its
class.
27 September
Barring 100–150 stocks of good-quality businesses, the rest of the stocks
in the Indian markets are only worth trading in and out of. You may
occasionally make a sizeable notional profit on paper in the latter group,
but you won’t be able to keep it unless you get out in time.
1 October
Came across a very insightful observation by André Kostolany. He said a
crisis is the best time to buy, as the government has no option but to
intervene. ‘You have to buy shares in a recession or crisis, because the
government will manage the situation by lowering interest rates and
injecting liquidity.’13
Some important tenets on micro-cap investing:
One needs to develop a good temperament for micro-cap investing, as
returns are not linear—they tend to be very random and back-loaded.
You need to ask yourself, can you hold such stocks patiently for one
to two years without any returns?
When assessing the capital misallocation for any company, look at the
magnitude and absolute amount of the capital deployment. Small
missteps can be pardoned.
Some of the best micro-cap investment situations are when you can
find that the capex is complete, but the benefits aren’t yet visible in
revenue or profits.

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A spinoff/demerger of a micro-cap company from a large-cap parent,
with residual institutional shareholding, is usually followed by forced
selling from large-cap funds (who are not allowed by their investment
mandate to hold a micro-cap stock in their portfolios) and it can result
in a deep-value opportunity.
Look for companies that don’t dilute equity. Also check for low float
—when coupled with no dilution, it means a limited number of shares
are available for purchase in the market.
The entry of a new generation of the promoter’s family can lead to
increased focus on market cap and newfound agility in marketing and
distribution in an erstwhile lacklustre company.
One should prefer unique businesses with no comparable listed peers.
The takeover of a stagnant company by a strong and proven promoter
group or management team can be a precursor to big value creation.
Look for companies with negative working capital or an improving
cash conversion cycle.
Author’s Note
Most of these principles are universally applicable to stocks,
irrespective of their market cap.
7 October
Went through a recent interview given by Stanley Druckenmiller. He has
made 30 per cent CAGR for thirty years by just focusing on liquidity. He
says liquidity is the most important thing in the market. I agree with this,
especially for mid-caps and small-caps.
8 October
The Indian government is not taking any steps to slow down the pain in

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the stock market. I think it doesn’t understand that long-drawn capital
market sell-offs have a feeder effect on the real economy as capital-
raising capabilities and the willingness to invest in capacities goes down
dramatically with crashing stock prices. A big enough stock market
correction itself can slow down the economy. The US Federal Reserve
and the European Central Bank understand this very well, and hence, on
every 15–20 per cent sell-off, many of their members come out with
reassuring statements to soothe the markets and let participants know that
they have their backs.
11 October
Interest rates go through very long cycles. The US’ rates, which were in a
bear market since the 1980s, have bottomed out now and broken out of a
very long downward channel. I think we will see higher rates in future.
And rising interest rates are not necessarily bad for equities. As long as
the rise in rates is in an orderly manner, interest rates and equity markets
can both go up together. We have multiple instances of this in history.
15 October
If anyone had said a couple of months back that DHFL’s growth would
slow down from 35 per cent to 15 per cent, they would have been
mocked. Now, the management itself has come on TV and said this.
Winds change fast in a leveraged business; DHFL was looking to grow
fast earlier because the company wanted to raise capital, and it tried to
show high growth before that. Else, DHFL’s historic growth rates have
been lower at 18–20 per cent. Now that the stock price has crashed and
valuation is depressed, the capital raise has been deferred. So, DHFL will
revert back to its historical growth rates until the market environment for
valuations becomes favourable again. Many banks and NBFCs in India
raised capital when the going was great for them (perfect timing) over the
last eighteen months. Despite DHFL being in the lending industry for a
long time, I don’t understand how it missed the golden opportunity to

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raise funds. Now, it’s in a tight spot. As they say, in the lending business,
you should raise capital when the market wants to give it to you, not
when you need it.
17 October
I have never understood the attraction that investors have for the
perennially disappointing third-tier private sector banks in India. So much
mental bandwidth, time and effort is spent, and high risk is taken, even
though these banks’ operating history is highly volatile. Sustainable
money is made in well-managed banks, albeit at higher valuations, but
with predictability.
18 October
Learned a new concept today—securitization of assets by NBFCs—and
how it helps them. An NBFC originates a loan, packages it and sells it to
banks. It helps the NBFC earn fee income, and frees up the capital locked
in the asset. It also helps banks meet their priority-sector lending targets.
Usually, loans to small and medium enterprises, loans for used vehicles
and affordable housing loans are securitized by NBFCs and sold to banks.
19 October
Henceforth, the very moment any adverse credit-related event takes place
in a lending business, I will exit it immediately, however cheap it may be
at the time. We all have seen what happens to cheaply valued banks
which have bad risk management. Such cheap banks only get cheaper
with the passage of time. The reported NPAs start spiking up once the
loan book growth slows down.
Since we cannot look into the individual loans of lending companies, the
best possible way to evaluate their lending practices is by leveraging the
collective wisdom of the market. Usually, the market gets it right in
valuing lenders—like valuing Gruh Finance and Bajaj Finance at very

