The book ‘MASTER CLASS WITH SUPER-INVESTORS’ can be considered as a pandora box of invaluable learnings shared by some of the highly successful investors in the Indian Stock market. The authors through a series of pointed questions tried to present its readers about the investment journey of these investors who created fortunes for themselves.
The investors selected for the interview have rich experience (20+ years) who have gathered learnings from the past two to three market cycles in the Indian Stock market.
The authors questioned them on their investment styles, methods of idea generation & portfolio construction, their past investments thesis, their views on cyclical businesses, taking leverage, short selling, etc.
1) The stock market is about looking ahead and not looking behind. It is not necessary that stocks that performed well during the last cycle or past decade will perform well in the next decade.
2) Countries never go bankrupt. Considering various crises in India, the government may take appropriate reforms to bring the country‘s economic growth back on track. You need to be bullish in India.
3) Great Ideas are very rare & if you feel you have one, you should perhaps back up the truck and buy. To bet big on buying a great business requires hard conviction and if you find a business that has the quality and is available cheap and you understand business deeply, then you need to back up the truck.
4) When a bull market gets over, the leaders are squashed completely. Hence, timely exit from overvalued stock is important otherwise the market will rattle you out of the position. So keep cash for some time and wait for the new opportunity.
5) An investor who is price-oriented will think that the stock has tripled, so let me take some money home. While the fundamentalist will understand that he has bought something that has deep value and even if the stock has tripled, it doesn’t mean that the value has been extracted.
6) To be great in the stock market, you need to find your own path. You can’t piggyback on someone else’s thoughts and convictions. Do your own homework and have the integrity of independent thought.
7) There are two times to sell- the first is when you think that the bull market is getting over. Secondly, when the valuations become extreme. Even if you don’t sell a good company when it’s going down, chances are it will come up again. But a bad company, once a bull market is over will almost never come up.
8) Before a bull market tops out, you fall in love with your stocks. It is very hard to sell them because every day when you sell them, the price goes up and you start feeling like a fool. You should have a disciplined approach.
9) A good investor pays a lot of attention to market extremes- end and start of the bull cycle. At the top of bull markets, in spite of positive news headlines, the market will go down those days. However, at the bottom of a bear market, the news will be very negative, however, individual stocks go up. When a panwaala starts giving you stock tips, you know it’s time to get out of the markets.
10) You don’t need a 180 IQ in the stock market, it is fine to have an IQ of 110-120. People try to be super smart and stumble along the way. The market values integrity, intellectual independence, and patience.
11) The market is a graveyard with tombstones of the people who failed.
12) Stock market is not a place to get rich quick overnight- one in a million nights do it.
13) Market is a place to create long-term wealth. Legends are told of how successful one has become so soon, but that’s not true. We all grind it out for years
1) When your mind is empty and you are hungry to learn, great books help you a lot.
2) Investing is about envisioning it first.
3) In earlier times, just buying stocks at cheap valuations made money but the world has changed. You cannot buy cheap and do well. You have to buy quality stocks with growth at cheap valuations.
4) The price of the business that you get when the market is pessimistic is very interesting.
5) Don’t invest in something which you don’t understand. Have a certain amount of adamancy in you.
6) When your concept is right and you have strong determination, you will succeed. You have to take problems with a smiling face and not crib about them.
7) One must have multiple frameworks in mind- Value migration, competitive structure, monopolist structure, terms of trade, etc. So any stock ideas coming through different thought processes should go through the filters of these frameworks.
8) QGLP Framework– It starts with Quality of Business, The Quality of Management, Growth, Longevity of Business, and finally a reasonable valuation.
9) Quality has two parts- Quality of Business and Quality of Management.
- Quality of Business– 03 Types of business- Great, Good and Gruesome
- Good Business- Have a high return on tangible assets of the company.
- Great Business-Have high returns but are able to deploy additional capital even at higher rates of returns.
- Gruesome Business- Earns less than the cost of capital and the company tries to grow making it a bottomless pit of capital destruction.
- Quality of Management- Good management has great competencies, passion for growth, and above all unquestionable integrity.
When you find a top-class business run by top-class management, you get a top-quality company.
10) One needs to have a focused portfolio strategy while investing.
11) The power of compounding is 60-70% investing.
12) One should look at tailwinds while investing. Without tailwinds, it is very difficult to generate fortunes.
13) Value of the company remains steady even if there are external events. Only the price changes. Focus on value, never look at the stock price, just the market cap. You cannot control the price but can only control the value.
14) To create fortunes one must have a vision, courage to buy, and patience to sit. Don’t be in a hurry to make money.
15) Most people failed due to behavior.
