Evolution of a Value Investor: Presentation at PPFAS October Quest

Evolution of a Value Investor: Presentation at PPFAS October Quest (October 10, 2025)

I recently presented at the PPFAS October Quest event. The presentation was titled, Evolution of a Value Investor. My endeavour through this presentation was to showcase the typical path a value investor takes through his investing journey. It was certainly my path and I shared a few of my experiences from over 20 years in this game. I am writing this note for two reasons: 1. This was a closed group event and a large number of interested investors, who were not present, may benefit from this note, 2. For a variety of reasons, some topics could not be covered in the required depth and with the clarity that I would have liked. Hopefully this note will address both those aspects.

I am an engineer and had little knowledge of the markets when I commenced my MBA in the year 1999. An engineer friend suggested that I attend a class on Portfolio Management, conducted by Professor Sanjay Bakshi, who was a visiting prof in our institute (MDI Gurgaon). Prof Bakshi spoke about the concept of Margin of Safety and purchasing a dollar for fifty cents. He quoted Graham, Buffet, Munger etc. and spoke about the inverse correlation between risk & reward in equity markets, which was quite contrary to what one had read in theory i.e. reward is high only if one takes greater risk.

That there could be bargains in equity markets and the greater-the-bargain, lower-the-risk tradeoff, seemed fascinating to me. What seemed even more fascinating was the prospect of reversion to intrinsic value of listed securities. This meant if I could spot stock bargains, I had to only wait with patience for stocks unlock value! Seemed unreal at the time…

Reading up on the subject seemed like the most logical step forward. A number of legendary investors have written extensively and shared their invaluable market experiences. I read almost every book on the subject, as did most budding value investors at the time (I assume they still do). I suspect the tribe of value investors, itching to read on the subject, was scarce at the time. Hence this reading gave many of us an illusion of knowledge, a mild arrogance in the uniqueness of our knowledge. Soon one realised that having theoretical knowledge on the subject was important but not sufficient. The ability to convert theory into a successful practice is essential. This realization dawns, as one experiences capital and opportunity loss. Thus starts the true journey of learning in the business of investing.

In 2005 I happened to meet Unitech’s promoters, in the context of a work assignment. The management indicated that the company had 3000 Acres of land holding, mostly in NCR region. Further, the company was building a mall in Noida, from which it expected to generate a PBT of Rs 450-500 over a 4-5 year period. The company was debt free and the stock traded at a Rs 300 Cr market cap. In those days Real Estate (RE) was a bad word and there were no real estate analysts on the street. A friend worked as a research analyst with JP Morgan, covering US real estate. I asked her how real estate companies were valued. She suggested the Net Asset Value method, wherein the value of the RE company should broadly be in line with value of assets held by the company.

Going by the NAV methodology, if I ascribed Rs 1 Cr per acre as asset value, Unitech’s value should’ve been in the range of Rs 3000 Cr. This meant the stock had substantial margin of safety at Rs 300 Cr market cap. I bought the stock and saw it rally 4x in pretty quick time, 6-8 months. Seeing so much money being made in quick time, Regret aversion tendency took over and I decided to book profits, lest the stock go down from prevailing levels.

However, this turned out to be a big mistake. That was just the beginning of a humungous rally in Unitech, with the stock rallying 100x over the next 1.5 years. It was a painful introduction to the concept of “Opportunity Loss”.

Thereafter I had a chance meeting in 2006 with Prof Bakshi. He mentioned Polyplex in some context. I assumed he owned the stock (in hindsight I had no knowledge whether he owned it or not). Authority caused bias kicked in and I bought the stock, after doing rudimentary work i.e. checking valuations, growth numbers etc. Generally in a cyclical business, PERs look cheap and growth looks exciting at peaks of the cycle. This case was no different. The stock promptly crashed, as the cycle turned and I halved my money in quick time. This was a painful introduction to “capital loss”.

The scars of these two experiences remain fresh till date. However there were a few positives that I took away from these adverse developments:

1. Bad stock calls seem akin to failure in school/college. For good students, generally the type who would enter value investing, this experience can be paralysing. It can force them to look elsewhere for career choices. It’s critical to see these calls as building blocks rather than a failed endeavor, and soldier on

2. Losing money, when you have less to lose, provides a relatively cheap insight into the tricks your mind plays with you. I shudder to think of the consequences of such calls on today’s resources. These calls (as also many others) became guideposts and helped improve the investment process

We are in the business of gauging a range of future possibilities. Hence it becomes critical that our decision-making framework is not flawed. In his book The Signal and the Noise, Nate Silver quotes Prof Philip Tetlock’s classification of political predictors. Prof Tetlock suggests there are two type of predictors, he terms them as: Hedgehogs and Foxes. Their characteristics are referenced in the above slides and the below table. In his view, Foxes are the better predictors since they have the ability to learn from multiple disciplines and are flexible in their approach to predicting the future. Foxes are iterative and build on their knowledge through course corrections.

The same multi-disciplinary approach has been advocated by Charlie Munger. He advises a latticework of mental models to solve problems and make decisions. This approach is crucial for success in the investment management business. This is an inherently uncertain and unstructured business. Hence flexibility of approach and an iterative learning process, the type that foxes follow, are important traits for success

Seth Klarman says that acting on a stock in a Buy or Sell transaction is an arrogant act. Investors are effectively saying my analysis of the situation is better than the person on the other side of the trade. However in many instances this analysis turns out to be incorrect. Hence it is good to temper one’s decisions with a dose of humility and the perspective that “I could be wrong”. Investing thus is a balance between Arrogance and Humility.

