Earlier this week, I had the privilege to be a part of an intense, immersive and absolutely enlightening investor conference in Goa. It was an invite-only and unfortunately, I am not at liberty to disclose either the names of participants in the conference, nor the name/theme. Participants were amazing. It was such an intensely collaborative conference that the time spent on the beach in 2.5 days of the conference was about 2.5 hours 🙂 But Goa, being the place it is, relaxes you completely in those 2.5 hours.
Anyway, enough about the background. I think I do have the liberty to compile a list of learning that I had from this conference. This is more like a list that I wrote down on paper, so there might have been a zillion other things that I missed. Papers get lost but Internet is forever (or something like that) and hence this attempt:
1) Owner’s View: Look at every business from the owner’s standpoint. What motivates the owner? What are 1 or 2 key factors that the owner understands that bring value to the business? How will the owner react in adverse conditions? That’s absolutely critical to value the business. (Book recommendation for this point: “Creating Shareholder Value”)
2) Crossing the Chasm. An excellent mental model to think about businesses, especially emerging businesses. There are two critical strategies for listed markets based on this mental model. a) Initially, follow a basket strategy in an emerging theme (bowling alley phase) and b) More critically (and this was the key learning), the leader usually gets a disproportionate share of the market and hence move capital from basket strategy to the leader once data/analysis points to who would be a leader.
3) Invest in Leaders: Try investing in large, proven and addressable markets (companies trying to create a market usually face a lot of headwinds and probably will not be successful). A further refinement would be to always invest in leaders in pull-based (demand) businesses.
4) What’s the DNA?: Understand the company’s DNA. Look for greatness DNA. The strengths and weaknesses of promoter/owner/leadership gets amplified in the company (and thereby earnings).
5) Write it down: Try and write down core investment thesis before investing in any stock (or selling a stock, for that matter). This would serve as a record to check against reality.
6) Sell a bit: Sell a bit of your most favorite/loved stock and check if the love holds (selling will trigger rationality in a much loved stock in your portfolio). Especially, sell a bit if numbers get disappointing to get rational.
7) Growth, growth, growth: The weightage for growth (usually, sales and then profits) in the Indian stock markets is 50%.
8) What’s your insight?: Decent opportunity size, difficult to dislodge and high predictability are critical factors for any business and in all markets (bull and bear). What requires more effort, insight and is more important to returns is the evaluation of a visible gap between performance and perception (especially, in bullish times like these).
9) Successful patterns: Some of the successful patterns in the Indian stock market have been Growth + Deep undervaluation, Operating leverage + reducing debt, maiden dividend, industries with a reform tailwind, demand businesses + oligopoly and small equity + illiquidity
10) Leverage Darwin: Buy shares (in tracking quantity) of all businesses that you like. Else, it’s usually ‘out of sight, out of mind’. And Darwin theory will force you to forget those stocks even though you seem to be hearing good news (since you don’t even own a share)
11) Read, Read, Read: I found that most good investors in that forum read, at a minimum, 500 annual reports a year (may not be 500 different companies; may be 5-7 annual reports of every company that one likes). And as Munger says, it adds up over a lifetime.
12) Psychological Denial: One of the bigger mistakes that bright investors usually make is psychological denial. It’s not that they fail to recognize that the business is deteriorating. It is that they don’t act upon it. There would be plenty of time to recognize deterioration of a business and act upon it (sell). But psychological denial comes into play and these bright investors are left holding the bag.
13) Are you screwed yet?: If you are not screwed by the markets in 2 years (consecutively), then watch out. Screwing is just round the corner (not just a bull to bear, but due to transition from confidence to overconfidence, mistakes are bound to happen)
14) Don’t take the lollipop: Many a bright investor with wonderful track records for 5, 7, 10 years get lulled by the market and their analysis. Market, at some point in time, gives a wonderful, sweet (but dangerously poisonous) lollipop which these investors partook and then got rogered. Sometimes, they don’t recover financially and worse, are broken in confidence too. The key always is to be watchful.
15) My observation/contribution in the conference: Be absolutely obsessive about working capital (and detailed components). Working capital is a leading indicator of competitive advantage. If working capital (days) is increasing for all businesses in your portfolio, either you have a shitty portfolio or the economy is going in a tailspin.
P.S: As I mentioned earlier, these are the ones that I wrote down (the essence as such. Detailed discussions on these points obviously were a killer). Such was the intensity of the conference and discussions that there were a zillion other things which I couldn’t/didn’t note down. My biggest takeaway from this conference was the humility and down-to-earth behavior of these brilliant investors who have seen the ups and downs of the market for more than 10-15 years and also have made a lot of money still looking to learn, still looking to share and in general, being absolutely stellar. Lot to learn. And as Frost lingers on, ‘miles to go before I sleep, miles to go before I sleep’.