16) Don’t forget to follow the rules
Rule No. 1- Don’t lose money
Rule No. 2- Do not forget rule no. 1
RAJA SHEKHAR IYER
1) Reading balance sheet only is not enough to understand the company’s business. An investor should also get into understanding macroeconomic factors, the impact of fund flow while having sound risk management in place.
2) When stocks are highly overvalued and start declining, it is the smart thing to sell them rather than becoming a long-term investor.
3) An investor should always be willing to risk a portion of his profits and should protect most of them.
4) When the stock reaches its fair value, it is not necessary to sell it completely because the stock can move far above its fair value.
5) One must incorporate an effective risk management strategy while investing/ trading using a combination of position sizing and pre-determined stop-loss levels.
6) One must have a step-up approach while investing in stock so that position size can be scaled.
7) Stock prices can move a lot more than you expect- both on the upside and downside. They can deviate massively from fundamental value and stay at deep undervaluations or over-valuations for a long period of time.
8) To be a good analyst, one should be able to read a lot, have a curious and analytical mind and develop the capability to learn from experience.
9) Criteria for stock idea rejection comprises- Low RoE, lack of scalability of business, poor quality of management, lack of entry barriers, and high valuations.
10) Finding high-growth companies or finding cheap stocks is not difficult. The trickiest part is to find growth companies at cheap valuations which can grow in the future and give exceptional returns.
11) The investment process comprises three parts- Deciding what you want to buy, deciding what price you want to buy it at, and then deciding how much you want to buy.
12) It is always important to look at how the company is doing as compared to the industry. This is how you can see the quality of the management.
13) 03 variables that determine the value of a business-
- How much they grow their sales,
- How much profits they can make,
- What kind of capital do they need to generate that sale.
Additionally, how they treat the minority shareholders also adds to the value of a business.
14) What was common amongst all his big winners-deep undervaluation, immediate trigger to buy, and big long-term position. Stocks that gave returns over the long term also gave returns from day one.
15) Writing down all your stock investment is one of the most useful things. This made the whole investment decision-making process very transparent and avoid future mistakes.
16) Most investors are good at introspection to understand what worked, what did not work, and why an opportunity was missed.
17) To become a better investor one must develop few good habits like; Reading good books written by successful investors.
- Writing down your stock idea whether you buy/sell it or not and review that at a later date to take appropriate action.
- Think strategically and tactically about investment decisions and portfolios whether taken or missed.
18) For a successful investor one must have motivation, self-confidence, and the ability to work hard on learning and practice.
19) For fortune creation, 03 skills are required- First, find out the next big winners, allocate a meaningful proportion of your capital, and held them. Second, drawdown management required a good risk management process and decisive decision-making. A third and most important skill is knowing when a bull or bear market is starting.
1) The key to investing in the stock market is to understand the business & more importantly understand the management.
2) Develop the power of observation. Learn by observing and experiencing things.
3) Striving for an extreme amount of learning and having a lot of patience is extremely important for success.
4) His investment philosophy (KCPLTD)-
Knowledge– Deep Knowledge of the business.
Conviction– Develop conviction in your assessment
Patience– Have patience for the market to properly value your stock. Luck– Need to have luck for stock to come down to your buy price.
Timely Deploy– Should have the nerve to timely deploy when the price comes down.
5) Study the business so deeply that your vision becomes better than the promoters, i.e. you can forecast their business better.
6) Invest in businesses that have growth, management is good, sharing dividend with shareholders and is available at a very low valuation.
7) One should remain within its circle of competence.
8) One should have an open mind and an ability to change it. For that one should have humility.
9) One should be active and have critical thinking ability and a questioning mind.
10) Don’t get married to a stock. Be quick in changing your mind and being aware of new developments.
1) One should not only see the past alone but also look at the future cash flows. Look past for the attributes like company pedigree, management quality, etc. but also keep a keen focus on the future.
2) Big money can be made during extreme phases of panic and euphoria. Bet big during these periods of crisis and sold in good times.
3) Buy cyclical shares when the cycle is bad and sell them before they peak. Basically, buy them extremely cheap and sell them when they are a little cheap.
4) In the markets, one thing is for sure, if you don’t make any mistakes, you will never learn.
5) Discipline and patience are the most important traits in investing.
6) Humility is the most important attribute one must have. To be open-minded and quickly correct mistakes is very important to be a good investor.
7) One must read as much as possible and meet as many experts as possible – both investors and companies.
8) One should book profits from time to time and keep cash in hand that can be deployed at the right opportunity.
9) Sell, regret (when the price goes up after you sell) and grow rich (when the prices come down later and you have the cash to deploy).
10) One should buy A-class companies and avoid B & C grade companies even if you make less money or have to wait for opportunities.
BHARAT JAYANTILAL PATEL
1) You should not regret what is gone as you have limited capital and if you have liquidity, opportunities will come.
2) Cumulative knowledge is nothing but experience. This experience must be supported by additional information and data while making an investment decision.