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high P/B multiples, and valuing DHFL at a low P/B. That’s not a
coincidence. Of course, there are always exceptions.
To understand why investors in the Indian market hold Bajaj Finance in
such high regard, one needs to study its history:
Started as single-product company.
Diversified into multiple products.
Diversified geographically and developed a pan-India presence.
Demonstrated the discipline to get out of a product segment when
most of its peers acted imprudently and chased growth at any cost.
Achieved good growth across cycles with low NPA.
The promoter, Sanjiv Bajaj, chose a great CEO (Rajeev Jain), and was
completely hands-off when it came to day-to-day operations. Such an
approach helps cultivate upper- and middle-level management.
We should use the recent sharp market correction (in which both low-
quality and high-quality stocks have fallen) to improve the quality of our
portfolio. Most of us would have made some mistakes which should be
quite apparent now. The broad-based market correction has given us an
opportunity to correct those mistakes at not very high relative costs.
Timely action now could help us survive and also recover over time.
In hindsight, the big mistake for me and many of my investor colleagues
was to be overly concentrated in one single sector (financials). We
exposed ourselves to huge single-factor risk.
20 October
APL Apollo Tubes has announced the acquisition of Apollo Tricoat.
There is an expectation among investors that at some point in the future,
the companies will merge. I hope that doesn’t happen. A small market
cap company being merged with a much larger one will lead to returns
getting diluted for the former’s minority shareholders. Imagine someone
taking all the pain to accumulate this illiquid small-cap stock (Apollo
Tricoat), holding it through thick and thin, and then the management

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telling them that instead of getting the reward commensurate with the
risk, they will end up holding a small piece of a larger company.
29 October
I have learned some important lessons in the last ten months:
Companies with working capital cycle of more than 150 days are
typically bad investments. Some exceptions can be there, depending
on the individual business model. For instance, some business-to-
business (B2B) companies need to stock high inventory or a large
number of stock-keeping units (SKUs) in order to be competitive.
B2B companies with supply-side dominance—having predominant
market share in an industry alongside marginal competitors—have
historically created a lot of wealth in the Indian markets.
It’s difficult to make sustainable money in companies with very high
debt.
Business-to-government (B2G) is the worst business model to invest
in.
Growth more than ROCE is not sustainable for more than three to
four years.
Growth is important, but the quality of growth is 10x more important.
I would rather have a 15–20 per cent grower with 30–40 per cent
ROCE, than the other way round.
Heavily leveraged companies make for great shorting opportunities
during a liquidity crunch.
One big learning from this bear market is to be wary of aggressive growth
plans in a lending business. There are a million ways to hide cockroaches,
and if promoters want to play to the gallery during a bull market, they
easily can.
1 November
Heard the Navin Fluorine conference call. This business is transforming.

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The proportion of the high-margin contract research and manufacturing
services (CRAMS) business in overall revenue will go up over time. As
the salience of the business changes, the ROE and margins will pick up
further, and management gave some hints around that. On being asked
why they are not expanding more on the refrigerants side of the business,
as their competitor SRF has done, management said this part of the
business is regulated and they don’t want to risk making huge capex here.
In my view, this highlights that Navin’s management is prudent, and is
not after short-term gains. It wants to make the business more sustainable
and of higher quality over time.
Capex backed by pre-signed long-term contracts has much lower risk
compared to those uncertain situations where the company needs to find
buyers for its product in the spot market after the completion of capex.
2 November
The ongoing NBFC crisis will make the sector’s leaders stronger, while
weak hands will fold due to the challenges. In the last four years, many
financial institutions opened an NBFC business, but they will find it
difficult to continue due to steep headwinds. Leaders have a good chance
to consolidate the market and become bigger.
3 November
Apollo pipes has reported its quarterly results. Revenue is up 43 per cent
and net profit is up 88 per cent. On the face of it, it would look like a
great set of numbers. In my view, it’s not really that good. There is gross
margin and earnings before interest, taxes, depreciation and amortization
(EBITDA) margin contraction. Net profit is up primarily because of other
income contributions, which are non-operating in nature. On the positive
side, if one looks at employee expenses and depreciation, it is evident that
the company’s expansion is going on in full swing. Hopefully, once it’s
complete and revenues start showing up at full capacity, true margins
would show up. Till then, revenue growth will be the key metric to watch.

