ValuePickr - Goa Conference Presentation - Abhishek Basumallick

Focusing on the BasicsAbhishek Basumallick

Disclaimer

Please assume I am personally invested in any stock ideas that may have been referred to in the presentation. My views ARE biased. This is NOT a stock recommendation. Kindly do your own due diligence and/or consult a registered investment advisor before making any investment decisions.

Whoever we are, whatever we are, as people, as investors is an

culmination of all our past experiences…

My Learning from Mr. Market

The market is a complex adaptive system – too many parameters to model for forecasting accurately – both at the macro & micro levels

For example, drug for cell cloning will wipe out the entire conventional pharma industry.

Given a long timeframe, all businesses are mediocre businesses.

Cameras, Newspapers, Landline phones, TV (?), Desktop Computers (?)

I cannot consistently time the market (Please read as I cannot do it at all!!)

Sell decision comes from a decline in business momentum

Helps in NOT falling in love with any business

Always fully invested. No meaningful cash holding in portfolio.

My Learning from Mr. Market

Diversification is crucial to portfolio risk management.

I cannot guarantee great upsides from my stock picks. But I can limit getting wiped out by one bad apple in the basket.

It protects me from unknown company-specific risks

When investing in small / mid caps, most of the companies have keyman risk. Something untoward happens to the keyman and the business will go down the drain (remember Apple without Jobs?). People with 40-50% allocation to such a stock, will find it very difficult to get even.

"He that fights and runs away, May turn and fight another day; But he that is in battle slain, Will never rise to fight again." - Tacitus

I think its optimum to have between 10-20 stocks in the portfolio.

My Learning from Mr. Market

All roads lead to … management

Very difficult to be certain that management are not crooks and cooking their books (even partially). Take care when there is a change is key management personnel. e.g CEBBCO

Management has a vested interest in promoting their company. Take their word with a BIG BOWL of salt.

Managements are as much under psychological influence as common people -hubris, endowment effect etc

Numbers tell a story. That needs to be verified against management speak. e.g. a co says they have a lot of IP. Then their intangible assets should be high. Consequently their RoE should be high.

My Learning from Mr. Market

I am my worst enemy in the markets.

I use a personal checklist, one which is a living document that gets appended over the years.

Covers my research process, business quality, management quality and valuation

Covers lessons from past mistakes – my own as well as vicarious

Covers potential behavioral biases

Makes sure I get the basics right. Over time I have realized that my mistakes have come from not doing the basic stuff well.

Investment Philosophy

What excites me (in a stock!!)?

A lollapalooza effect of more than one of the following factors working together:

Large opportunity size Supreme Ind, Mayur, PI, Astral, Cera, Symphony / Hawkins, Page

Limited competition PI (CSM), Bajaj Finance

Very low debt All long-term holdings

Industry tailwind Pharma, Financials

Great management TCS vs Infosys; Supreme vs Sintex

Cheap Valuation All picks except Symphony / Page, Zydus Wellness

Investment Philosophy

When do I sell a holding?

Business deteriorates or management does something that harms the business long term

• Opto – Continuous dilution, dependence on inorganic growth – checklist red flag

• CEBBCO – Continuous change in management team – checklist red flag

Switch to a better opportunity Since, I am always 100% invested, any new acquisition means, I have to sell what is least favoured at the time. Pidilite vs Mayur

Broader market becomes very high • Overall Sensex / Nifty PE of > 25. • Headlines in non-business daily

(Anandabazar / Telegraph)

Examples

Company Description Checklist Details

STFC • Superb management• Good growth; low NPAs• Excellent franchise; unique

customer base of 2nd hand truck owners

SELL decision –Cyclicality of customers (CV owners) -Karnataka mining ban

Supreme • Leading plastic manufacturer in India

• Best-in-class management• High return ratios for a

commodity business

BUY /HOLD decision -• Continuous focus on improving margins &

RoCE• Moving out of low margin businesses

(commodity furniture)• Management compensation, debt

management, dividend payout• Huge manufacturing & distribution reach• Continuous product innovation

Examples

Company Description Checklist Details

Page • Jockey• Speedo

What kept me from BUYING –• Valuation• Internationally, JOCKEY underwear is NOT a

premium product• No perceivable moat (!)• Questionable market size• The growth music will stop, I just don’t know

when.

Confirmation Bias

The Curious Case of Sintex

Started getting interested – BUY Zone

Foreign acquisition - FCCB

Feeling Happy - 3x

Concerned; Loss Aversion

Started getting interested – BUY Zone

Monolithic under performs; FCCB conversion; equity dilution – SELL Zone

BUY:• Valuation• Friendly Management

- 80 yrs record of uninterrupted dividends

SELL:• Headwind - No

traction in pre-fab & monolithic

• Increasing debt -Debt & FCCB overhang

• Equity dilutionBUY:• Valuation• Business Tailwind -

Custom moulding, Prefab & Textile improving

A meaningless peak into the crystal ball…High probability event Possible implications Possible Beneficiaries

Lowering of interest rate • Leveraged companies may benefit,specially those who have borrowed to add capacity that can get utilized better

• Financial companies – banks, NBFCs, Insurance

• Increased consumer spending, specially on durables on loans (home loans, consumer durable loans, auto loans etc)

• Sintex (?)• Cement (?) – JK Lakshmi,

Shree Cement• Banks – specially PSU ones –

some are really cheap valuation. There are banks with PE < 10 & PB <0.5…worth looking at Canara Bank, Union Bank

• Bajaj Finance, SCUF, Edelweiss (?)

Increase in Mobile / Broadband penetration

• Content providers can sell content on multiple platforms

• Newspapers, TV, Cable consumption goes down and get replaced by on demand video

• Beneficiaries – Can’t figure out

• Losers – Cable TV, Broadcast networks, Newspapers