3) In old economy stocks, connect business fundamentals with the replacement cost and think about a possible combination. This is more important than growth.
4) It is better to sell on the way up so that when the market goes down, one can focus on buying better since your mind is free.
5) In a commodity business, if you can just visualize the kind of a cycle you are in, and if you get it right, it can give you multifold returns.
6) Understand the business in which you invest reasonably well and have conviction.
7) Do not be fearful when the market is down. Do not be greedy when it is going up. This means- BUY LOW and SELL HIGH.
8) investing in promoters where corporate governance compliance is in its true spirit.
9) Do not buy on hearsay and do not take investing casually or as a side activity.
1) Excessive focus on a number, P/E, or a ROCE, or anything else will make you miss a lot.
2) Three things to look at in a stock -Growth over the next 3 to 5 years, ROCE, and valuation.
3) Buying is 20% decision-how long you can carry it and when to get off are more important decisions.
4) P/E is a function of two important variables-growth and ROE. If both ROE and earnings are expanding, there will be a P/E reiterating. If earning growth flatters then P/E derating can happen. P/E rerating or derating is more sensitive to ROE than growth.
5) Extraordinary company has the ability to consistently surprise with their numbers in the early phases of their growth. Secondly, the ability to maintain consistency of returns. Thirdly, the ability to deliver at a high scale what you were delivering at a lower scale.
6) You keep learning from success and failures and keep superimposing that knowledge on your next picks. You think of patterns that didn’t work in the past and why they did not work.
7) It is not whether you are right or wrong, but how much money you make when you are right and how much money you lose when you are wrong.
8) The success of turnaround depends on a lot of internal and external factors. You can improve your risk-adjusted return of turnaround stocks by increasing the margin of safety and not making unrealistic assumptions.
9) One of the great qualities of all these great investors is that they decline to invest in new ideas most of the time because they are so disciplined. If you have the ability and confidence to let go of an opportunity at the cost of not making an error, then you have achieved that high order of mental state or that sense of discipline.
10) You have to kill your ego to say that this is where I went wrong. You can then reflect if you’re making the same mistake I made last time.
11) The best time to buy is when the macro is bad. That’s when you get the cheapest valuation. When the growth is not broad-based, quality outperforms. When growth becomes broad-based, the value will start outperforming.
12) The interplay of EPS and P/E is remarkable. Most investors focus on earnings, however, P/E is the leading indicator and not the EPS. P/E goes up in anticipation of liquidity and confidence about future earnings recovery.
13) Attributes of a good investor
- First is curiosity-you have to be curious, if you are not, then you will not be a self-starter.
- The second is learnability from two points of view. The first is from a knowledge point of view. The other is in terms of how you improve your process and judgment. That comes from the reflection in keen observation of other successful investors.
14) People fail in the stock market due to a lack of discipline and self-awareness. Investing is all about controlling your emotions. You have to feel a sense of vulnerability at every stage, if you don’t, then you are dead. Secondly, it’s important to have extreme adaptability, learnability, and flexibility. If you are rigid, you are dead.
15) To create fortunes in the stock market, three things are important. The first is the ability to judge risk-reward. Second is the need to have a long-term horizon, patience, and ability to size your bets with high conviction. Lastly, leverage is the pinnacle of sophistication in investing.
16) Getting the risk-reward right is more important than the patience and conviction attributes.
1) Protect the downside more than catch the upside.
2) Buy a company which is the market leader, available at a good price and sit on it.
3) Mr. Kenneth put emphasis on balance sheet analysis. Look for the capital-efficient company at the bottom of the cycle. Get the entry price right and let the market and business cycle play out over time without trying to time it precisely.
4) Selling in cyclical business comes when the cycle peaks out. Indications like when the top two or three players start leveraging and creating new capacity or there is an enormous amount of profits at the top of the cycle. Also, look out for any breakdown in the balance sheet.
5) Another reason to sell is if the business metric deteriorates-High debt, loss of market share, or increased capital in the business.
6) To choose between a good business and good management, Mr. Kenneth is in the opinion of buying good business. If the wind is in your direction, then bad management cannot do anything about it.
7) Attributes of a good investor -Patience and Discipline. You got to learn to say ‘NO’. If you buy something you don’t understand, you won’t know when to sell and you will get stuck.
8) Stick to the investment strategy that suits you and try to minimize mistakes. Pick one and stay for long. Quickly correct your mistakes.
1) The first rule in the market is to survive and the second is to make money. Always trade with a stop loss.
2) If you want to earn big, you will have to take bigger risks. What matters is how you make it a calculated risk. It all depends on your courage, your intelligence, and your luck.
3) To evaluate the management of a business, three things are important. They must be honest to shareholders, hungry to grow in size, and smart enough to know how to maneuver the company when a crisis or opportunities come.