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3.
5 November
Many managements which gave rosy projections of high growth during
the 2017 bull market euphoria are now reporting bad numbers. Coming
frequently on business channels, projecting 40–50 per cent CAGR
growth, and then delivering poorly is not a sign of good management.
Such stocks get punished very hard during a bear market, and don’t get
good multiples in the long run.
6 November
Deepak Nitrite looks promising. Good management pedigree. The phenol
and acetone plant has come on stream. Phenol prices are at a 4-year high.
Seed marketing has been done, and customers tied up, according to the
latest conference call. It has no major competition in India. Rupee
depreciation is raising the cost of imports. The company will meet 80 per
cent of import substitute if the plant is utilized as planned. The fine and
specialty chemicals segment is expected to continue doing well; there is
scope for margin improvement. Raw material supplies have been secured
for the phenol business. All these points make me bullish on this
company’s prospects.
I learned about real estate developer funding today. A developer needs
financing at three stages:
Equity funding: To purchase land (mostly provided by private equity).
Structured debt: The funding gap during the time between land
purchase and getting various approvals and launching the project is
met through debt funding from NBFCs. The market rate of interest is
16–18 per cent.
Construction finance: Pre-bookings can only partly fund construction.
Developers need additional debt funding to complete construction.
This is provided by NBFCs at a market rate of around 14 per cent.
In recent times, a few things have happened that have increased
funding needs for developers:

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Previously, a developer could launch a project without many
approvals, and could fund both approval phase and construction phase
with customer deposits. The Real Estate Regulatory Authority
(RERA)14 act changed that. Now, one can’t launch a project without
all approvals in place, so a developer is dependent on NBFC funding
(structured debt) during approval phase.
In the last five years, a lot of home buyers lost their entire initial
deposit money in under-construction projects. So, today, buyers prefer
finished projects. Hence, there aren’t many customer deposits coming
in, and developers depend on construction finance from NBFCs.
7 November
As the bear market continues, business channels are increasingly inviting
bearish commentators on a daily basis. During the next bull market, they
will be conveniently replaced with bullish voices.
8 November
Investors are getting increasingly nervous about the possibility of the BJP
government losing the general elections next year, and a subsequent
coalition government which will slow the economic development agenda.
There are media reports of opposition parties joining hands to challenge
the BJP government in India’s most influential voting state, Uttar
Pradesh. Some investors are advising moving to cash ahead of the state
election results on 12 December in Madhya Pradesh, Rajasthan,
Telangana, Chhattisgarh and Mizoram. It is true that elections in India
have historically led to short-term market volatility in the past, but if you
invest in politically sensitive or government-facing businesses, then you
will always need to take such complicated cash calls throughout your
career, which in turn will increase the potential for unforced errors.
9 November

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It is tough being a fund manager during a bear market when so many
people criticize you. Public fund managers make decisions with foresight,
though they are judged only in hindsight.
It’s only after becoming a professional fund manager that you realize how
narrow the investable universe becomes when you apply the ‘quality with
growth’ filter. Low trading liquidity in small-caps and the high valuations
in quality stocks add to this challenge.
Key longevity tenets for an emerging manager in the fund management
business:
Don’t go overboard with concentration in a single sector.
Minimize operating expenses to the maximum extent possible.
Avoid short-term minded clients (this is very important since a fund
will occasionally have big drawdowns during its lifetime). Choose the
best cheque, not the biggest cheque.
10 November
I believe investors should stop commenting on and discussing politics,
and focus on the great investment opportunities in front of us in this bear
market. I am very sure that when we look back at this period in the future,
we will acknowledge how good a time it was to look at and pick stocks.
Being a full-time active investor is a tough way to make a living. It looks
easy only during a bull market. Other career options are far more
forgiving, and pay off sooner. Returns from active investing are back-
ended and come after a lot of blood, sweat and tears. Paradoxically, those
who love the process more than the money are the ones who last long
enough to make the money.
Some important observations from the recent Avanti Feeds conference
call. The company has two business segments: shrimp feed (which is
capital-light, doesn’t need much capex and constitutes the bulk of the
company’s revenues) and shrimp processing. Processing will continue to
scale and become a larger part of total revenues over time. It is a lot more
working capital-intensive, with similar or lower margins than feed. Since

