Sunday, November 8, 2015

Investment Philosophies of Guru Investors

An investor should have the ability to segregate information from the noise while taking an investment decision. This is all the important in today’s time when we all are flooded with millions of data points, analysis and suggestions. An amateur investor finds it utterly difficult to frame her investment theory. In this post, we’ll try to understand the philosophies of established investors in India. It is not necessary for us to follow these philosophies to create sustainable wealth, however, it may be a good source to understand the relevant factors which may contribute in one’s investment theory.  

John P. Reese has written a book ‘The Guru Investor’ where he has captured the investment theories of established investors like Peter Lynch (buy what you see around), Kenneth L. Fisher (Price-Sales Pioneer), Martin Zweig (conservative growth investor), James O’Shaughnessy (quantitative equity analysis), Joel Greenblatt (Magic Formula) and Joseph Piotroski (accounting-based fundamental analysis). All these investors had their own theories which drastically differed from each other but, I guess, all of them have made tonnes of wealth. One key message for all of us is - there could be multiple theories basis which huge wealth could be created. An investor doesn’t need to follow same theory to create wealth.
I should thank CNBC for starting a brand new show ‘The Wizards of Dalal Street’. This show is hosted by Ramesh Damani who himself is an astute investor. Mr. Damani has interviewed a number of investors to understand their investment theories. I’ve referred to these talks to explain the theories of these investors.

S. Naren:
Mr. Naren is CIO of the ICICI Prudential AMC and is a contrarian investor. His investment theory is to follow an investment checklist. This checklist based investing helps him to remove mistakes to a large extent. His checklist parameters are:

Fear & Greed: He looks for opportunities in fear and greed situations. Around few weeks back Glencore stock got thrashed when metals were under huge pressure. This was an opportune time to buy the stock – as it happened Glencore gave astounding 30-40% return in couple of weeks’ time.
Valuations: The tech stocks were moving up day in and out in 1999 but he stayed away as the valuations were unjustified. His contrarian approach helped him to remain solvent after the bubble burst.  He also avoided infra companies in 2007 as some of the infra companies had valuations more than the entire Pharma sector!
FII & CAD: He looks to buy stocks when FIIs sell as it happened recently in Aug and Sep 2015. He considers CAD as an important factor to time his investments. He likes the institutions which allocate the capital efficiently.
He tries to time the market basis the data thrown by his checklist.

Anand Radhakrishnan:
Mr. Radhakishnan is CIO of Franklin Templeton and is a classical growth investor. His overarching investment theory is growth and discipline.

Existing market, growth stocks: He looks for new entrants in existing markets growing at a good pace.  He liked the private banks Kotak, IndusInd, HDFC in 1990s when they disrupted the existing market with new business models.  
Future growth & leverage: He looks for companies which may not be growing at the moment but has the potential to grow in future without requiring much capital.  He is comfortable with financial leverage to an extent. He believes that operational and financial leverage are necessary for compounded growth. He doesn’t look for pristine balance sheets as they are mostly over-valued.
Sell strategy: He believes in leaving money on the table for the next buyer and doesn't try to capture the peak. He sells if the underlying investment assumptions of the investment are not playing out well.
Growth investing vs value investing: He is of the view that people invest in India to buy growth stocks and not value stocks as India is fundamentally a growth story.

Govind Parekh:
Mr. Parekh heads the Govind Parekh Securities and follows an interesting theory of buying what you know and buy & hold when there is blood in the market.

Buy what you know:   He believes in attending AGMs and visiting factories. Such visits provide much more information than just by studying the financial statements. He made money by investing in Madras Cements, Lakshmi Machine Works, Sundaram Group companies, Murugappa Group - Chennai based companies as he was based in Chennai. He never bought real estate or Gold as he didn’t understand these asset classes.  
Margin of Safety: He follows Margin of Safety principle. He may not make much money with such approach but doesn’t like losing money. If price falls, he would assess his underlying assumptions and buy more if there is nothing wrong with the company.
When to buy: He keeps part of his portfolio in cash all the time and does most of the buying when there is blood in the market. He has made most of money after markets have crashed than in the bull market.
Sell strategy: He sells if the price has increased and such high valuation is not justified. Such selling allows him to buy in bad markets. He sells partly if price has shot up and he himself wouldn’t buy the share at this level. This helps him to remain solvent when the market crashes.

Sunil Singhania:
Mr. Singhania is the CIO of Reliance mutual fund. His underlying investment theory is based on ‘Zebra in a Lion country’.

Zebra theory: Zebras move in a herd and want to be at the centre due to perceived safety when the lion attacks. But they get to eat little grass. Large companies are the Zebras at the centre while the small companies are the Zebras on the outer side. These small companies are the fastest to run and get to eat a lot of grass. A lot of wealth is made by investing in small cap companies.  
What to buy: Smaller companies with good balance sheets are great investment opportunities. Look for companies where the management is passionate and scale of opportunity is large. A balance sheet reading can say a lot about the management – whether companies have diluted the equity, cash flows, inventory, gross block or debtors status etc are very important to understand.
Don’t just go by fundamentals: He learnt in a presentation that market cap of cigarette companies is lower than the liquor companies across the world. In India, the largest Cigarette had a market cap of 40.0 billion while the liquor company was at 1.5 billion for obvious problems. He invested heavily in the liquor company and made a lot of money. It is important to have a strong thought process to find such ideas.  
Sell strategy: He doesn’t restrict the upside and remains invested for long periods of time.  

What’s my theory?
I have developed my own theory which is inclined towards ‘contrarian value investment’ over last 1.5 years and is still evolving.
I like to invest in small companies with good financials and growing at a sustainable rate. Such companies are not the darling of investors and have very low institutional holdings. Such companies are in niche but high quality businesses.
I prefer sustainable growth of 15-20% than high but volatile growth rates. I hate leverage and don’t understand why even banks exist (may be because I work with one!). Financial leverage encourages management to expand quickly which may lead to errors in capital allocation. I prefer companies generating a lot of cash flows and such cash accruals are sufficient to provide a sustainable growth.
I prefer a concentrated portfolio and has 5 stocks in my portfolio and around 60% of my investment is in single stock.

I hope to hear about your investment theory and what has worked for you in the past.  


  1. Informative article Vikrant! Naren's preference to buy when FII exit can sounds good for mutual funds. Retail investors with similar investment style can look at stocks which funds exit. Since most of leading funds take position in similar top 200 stocks hence when one exits others usually follow the suit to cut losses, at times such herd mentality by fund houses can present opportunity to fundamental investors or traders on short side.

  2. @Ashutosh: Glad you liked the post ! I agree with you on the herd mentality.

    An investor should look for opportunities when there is fear and be aware when there is greed in the market.