4) Avoid investment in ‘Bhangar’ (crap) stocks. Look for companies having 15 to 20 years track record; what were their earlier commitments and which ones they delivered.
5) Follow the SMILE principle for shortlisting businesses to invest. Small in size, Medium in experience, Large in aspiration, and Extra Large in market potential. If you find a company fitting the above attributes, then invest in the right valuations.
6) Do not have too much attachment with your investment else you can’t make big money.
7) For selling one must look for the following factors-
- Any change in management focus.
- Valuations are exorbitant.
- Quantity of shares requiring ample volumes for sale in the market.
- Any sign of the start of a bear market.
8) During the stock market bubble burst / steep crash, the key learning is- the steeper the fall, the greater the rise.
9) Regrets are like a lifestyle disease in the stock market. Regret won’t help you in any manner but only affects your next decision.
10) An Investor should read a lot of broker reports, see management interviews and learn about various industries and companies.
11) Attributes for a successful investor-
- Long-term thinking.
- See stock market investing as a business.
- Have a commitment to stock for the long term.
- Stop thinking of the stock market as a quick rich game.
- Do appropriate risk and stress management.
12) Have the courage to bet big and hold shares during bear markets. History tells us that big money was made by buying stocks in a bear market.
1) The growth of P&L is supported by the balance sheet and not the other way around. If you focus on P&L instead of the balance sheet, you will always need to pay a premium as valuations shoot early by the time growth gets reflected in P&L.
2) Grahamian investing- 80% P&L (Low P/E) and 20% Balance sheet (Book Value). It is basically P&L-based investing – Low P/E or Low P/B multiples. Fischer’s style of investing- seeing growth from a balance sheet perspective.
3) Important learning from Grahamian investing style is to find ideas that are swift turnarounds, buy them on sound, tight valuation metrics, and sell them after the investment premise plays out.
4) Mistakes made like selling early and not holding stocks with high P/E & high ROCE as once sold you could never buy them back. Also not buying big positions in stocks and then selling them early due to small positions.
5) Theme-based investing leads to identify stocks among various choices, choosing best amongst them thus providing ample clarity in why a specific idea is superior to others.
6) Do in-depth research on companies and industries. Read industry opinions, company news, industry analysis, corporate announcements, conference call scripts, Business history of a company, magazine articles on the company.
7) One needs to constantly update his knowledge and keep measuring change. This will help to update his knowledge.
8) One must be a good observer- understanding trends and business transformation and ready to catch them when they show up.
9) Being an early entrant into a cyclic turnaround is never easy. You need to have high conviction and get in very early. As entering early, you enjoy the best margin of safety and the highest returns in stock. This always helps you exit early and yet make huge profits.
10) One should read multi-year balance sheets, especially in micro caps. One should see if the financial traits are consistent and if the market has not valued it, and if not, try to understand the reason.
11) buy stocks that are out of flavor, microcaps that have clear visibility of growth for five years and deep value special situation plays. Sell overvalued fancied stocks of the present to buy potential distant winners.
12) The only thing the market always demonstrates is irrationality. One should develop that equipoise to handle the market irrationality. As an investor, one must learn to be indifferent to Mr. market and keep himself focused on what he is doing.
13) For fortune creation, one needs to be focused, disciplined, knowledge-driven, and demonstrate the right investment behavior.
1) For successful investing, firstly, thoroughly read the annual reports of many years of all these companies. Secondly, ensure that you are paying a cheap price for the stocks. Lastly, have the guts to deploy capital when everyone is shivering.
2) Focus on earnings, ignore daily stock movements, and ignore the noise. Investing is like watching the grass grow. Be greedy when others are fearful.
3) Start trimming when the stock approaches intrinsic value in the bear markets and when it crosses intrinsic value in the bull markets. Keep selling in small tranches to try and maximize your proceeds.
4) In cyclical stocks, when the cycle is down, capacity utilization is low and hence all the fixed costs and finance costs eat away most of the margins. Once the utilization goes up, it flows straight to the bottom line.
5) Attributes to analyze companies-
- They are not going bust at least for a decade.
- Their balance sheet is not damaged beyond repair.
- They are making some money even in bad times.
- Their valuations are pricing in only their current earnings. They are undervalued even on an asset value basis.
6) Do thorough homework to generate an idea. Wait patiently till you get it at the right price. Disciplining yourself to keep your head when the mistakes are going berserk. Do not let the feeling of being left out get the better of you, because you will always miss a lot of ideas.
7) Few habits to inculcate for becoming a good investor- Remain dispassionate, continuous reassessment, staying away from consensus, avoiding traps and paralysis, developing conviction, invert, trying to be broadly right than precisely wrong, admitting and tolerating your mistakes, getting used to doing nothing for a prolonged period if required, etc.
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