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working capital is a part of capital employed, the company’s ROCE will
come down over time. Quality of earnings (margins, return ratios and
working capital) is deteriorating in this business, and that may lead to
valuation derating.
11 November
Good investments at a big discount always come with some sort of
discomfort or doubt, else there would be no discount. It could be anything
ranging from an industry headwind to negative perception about the
management due to a capital allocation misstep in the past. There will
always be something to worry about in a stock that’s giving you a good
margin of safety.
12 November
When investing in cyclicals, one needs to understand behavioural
patterns. The overbought and oversold state in markets continues much
longer than one can fathom. If the sector tailwinds were there for many
years, expect the headwinds to probably stay longer than you can
envisage.
14 November
The time to buy high-quality, blue-chip stocks in India is when there is a
broad-based market sell-off and these stocks fall along with the overall
market. During less volatile times, they tend to trade at very expensive
valuations. For investors with a lower risk appetite, the key benefit of
investing in such stocks is that they help provide stability to the portfolio
during times of crisis.
15 November
Many forensic accounting articles published these days do a deep dive
into the shady financials and/or bad corporate governance practices of

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some popular stocks from the 2017 bull market. I wish these articles had
been published ‘before’ the stock prices collapsed 60–70 per cent from
their highs.
16 November
Today, Rs 10,000 crore capital was raised by corporate India in the
commercial paper market. A total of Rs 28,000 crore has been raised in
the last three days. There are initial signs of liquidity conditions
normalizing. However, the funding rates of a few NBFCs are alarmingly
high. Need to be very cautious in those names.
19 November
Small finance banks (SFBs) can pose a serious challenge to many NBFCs
and microfinance institutions (MFIs). Their target end-customer profiles
are similar, and SFBs’ cost of funding is lower.
Distractions are at an all-time high in the digital age. Being able to keep
your head down and focus is becoming a big competitive advantage in
investing.
For some reason, most investors only want to learn from people that
invest like them. Try doing the opposite: the best nuggets of wisdom can
come from successful investors who invest differently than we do.
The best investing strategy is one that you can stick with for the longest
period of time across market cycles.
20 November
Very sharp fall in the US markets recently. Fall in leading stocks from
their fifty-two-week high:
Facebook—40 per cent
Apple—20 per cent
Amazon—26 per cent
Netflix—36 per cent

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Nvidia—49 per cent
Google—20 per cent
Since there is no issue of high inflation in the US, this sell-off is setting
the stage nicely for the Fed to put a brake on rate hikes in 2019.
Author’s Note
Jerome Powell, chair of the Federal Reserve, pivoted to a dovish tone
in January 2019, and by the middle of the year, he was cutting rates
rather than raising them.
21 November
Every crisis in an industry consolidates it further, with the sector leader
capturing market share and becoming stronger.
There are two key sources for ROCE expansion: margin improvement
and improvement in asset turns. Between the two, I prefer the latter since
high margins tend to attract competition.
Author’s Note
There are three forms of expansion capex: debottlenecking (most
accretive for ROCE because of very high asset turns), greenfield
(least accretive with lowest asset turns) and brownfield (more ROCE
accretive than greenfield but less accretive when compared to
debottlenecking).
25 November
Bitcoin has crashed below $4,000. Looks like we are in the final stages of

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capitulation.
Author’s Note
For risk assets, a huge liquidation event (for example, a prominent
company from the industry going bust) typically signals a durable
bottom for the foreseeable future.
26 November
For the HFCs that focus only on home loans for salaried people and lend
at 8–8.5 per cent, I don’t understand how the economics work. Given
their cost of funding of approximately 8 per cent, there is hardly any
room for making profits at even zero credit costs. After factoring in
operational costs, such loans would be loss making. That’s why most
HFCs were giving out riskier loans against property (LAP) and builder
loans, as that’s where the margins are. The HFCs that lend only to
salaried people have a broken business model. If they are lending to non-
salaried/self-employed, that’s a different story, as loans in that category
are given out at over 10 per cent. If any HFC investor thought they are
actually exposed to retail housing loans, that was a delusion. It’s
effectively builder loans and LAP that they are exposed to.
27 November
I don’t understand a particular anomaly. Everyone in the market says the
real estate industry in India is in distress, and there is an ongoing
consolidation as small builders can’t survive. There is clearly huge stress
in the industry, as NBFCs have stopped lending to builders. But all
NBFCs in their conference calls say there is no stress in their builder loan
book, and that it is all being serviced on time and asset quality remains
pristine. Why this disconnect? How are all these builders being able to

