Archive for the ‘Investment process’ Category.


I wrote the following note to subscribers, in context of a specific position. I have made edits and additions to the original note for this post.


I have a different set of expectations from this position. The management of the company is quite conservative (rightfully so) and as a result has always grown at a measured pace without taking on too much debt. As a result, the profit growth has never been too high, but at the same time the company has always been profitable even in the worst of the times.

Due to this cautious approach, we cannot expect this position to be a multi-bagger any time soon.

Although a lot of subscriber still look at individual positions, I prefer to zoom out and look at the aggregate portfolio level. We are not in multi-bagger business where me and kedar will run around touting our wins on social media.

Our focus is to achieve above average returns at the portfolio level with lower risk over the long run, to achieve our financial goals.

Mania of the multi-baggers

The last three years have been all about multi-baggers.

The Media is usually fixated on multi-baggers and short term price changes as that grabs attention (which is their sole focus). Unfortunately, a lot of investment advisories and so called gurus are the in same boat. It is not too difficult to see the reason – you need to make big claims to grab attention and clients.

Touting a low risk, steady compounder which doubles every four years is not going to win too many fans and subscribers/investors. As a result, the focus of the industry is to talk about high returns and multi-baggers in the portfolio, ignoring the risk completely.

On this count, I will not blame the media and financial industry alone for selling dreams to the general public. A vast majority of investors (if you can call them that) are searching for shortcuts to become rich quickly. Media and a lot of professionals are merely satisfying that demand.

One cannot run a business on high principles alone.

Missing the forest for the trees

In selling, what is being demanded, the financial industry ends up ignoring several other key factors which drive returns over the long run.

The key point in investing is how well are you doing at the portfolio level and if the return is commensurate with the risk. The individual wins and losses are a driving factor but not the only criteria. Overall risk driven by position size and diversification plays an equally important role. I find these aspects of investing missing in most discussions.

If you agree with the above point, then you should also consider the lower risk, moderate return ideas. In the past, I have not allocated as much as I should have to these kind of ideas as they do not have the dazzle and fireworks. However, I have slowly changed my thought process on it.

A part of the portfolio should be allocated to such low key, solid performers which act as a ballast to the portfolio and deliver decent returns over the long run (with much lower stress). This is now becoming apparent where some of the past multi-baggers have left investors holding the bag.

Confusing the means (multi-bagger picks) with the end (achieving financial goals via equity investing) had led to investors achieving neither.


I have often been asked by subscribers – what fixed income option would I recommend for the cash they hold?

My response is that I usually hold my cash in short term FDs or at the most in short term debt funds with high rating and from a well-known fund house.

The main criteria I use in selecting a fund are

– Fund should have a high AUM (> 1000 Crs) for liquidity purpose
– Should be from one of the well know fund house, preferably backed by a bank
– Should have a low expense ratio (as far as possible)
– Should have a 3-5 year operating history or more

You may have noticed that I have made no reference to returns. This is by design as I am looking at high safety of capital and liquidity in this case. The entire point of holding cash or equivalents is that it should be secure and can be accessed at times of market stress without any loss.

Some of you may be unhappy that these options provide ‘only’ 4-5% returns which are quite meager.

Do the math

Let’s do some math. I usually hold somewhere between 10-20% cash in my portfolio. In a crazy bull market such as now, it may go upto 30% level, but on average it hovers around the 15% mark. Let’s assume I get very creative and aggressive with the cash holding and can earn around 10% returns on it. Keep in mind, that the level of risk rises exponentially in case of fixed income instruments. A vehicle giving 10% when the risk free rate is 6%, is not 60% more risky, but carries several orders of magnitude higher risk.

Let’s say, that I still decide to move forward and invest all the cash in such a vehicle. So in effect I have made 4% extra on the 15% cash holding which translates to an extra 0.6% return on the overall portfolio. This additional 0.6% would translate to roughly 7% additional return over a 10 year period.

Is it really worth the risk? Does one really need the extra 0.5- 1% return when rest of the funds are already invested in equities?

There is no free lunch

One of the reasons for holding cash and equivalents is to lower the risk of the portfolio, especially when it is high in the equity market. If you are attempting to get higher returns via fixed income instruments, then you are just changing the label of the investment, but not the level of risk in the portfolio as a whole.

A fixed income label does not change the nature of risk. It is the characteristics of the instrument and its past behavior which defines the same. The worst aspect of investing is to take on higher risks unknowingly and then get shocked when it comes back to bite you.

