In the investment world, it is important to know what kind of personality and temperament you have, as it plays a very important role in determining the way you view investments vis-a-vis your investment goals.
An investor should deep dive into his/her own strengths & weaknesses and figure out what works best for them. Knowing one’s own strengths and creating a process around it, is what will generate a conviction in one’s investment decisions.
Over the years I have figured out what works for me, which gives me returns over a period of time and at the same time keeps me temperamentally balanced during the tough times. Below is my thought process which I believe could act as a check-list for investors, irrespective of their investment style or personality and help them build wealth.
Own Your Conviction
We do not live on borrowed conviction; we create our own. Every business goes through ups and down cycles, and it is during the tough times that markets offer opportunities to participate in these businesses, which over a period of time deliver returns.
It is an investor’s conviction at that point in time, in the business’ strengths & managements’ capabilities that make him own these businesses. The following are the examples of the companies I have continued to believe in, despite the external environment hurling challenges at them, that made many exit them.
a. Divis Lab: USFDA warning in 2017
b. Nesco: In 2010, halting of construction of new IT parks due to challenges with civic officials or during COVID19 – Exhibition business losing out full 1 year of revenues
c. Sundaram Fasteners: Domestic Auto sector witnessing a downturn in 2019-2020
Market volatility is inherent to equity investing, and gets created due to external/macro circumstances (geopolitical, natural disasters, macro factors going overboard, etc). It is during these times that our understanding of the business, faith in the management capabilities allow us to ride with our conviction that these companies shall emerge stronger post these circumstances.
How do you create your own conviction?
Conviction is created based on an independent, process-driven, objective (read unbiased) research & understanding of investing
Independent: It is important to have an independent thinking process which shall be unaffected by the external noise. As they say ‘listen to everyone, but do what you think is right’.
Process-driven
Whatever one’s investing style, one should ensure that it is process-driven and not random. Following are the parameters that I consider and adhere to for picking up the stocks: Business size opportunity/Scalability of the business opportunity: Current market size/growth, Market Share of top 5-10 players,
Track record of the company: Last 5-10 years of Balance sheet/Cash flows/P&L, in that order,
Inherent business profitability: ROCE/ROE,
Management quality: Integrity of the top management, last 5-10 years track record and management commentary, a track record of time and cost over-runs of past projects.
For me, the regular interactions with the management also help spot inflection points in the company’s businesses.
Purchase Price Discipline
It is important for an investor to arrive at an appropriate risk-reward matrix to determine the purchase price to earn adequate returns over a period of time. Purchase price discipline supports the margin of safety – Capital Preservation
Once a company qualifies on the previously mentioned parameters, I give high importance to the last parameter of management quality.
In my experience of several years, it is the management quality factors (all three – Integrity, Strategy & Execution), which act as a differentiating factor between successful investments and not-so-successful holdings, over a longer period of time 5-10 years or more.
Sachin Shah
Fund Manager, Emkay Investment Managers Ltd.
Sachin is a seasoned fund manager with over two decades of experience in the Indian equity markets. By virtue of his extensive research, Sachin realised early-on the need for a framework in which companies with evasively tricky standing needed to be filtered out very objectively, leading to the development of E-Qual Risk, EIML’s proprietary module which helps us to evaluate and compare listed companies on various aspects of governance. Sachin shares his knowledge and insights through various media interactions across print and digital platforms.