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pay all their monthly installments to the NBFCs on time, if there is so
much stress and slowdown? And why have NBFCs stopped lending to
builders if there are no asset quality issues and payments are happening
on time?
Most investing is cyclical. The duration of individual cycles and their
impact varies.
1 December
The big challenge in the Indian market this year has been one of growth.
Almost every industry struggled this year. An even bigger issue has been
that in the handful of high-quality stocks with good promoters and
sustainable growth characteristics, valuations hardly corrected.
It’s hard not to make money in a diversified small-cap/mid-cap portfolio
from these price levels in the next three years. The question is of patience.
When you start from low valuations, returns could be fast and furious in
the future, but the timing will always be unpredictable. So, one needs to
stay in the game.
Some analysts are praising the relatively safer business model of
diversified NBFCs. I have a different opinion. Bajaj Finance doesn’t need
diversification away from the lending business. You need to diversify
when either the sector you are building a business in is cyclical, or you
are just average in everything.
2 December
The market tends to give a valuation discount for conglomerate structure.
Intellectually, it is satisfying to do a sum-of-the-parts valuation. However,
the market prefers simple businesses.
One of the surest signs of future growth slowing down without
management admitting to the fact is when the dividend payout ratio is
increased significantly. During the high-growth phase of a company,
almost all of the earnings tend to be ploughed back into the business.

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3 December
We need to come out of the 2017 bull market mindset and avoid
anchoring bias. We were so used to seeing most stocks trade at 40–50x
P/E that 25x P/E started looking cheap to us. Very few stocks in India or
other markets of the world deserve to consistently trade at high valuations
for a long period of time. The business has to be something very special
and rare.
Not investing in anything when there are no attractive opportunities
available is good capital allocation.
Until a few years ago, Sun Pharma was widely regarded as a high-quality
blue-chip stock. Today, its shares fell 11 per cent on the news of India’s
stock market regulator Securities and Exchange Board of India (SEBI)
reopening its probe on insider trading and corporate governance issues in
the company. This event just goes to show that nothing in the stock
market is permanent. Rather than ‘buy and hold’, one should ‘buy and
monitor’. Investing is a 24x7 activity, and requires a lot of dedication and
hard work. Only the passionate few can sustain it for a long time.
4 December
A key concern with some of the listed multinational companies in India is
that the moment growth starts accelerating and operating leverage kicks
in, the royalty percentage is increased to make sure most of the upside
goes to the overseas parent.
A big challenge in the Indian markets is the scarcity of good businesses
and lack of investable options. The quality businesses of India wouldn’t
trade at such high valuations in the US, where there are many listed
stocks available with healthy growth and good corporate governance. In
India, growth is available in financials (which are cyclical in nature) and a
few niche mid-caps and small-caps (where investors face the issue of low
trading volume). So, large-cap consumer stocks become the default place
to hide for institutional investors. When growth was broad-based during

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the 2003–2007 bull run, and there were many growth stocks available,
none of the consumer stocks used to trade at their current insanely high
valuations. Today, their valuations carry a huge certainty premium, since
there is a lack of predictable growth elsewhere.
The strongest test of a brand is working capital reduction. It’s more
difficult to negotiate with channel partners than end consumers.
No discount for bad promoter-quality is enough in a bear market, and
hardly any is given in a bull market.
Author’s Note
It’s quite unbelievable—given how little minority shareholders can
know about what goes on inside a company—that investors look to
partner with anyone but the most exceptional and trustworthy
management teams.
6 December
Conventional valuation parameters do not work in stocks which have
cornered float. They overshoot both on the upside and the downside.
Rather than growth versus value, look for ‘growth in value’.
Special-situation investing (spinoff/demerger, promoter/management
change, merger arbitrage) is like deep-value investing with a clear
catalyst. It’s a very useful method to generate alpha in range-bound
markets.
Author’s Note
Special situations don’t always work out as expected. Big losses can
also occur. Some notable examples from 2022–23 include Piramal
Enterprises (demerger) and Indiabulls Real Estate
(promoter/management change). Investing is a probabilistic activity.