Please always keep in mind – there are no free lunches in the market. There are absolutely no ‘assured’ high return fixed income options (the term itself would be an oxymoron). If someone tries to sell you one, please run away from the person as fast as you can.

It is not a race

I will never tell anyone of you what to do as you need to make your own decisions. However, let me share what I have been doing for the last 10+ years – I have my funds in safe and relatively secure FDs earning pathetically low rates of returns. This allows me to sleep soundly and have one less thing to worry about. If the equity portion of my portfolio does well, then I don’t need the extra 0.5%. If it does badly, the 0.5% will not save me.

In the end, investing is not a 100 meter dash where the winner gets a gold medal and the fourth place goes home dejected. As a long as I can make a decent return (being 18 %+) over the long run, I would rather exchange a few extra points for much lower risk. The journey would be far more pleasant and I will still reach my financial destination (maybe a year later).

Ps: This does not refer to any investment options such as real estate from a diversification point of view. This is mainly about the desire to optimize the cash portion of the portfolio.


It is widely understood that stock prices are forward looking – they discount the future expectations of cash flow of a company. In bear markets, these expectations are lowered as markets extrapolate recent trends (and assume a recession forever). On the flip side, the reverse happens during bull markets, when investors extrapolate the recent good results into the future and assume that there will be no hiccups along the way.

Finally, we have markets like now, where investors have gone ahead and extrapolated ‘hope’ and discounted that too.

The idea funnel

I maintain a 50+ list of stocks which I track on a regular basis and have created starter positions in a few companies which appear promising. The process i follow is to create a small position (usually 0.5% to 1% of my personal portfolio) and then track the company for a few quarters/ years.

In atleast 50% of the cases or more, I realize over time, that I am not too excited about the prospects of the company and exit the stock immediately. In a few cases, however the company and its stock may still hold promise. In such cases, I start raising the position size in the portfolios I manage.

The above approach allows me to run experiments with lots of ideas and controlled risk.

Discounting infinity and beyond

I am now noticing that some of the positions I hold on a trial basis have started running up based on hope.

Let me take one example to illustrate – Repro India.

Repro India is a printing business with operations in India and Africa. The company performs print jobs for publishers for all kinds of printed materials like books, reports etc. The company has had a chequered past with uneven performance.

The company was growing till 2012-14 with rising sales in India and Africa. The return on capital of this business was mediocre as the printing business involves high fixed assets, high and sticky receivables with average operating margins in the range of 15-18%.

The export business in Africa went into a nose dive in 2014 due to the drop in oil prices. The company was not able to collects its receivables as these African countries faced currency issues and hence incurred losses. Since then the company has been slowly recovering the receivables and nursing the business back to health. In addition the domestic business continues to be competitive and sub-optimal due to the lack of any competitive advantage

I would normally avoid such a company unless there are some prospects of improvement or change in the future. One such possibility exists for the company. This is the new BOD – books on demand business of the company.

The BOD business is similar to an aggregation model followed by companies such as uber or Airbnb. In the case of repro, the company has a tie up with Ingram (another US based aggregator) and other publishers in India to digitize their titles and carry them on its platform. These titles are then made available through ecommerce sellers such as Amazon or flipkart. When a user like you and me finds this title and purchases it, Repro prints the copy and delivers it you.

The business model is depicted in the picture below (From the company’s annual report).

The above business model ensures that there is no inventory or receivables for Repro or the publisher. The payment is received upfront and the product is delivered at a later date. This is a win-win business model for all the value chain participants as it eliminates the need for working capital. As a result, this business model is able to earn a high return on capital with the same or lower margins than regular publishing

Illustration from the company’s annual report

Repro is doing around 40-50 Crs of sales in the BOD segment and growing at around 70-80% per annum. The company has loaded around 1.4 Mn titles on its platform and plans to load another 10 Mn+ titles in the future. This business is at breakeven now. The BOD business has a lot of promise and it’s quite possible that the company will do well.

However, success in the business is not guaranteed. The company needs to scale its operations and could face competition from other print companies in the future (as the entry barriers are not too high).

The market of course does not care about the uncertainty. There are times, when markets refuse to discount good performance in the present and then there are time like now, when the market is ready to discount the ‘hope’ of good performance in the future. The stock sells at around 100 times the current earnings. As the legacy printing business continues to be mediocre with poor economics, it is likely that the high valuations are mainly due to the exciting prospects of the BOD business

I had created a small position a couple of months back and have been tracking the company. The stock price has risen by around 50%, 60% since then even though the company is just above breakeven on a consolidated level.

I am optimistic about the prospects, but the execution needs to be tracked. I am not willing to pay for hope and so I am a passive observer for now.