How do you value a stock like in this kind of an environment when the business is looking solid but so are the prices?
Before talking on IndiaMart, I want to take you back to the winner of the last bull market, Bajaj Finance. Something very similar happened with
and we picked that up early but we sold it early as well as we thought we were very smart and our money had gone up 5x. Then we bought and sold it again in the middle but we could not drive the entire rally and it was almost a 100 bagger in that whole phase.
The learning from that experience is that do not sell your winner too soon. Great companies have the ability to surprise you with earnings and in the short run, many of these companies could look expensive but five or 10 years later, you would not find it as expensive as it seems today. We are just following a process and trying to ride the winner as much as we can. That is what we feel here, because the opportunity size is huge, the delivery on the earnings are greater than expected and we think they are on a very strong footing and the industry tailwind is with them. So we keep our eyes open and we try to follow a process and if something goes wrong, we will keep a track on the fundamentals and on the price.
Stocks like Bajaj Finance, Indigo, D-Mart, HDFC Bank are rare. If you have to construct an outsize view based on probability and perhaps possibility, where do you think we will see outsize winners?
When we bought IndiaMart, we did not know that it was going to be such a big winner. It is very difficult to say on day one that this is where you are going to get outsized winners. You have to put up a process which has the ability to throw up great winners and opportunities that can create great winners. Everybody in the portfolio would buy a winner at some point. Take for example, Titan. All of us at some point in time got Titan in the last two decades but there is only one guy who held it for the entire 20 years and made enormous wealth. It is a process of riding winners. You will have losers and winners in your portfolio and some of them will become large winners. The idea is to get over your biases and fears and the temptation to book profit too early.
If one follows that process, there would be many winners in the past decade, apart from the names you mentioned. Do you have the framework? Do you have the emotions? Do you have the ability to hold on to them as they grow in wealth and as they make profits for you? It is probably one of the hardest things to hold on to your winner because you are always fearful of losing the profits that you have made. Get over your own fears and I am sure many multibaggers will come in your portfolio and you would be able to hold on to them.
Another very important bias is recency bias and a lot of fundamental investors get trapped this way. If something has done well, it is expected to continue to do well.
Recency bias is a very relevant bias and a lot of people do not even understand this bias because you are so used to what has happened in the recent past — be it a crash or a rise — that you completely missed that it is actually a bias and it is one of your emotions. Like we saw the recent fall in the market and after that nobody could catch the rise because they were so scared of the next fall and everybody thought that there will be another correction and will go back to the same levels. This way, most of the people missed one of the biggest rallies in the recent probably a decade.
So you are absolutely right, we get trapped in recency biases. A lot of our investors called us recently to ask if we invest in the US markets just because US markets are doing well. That again is a recency bias. So the idea for us is we got to be aware that these are biases and we got to again overcome these biases through process.
We could have some of these stocks in our portfolio which were winners of the past like Reliance. If we made money in
and it became a large part of our portfolio but once it showed signs that it was not doing as well as we expected, we started trimming it in spite of us coming on TV and talking highly of Reliance. It might actually happen. But when we are managing public money, we get over our own emotions. A process needs to supersede our biases and confirm why we should trim exposure in Reliance. We have to make sure that we ourselves do not fall in some of these biases traps and recency bias is one of the biggest traps which investors fall into.