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Diversification is an acknowledgement of the need to always remain
humble in this profession.
8 December
The stocks of Nestlé, GlaxoSmithKline, Hindustan Unilever, and Colgate
are near all-time highs. Quality at any price has been the theme in vogue
this year, as people fled to safety.
Investors are fretting over the possibility of the BJP government not
coming back to power next year. They have forgotten that India had its
biggest bull market of 2003–2007 with a Congress-led coalition
government at the Centre. These political discussions among investors are
good for intellectual debates, but they do not achieve much. Good
companies and their stocks perform despite political parties. Instead of
getting carried away by the noise at times like this, we should be
discussing good stock ideas. One should be an optimistic realist. India is
too strong to be managed or drowned so easily by a group of politicians.
The best buying opportunities come during ‘unexpected’ macro shocks
when there is chaos and fear all around.
16 December
Net outflow by foreign portfolio investors in the Indian debt market this
year is Rs 52,700 crore, while in equities it is Rs 35,000 crore. Overall net
outflow of Rs 87,700 crore so far. Even if the figure does not rise any
further, 2018 is the worst year for Indian capital markets in terms of
overseas investment since 2002.
The sentiment among investors is really bad right now. As is typically the
case during bear markets, there seems to be no end in sight to the pain.
20 December
High growth, when accompanied by valuation contraction, may still give

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you decent returns over the long run, because growth can bail you out
(provided the company is earning more than its cost of capital). In such
cases, the key is to be reasonably sure that the derating will be slow and
gradual. That, in turn, will be driven by the quality of the shareholder
base, the size of the opportunity, the ability of the management to exploit
that opportunity and the nature of the industry (competitive dynamics).
23 December
It has been a very difficult year for investors in India. The negative events
this year that led to the big fall in mid-caps and small-caps from January
onwards include imposition of taxes on long-term capital gains,15 changes
in mutual fund regulations,16 the introduction of ASM, and interest rate
hikes in the US.
24 December
The sell-off in the US markets has been brutal this month. Only a Fed
intervention can stop this free fall. I used to hear about ‘Santa rally’, but
this time, it’s an Xmas sale. Fall in stocks from their 52-week high:
Facebook—43 per cent
Apple—35 per cent
Amazon—33 per cent
Netflix—42 per cent
Google—23 per cent
To add insult to injury, the Nifty is up 1 per cent year-to-date. The rally
this year has been primarily in large-caps, which has masked the bleeding
in mid-caps and small-caps.
25 December
The S&P 500 has fallen to 2,350 today from 2,630 on 14 December—
almost 10 per cent down in seven trading sessions. Brent crude is now

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below $50 from $86 not too long ago. All asset classes are now pricing in
a recession in the US in 2019.
30 December
The impact of the tough economic reforms carried out in India over the
last few years has been visible in 2018:
Thanks to the IBC law, 2,100 companies have settled their dues of Rs
83,000 crore.
The government has attached Benami properties17 worth Rs 4,300
crore.
Public sector banks have reported recovery of Rs 60,713 crore against
NPAs. The figure has doubled since last year.
Around 410,000 shell companies have been deregistered.
The 2008 market crash in India was due to foreign institutional investors
exiting and hardly any domestic money coming in. Now that a constant
stream of domestic investor money comes in every month, we are very
unlikely to get rock-bottom valuations like 2008, unless a catastrophic
event of unprecedented magnitude takes place. Just waiting and hoping
for market valuations to get to 2008 levels is not investing. If you work
hard, you will always find stocks that look cheaper than where they
should trade at. In every market, there would be stocks that will do well.
Find them and invest in them.
31 December
Markets go through cycles—accumulation phase, mark-up phase,
acknowledgement, euphoria and correction. We went through euphoria in
2017 and correction in 2018; 2019 will be accumulation, where only
select stocks with earnings growth visibility will do well. Basically, the
good old markets as we know them.
One of my biggest learnings this year took place after seeing some of my
stocks, which went up 2–3x in 2017, fall back to my initial purchase

