The reasons for having own convictions, are as follows;
No one can live on borrowed conviction, as every business goes through up & down cycles, bad and good times (fortunes), business headwinds / tailwinds, and it is during those tough times when markets offer opportunities to participate in those businesses, which over a period of time will deliver multi-bagger returns. At that point in time, it is our conviction in the business strengths and management capabilities that makes us own those businesses.
Some of the investments where we practiced this over the last 10+ years and which turned out to be quite successful are;
Divi’s Lab – despite US FDA Warning
– in 2010, construction of new IT park was halted due to challenges with civic officials or during Covid-19 – exhibition business lost out full two year of revenues
– despite domestic auto sector witnessing downturn in 2019-2020
Also, market volatility which gets created due to external / macro circumstances (geopolitical, natural disasters, macro factors going overboard, etc.) is inherent to equity investing. It is during such times that the understanding of the business, faith in the management capabilities allows us to ride with our Conviction of our companies emerging stronger post a change in the circumstances.
So the next question is, how do we create our own conviction?
Our conviction is based on our independent -process driven – objective (unbiased) research and experience (understanding) of investing
There are broadly three steps to identifying, owning & riding multibaggers in equity markets,
Identifying – Process Driven Research
Owning – Purchase Price Discipline
Riding – Patience to HOLD & Avoid temptation to Book Profits
A) Identifying — process driven research
Processes for each of the evaluation stages:
Business size opportunity/ Scalability of the business opportunity
Current market size / growth outlook
Market share of top 5-10 players
Track record of the company
Last 5-10 years history of cash flows, balance sheet and P&L, in that order
Inherent business profitability
ROCE / ROE = Fuel for Future Quality Growth
Management Quality
Integrity –towards all stakeholders – customers, vendors/ suppliers, employees/associates, minority shareholders, etc.
Strategy – having the big picture and vision, the track record of the last 5-10 years & consistent management commentary and actions.
Execution –track record for project execution (least possible time & cost overruns).
Regular interactions with the management also help us spot inflection points in businesses.
Sundram Fasteners – From 2014-2015 – acceleration of growth in exports.
Divi’s Lab – capex plan of nearly Rs 1,500cr+ announced in FY19 was higher than the cumulative capex of the last 5-7 years.
Alembic Pharma, Ajanta Pharma, Sundram Fasteners, Narayana Hrudalaya – change of guard at management level (2nd generation) at times brings sharper focus on business strategies and also bigger / wider vision changes the mind-set of being penny-wise pound foolish, which starts reflecting across all three aspects of corporate governance, business strategy and focus on growth.
In our experience of many years, it is the management quality (all three – integrity, strategy & execution), which acts as a differentiating factor between our successful investments & not-so successful holdings over a longer period of time (5-10 years+).
Once a business with high potential for growth is identified, the next important parameter is
B) Owning – Purchase Price Discipline
Process for arriving at an appropriate risk-reward matrix to determine the purchase price to earn adequate returns over a period of time
Also purchase price discipline supports margin of safety – capital preservation
C) Riding your conviction – temperament, patience to hold & avoiding temptation to book profits – big bucks and not quick bucks
Patience and discipline are the most under-rated virtues in wealth creation. Most people come to stock markets to make a quick buck, but the stock market is actually a place to make big bucks with patience and long-term horizons.
Warren Buffet summarises it best, “
The stock market is a device to transfer money from the impatient to the patient.”
(The author, Sachin Shah, is Fund Manager, Emkay Investment Managers Ltd. The views are his own)
