My journey as a value investor

Since long time, I wanted to write about my investment philosophy. But, personal things didn’t allow me to do the same. So, without further ado, I want to start on this topic. I joined workforce in Jul-2011 after completion of B.Tech in Computer Engineering from College of Engineering, Pune. One obscure mutual fund agent visited my office for investment purpose. This was mainly for tax-saving purpose as one can submit a proof of mutual fund investments as part of Section 80-C. He made many points clear about the investments long term holding, patience etc. I didn’t look at the performance of mutual fund I bought for three years. The investment doubled within three years. So, I had started taking interests in reading investments related books starting with “The Intelligent Investor” by Ben Graham. This book changed the way I was looking at stock market and built a foundation of how a good investment could be.

After that, I read as many books as possible about investments. Simultaneously, I started building portfolio. Here is a list

1. The Intelligent Investor
2. Security analysis
3. Warren Buffett and the Interpretation of Financial Statements
4. Value Investing: From Graham to Buffett and Beyond
5. The Little Book of Behavioral Investing: How Not to be Your Own Worst Enemy
6. The little book on value investing
7. Aswath Damodaran: How to Value a Company Pick a Stock and Profit (Business)
8. The Warren Buffett’s portfolio
9. Letters to shareholders of Berkshire Hathaway

What is value investing ?

Value investing is mostly mistaken with analysis of ratios like P/E, P/B etc. In my opinion, definition of value investing is very simple. Value investing can be defined as investing in a business which is available at significant discount to its intrinsic value. Forget about P/E, P/B etc. Now, someone might ask how do I figure out intrinsic value of a business. This is unanswered question till date. However, I have simple ways to look at my investments. Invest in business, not in stocks. So, next question is how can I find out business to invest. What characteristics should one look in the business while investing?

Characteristics of business to invest

I check following things while making investment :

1. Clean, focused and hungry management for expansion with good capital allocation skills : Management is the jockey of horse. If jockey is bad, don’t expect good returns. I look at their future plans for company and their hunger to make the company big. Also, making company big shouldn’t come with lot of debts. So, I evaluate capital allocation decisions. Management must be focused on their core competencies and should not have conglomerate forming tendencies. Essentially, great management will lead the company to awesome path. 
2. Business with strong fundamentals, predictable earnings growth for next 7–10 years and good future demand to the products : A business with strong fundamentals will protect the downside of the earnings. This is really important factor to evaluate because, in my opinion, risk in business comes from permanent capital loss. Evaluate what would be downside, great business will take care of upside. All these factors can be figured out if you look at what company is doing, their annual reports and thinking a lot about future demands of the product/service. E.g. NBFC, Housing Finance space are very good bets because they have high penetration capacity in Indian market. Great quality business will earn lot of money than the one with poor fundamentals. Characteristics of great business in short :

Business with less capital requirement

Business whose products/services don’t get obsolete easily. Meaning, such business does same boring thing for last decade or two.

Business shouldn’t be regulated.

Business whose products/services are so much desired that customer doesn’t have any other choice or very few choices.

     3. Reasonable price : Such wonderful thing should not be available at infinite price. I look at difference between current price and projected price. If this difference is too much, I have figured out an ideal investment destination.

     4. Minimum holding period : It should be at least 5 years. If you sense fundamentals of business have changed, you can sell the stake.

     5. Diversification : Concentrated holdings of 10–15 businesses in your portfolio will always return satisfactory performance. I don’t want to diversify beyond 20 stocks in my portfolio. I want to hold businesses which I really understand well and matching these simple criteria.

With that said, investor should read a lot about new opportunities and focus on analyzing the business very well. Focus on reading at least last 10 years annual reports of the business, watch management interviews. This will help evaluate the business.

I wanted this blog to be very simple and short. If you have any comments, please post.

Originally published on medium.