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