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price. ‘Buy and hold’ doesn’t work for cyclical and commodity stocks.
One can’t afford to be asleep at the wheel when stock prices are soaring.
Many low-valuation stocks corrected further this year. The reasons for
low valuations in many stocks were evident. They just became de facto
buys as others had reached high valuations. Buying the stocks of good
businesses during corrections (albeit at a slightly higher premium) rather
than the low-valuation stocks of bad businesses is a prudent strategy for
long-term investors.
The more experience you gain in the stock market, the more your
investable universe shrinks as you learn what to avoid.
3 January 2019
Steel turned out to be a classical commodity trap. People invested
thinking that earnings are still coming in strong, so stocks should go up
further and, meanwhile, stocks fell 50–60 per cent. In commodities,
investor sentiment and the trajectory of the demand-supply dynamics play
a bigger role than reported numbers. Price action usually precedes
deterioration in reported fundamentals.
5 January
The legendary investors of Dalal Street got rich buying great companies
either at cheap valuations, or when those companies were of a small size.
None of that happens now. The great companies in the listed space today
are expensive, and the great businesses in the unlisted space will never
get listed at an early stage. Private equity and venture capital firms get
most of the upside, and only leftovers remain for IPO investors. This
problem wasn’t so prevalent a few decades ago, when the bigwigs of
Dalal Street made their fortunes. It’s way tougher these days. When
Radhakishan Damani bought HDFC Bank at 100x P/E many years ago,
the company was available at a low market cap with a huge growth
runway ahead of it. (For a high-quality small-cap business with huge
runway, you can afford to pay more and still make healthy returns.)

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Today, the wonderful startups in India do not list at a stage where they are
small and growing rapidly.
6 January
Polyplex looks interesting from a valuation perspective. It has shown very
good cash flow generation, and it has been paying down debt
continuously. It is trading at 0.5x sales. It has given forty-five rupees as
dividend in the last six months, which implies a dividend yield of 8 per
cent at its current market price. Company plans to continue to pare down
debt, while also setting up additional capacities in Indonesia. It has Rs
700 crore cash on its books, and is poised to generate an annual CFO of
Rs 700–800 crore. Market cap is just Rs 1,600 crore.
Author’s Note
In hindsight, I should have pulled the buy trigger on this stock. It went
on to become a big multibagger.
8 January
When investing in a leveraged business such as lending, one should be
fine with paying up for high-quality leadership. Capable managements
need to be valued highly in this sector.
9 January
Shareholders of Gruh Finance don’t seem too happy with the news of its
merger with Bandhan Bank. Overnight, they’ve gone from being part of a
secured housing finance business with HDFC parentage to an unsecured,
microfinance entity. This merger news should lead to some sharp selling
in Gruh’s stock in the near term.

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10 January
Whenever the US markets sell off, people start talking about the end of
the best times for the world’s economic superpower. What most don’t
appreciate is that the US is the global epicenter of innovation. The
prevalent culture of entrepreneurship and creativity gives rise to huge
productivity gains from time to time. America is an engine which will
keep chugging along, with some speedbumps along the way.
Read a report by India Ratings and Research (Ind-Ra) which states that
the overcapacity in the medium-density fibreboard (MDF) industry in
India will persist till fiscal year 2022 at least. The sector has witnessed
capacity growth of nearly 200 per cent through a mix of greenfield and
brownfield projects in the last couple of years. Given the overcapacities,
the sector has witnessed a price correction of 10–12 per cent in the first
two quarters of the current fiscal year. Ind-Ra expects MDF prices to
remain suppressed for the rest of the year on account of overcapacity.
When investing in cyclical industries, we need to pay very close attention
to the supply side.
Author’s Note
Investors in cyclical industries need to closely track supply (especially
if the total industry size is relatively small). Tracking supply means
monitoring the capex plans of various players, the resultant capacity
addition, and taking a view on industry pricing over the next few
years. Between 2017 and 2019, the total installed capacity in the MDF
industry in India went up significantly (>60%). Greenpanel’s MDF
capacity was increased to 540,000 CBM, Action Tesa’s MDF
capacity increased to 400,000 CBM, and Century Ply’s MDF capacity
was increased to 220,000 CBM. When so much of supply comes
onstream within a short span of time, companies are under pressure to
increase volumes and improve utilization to break even on the new
capacity. This is why the domestic price of MDF in India

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subsequently fell from ~25,000 per CBM to a low of ~19,000 as the
market was flooded by increased supply from all the major players.
11 January
In the Indian markets, quality with growth is generally available only at
an expensive valuation. There are some important reasons behind this:
There is a low supply of quality equities available in the market.
Domestic institutional investors (DIIs) are not comfortable investing
overseas, so their money keeps getting deployed into the same set of
limited good-quality names which are of a decent market cap size
with acceptable levels of trading liquidity.
Free float in the Indian market is possibly the lowest among global
markets. No other stock market has such high levels of promoter
holding/insider ownership.
13 January
No crook suddenly becomes a saint; they just pretend to be one for a
while in a bull market. Then comes the bear market, and they go back to
doing what they are good at.
14 January
Only those stocks are correcting where either there are headwinds for the
foreseeable future, or there are corporate governance issues. The stocks of
quality businesses with long-term earnings visibility are still standing tall
—Marico, Pidilite, Godrej Consumer, Bajaj Finance, Titan, among
others.
Never waste a bear market crash in which both quality and junk stocks
have fallen. Use it to course-correct your portfolio by selling the bad-
quality stocks and buying those good-quality stocks you always liked,
where unreasonable corrections have taken place.

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16 January
After reading in detail about the real estate industry, I have come to the
conclusion that a residential-only business model will face difficulties in
generating free cash flows on a sustained basis. The business model that
can do well is a combination of commercial real estate (which generates
rental income with high ROE and lowers volatility in difficult times) and
residential (which can do well in a strong-demand scenario only).
17 January
In bull markets, most investors’ focus is on the income statement and
reported net profit growth. Very few care about the balance sheet, cash
flow, working capital intensity or management quality. The hard lessons
are learned in the subsequent bear market.
19 January
I learned about how cement stocks are valued in the Indian market. There
are many factors like limestone linkage, plant location and EBITDA per
tonne that drive the valuation. Enterprise value per tonne is the typical
valuation metric used. Valuation range for various capacities:
1-2 MTPA (million tonnes per annum)—$40–50 per tonne
3-5 MTPA—$60–80 per tonne
5-10 MTPA—$80–$100 per tonne
>10 MTPA—$100–$140 per tonne
Yet another poor quarter for South Indian Bank. Higher NPAs and big
losses from its corporate loan book. Cheap can become cheaper for stocks
of lenders. The market rightly pays up for management quality in this
industry.
Author’s Note

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Murali Ramakrishnan, former senior general manager with ICICI
Bank, was brought in as MD and CEO by the board of South Indian
Bank in October 2020, to turn around the company’s fortunes. He
went on to do a good job of improving the bank’s collection
efficiencies and boosting its digital capabilities.
21 January
Bandhan Bank’s stock price has been falling sharply over the last few
weeks. Today, many research reports were published about stress in the
microfinance industry in West Bengal. Stock prices lead, analysts follow.
23 January
Inflows into domestic mutual funds have slowed down sharply. People
are very nervous and in wait-and-watch mode ahead of the national
elections in May.
There are a few things investors need to factor in for Edelweiss (a
diversified NBFC) now. The growth in its NBFC business will slow
down to 15–20 per cent (from 35 per cent previously). The insurance
business has still not broken even. Capital market businesses are now in a
cyclical downturn. Asset management and wealth management
businesses are highly correlated to market sentiment, so growth over there
too will slow down significantly. In summary, it’s a bull market stock that
will perform well when the markets are doing well. Many investors
(including me) mistook it to be a secular growth business in 2017, when
its stock price rose rapidly.
Author’s Note
Big investing losses typically occur when we extrapolate the high
profitability at the peak of an industry cycle and assume that they are

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•
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sustainable. Recency and vividness biases driven by stock price
euphoria in such industries further cloud our judgment.
Right now, the market is extremely narrow and the rally is limited to a
few large-cap Nifty stocks and a handful of names in the broader market
with earnings visibility. Every bull market has stages; small-caps as a
group rally hard only in the last stage. Till then, it’s a grind for most
investors.
24 January
So many individual stock accidents have taken place in the broader
market in the last one year. Today, it is the turn of Zee Enterprises, whose
stock is down 34 per cent due to the adverse news surrounding its parent,
Essel Group.18 Zee Learn is also a related casualty, down 20 per cent.
25 January
We tend to lose patience and become despondent in bear markets. But we
need to bide our time here in order to be able to reap the rewards
eventually.
An investor’s maturity and discipline is revealed near the end of a bull
market. That’s when widespread euphoria is at its peak. An investor’s
courage and temperament are revealed near the end of a bear market.
That’s when widespread fear is at its peak.
26 January
There aren’t many trends in this market. However, you can find a few
bottoms-up stock picks where you can expect 20–25 per cent growth for
next three to four years. The key right now is to focus on getting the
earnings growth right. Any negative surprises there, and you can have an
accident. I don’t mind paying a premium for good corporate governance

The Making of a Value Investor

The Making of a Value Investor

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