I will now discuss four perspectives on investment decision making.

Charlie Munger on Pari Mutuel System: Investing is effectively looking for favourable odds in investment opportunities

As one progresses in the investment journey realisation dawns that buying cheap companies is not for the sake of it. Cheap companies are sought since they offer favourable odds. At the same time, certain companies deserve cheap valuations for a variety of reasons ranging from management credibility (or the lack of it) to inconsistent revenue models. It is important to distinguish between the two sets of companies. We will deal with this aspect in subsequent slides.

Through the above statement, Michael Steinhardt beautifully and plainly elucidates a process of identifying favorable odds in investing opportunities. He suggests that a simple process in identifying favorable odds is, in essence, identifying expectations built into a stock, developing a variant perception about these expectations and then identifying a trigger event for value unlocking.

Just like the Rig Veda says, Truth is one the Wise call it by many names, investing is really about identifying stocks trading at bargain prices

Stakes are high when long only investors are making stock calls. The disincentive towards calls going wrong is quite high for an investment management firm and individual investment managers. Hence many investors like to:

• Stay in line with the markets/ peers. Avoid stocks where performance has been weak in the near term

• Buy stocks where mistakes are less costly i.e. questions will be muted if HDFC Bank falls, however if a less researched small cap stock falls, chances are credibility will take a permanent beating

• Avoid so called “bad companies”. Some of these perceived bad companies are exhibiting temporary weak performance, others are cyclical businesses with low ROE profiles and some are truly avoidable companies with weak balance sheets and questionable governance standards. In certain instances the market doesn’t distinguish between weak/ declining business models and temporary weakness in operations and throws the baby out with the bathwater

• Investors managing large capital tend to avoid stocks which have low trading liquidity

At times, investors tend to take a short term view and over weigh risks. I have heard the refrain, “Let it move 50%, then we will take a look. What’s the hurry.” The implication being that it’s better to look at a stock once the business turns. However, as Buffett says, “You pay a hefty price for a cheery consensus”. You get the right price, when consensus is mis-assessing a business as a weak one

Loss Aversion tendency in the markets is a key reason, as to why consensus lags reality in many instances

There can be Macro factors or Micro developments, which skew consensus in one direction. The above chart is self-explanatory. A couple of examples:

• In 2016/17 ICICI Bank was facing management and business challenges, which lowered consensus expectations. Stock traded at under 1x PBR, however both issues were resolvable. With the issues resolved, performance having rebounded, the stock is up nearly 10x since. This is a case of micro developments depressing stock price

• In the period 2014-2020, Sun Pharma witnessed a secular decline in expectations. Most of this was due to industry headwinds, with USFDA taking inordinate amounts of time to clear facilities and Distributor consolidation in US catalysing drug price declines. Expectations hit rock bottom in 2020. Chances were these issues would get resolved progressively, hence the stock offered favorable risk reward at 10x EV/E. Stock is up 5x since. Here, macro factors, beyond the control of the company, were afflicting performance and valuations

As is widely known, the value of any business is its cash flows discounted to today’s value. The street implicitly calculates these cash flows, the value of which is embedded in today’s share price. Each investor’s variant perception of cash flows determines his action on the stock. Variant perception can be three-fold: 1. Cash flows will be greater than street estimates, 2. Cash flows will be lower than street estimates, and 3. The situation is too tough to gauge. Only in the first case will an investor buy a stock.

The above Expectations Infrastructure chart (extract from the book Expectations Investing) suggests that there are three value triggers - Sales, Operating Costs and Investments. These value triggers are the catalysts of cash flows of a company. Higher the sales, lower the operating costs and investments of a company, greater are its cash flows. Of these three, Sales is the one trigger that influences value the most. Hence an investor needs to have a variant perception of these Value triggers, especially Sales, to form a thesis on a stock.

To form a variant perception of value triggers, an investor scours the Financial Reports, Management Communication, Sell Side Research, Industry surveys, etc. After reading the same, he applies personal judgement and experience to come at future projections (Variant Perception). Now, since the investor is using personal judgement, there is every chance that his biases, like Confirmation/ Overconfidence/ Recency/ Availability, etc., seep in. To ensure that the variant perception is not hemmed down by own biases, Base Rates come in handy.

Investors should ask two questions (instead of just the first one):

1. What do I think will happen

2. What happened when this situation occurred earlier or what happened when others were in this situation

Asking the second question helps to keep own biases in check. For instance, every few years someone or the other approaches me with a positive view on a chemical business, where a prominent business group has a large shareholding. The usual refrain is management is guiding for strong growth. They have invested behind capacity and will sell new products to existing and new clients. However, the history of such guidance going unmet and execution leaving much to be desired (both on manufacturing and winning client trust), has saved me a lot of energy and capital. Applying base rates to market perception has helped in this case and many others.

Druckenmiller suggests that in any stock analysis it is critical to assess “what makes a stock go up or down”. Lengthy analyses, which obfuscate this aspect, are of limited investment value. In his view, usually the factor that makes a stock move is ‘earnings’. Usually earnings beating street expectations act as a trigger for value unlocking

Markets differentiate between short term earning beats and earning power led earnings beats. Earning power emanates from the above factors and is resilient. While fads and fashions are temporary.

Century ply is a leading home improvement player, manufacturing plywood, laminates, particle boards and MDF. When we started analysing the stock, it had fallen from a high of over Rs 300 in 2017 to approx. Rs 100 in 2020. We did a reverse Discounted Cash Flow analysis on the name to figure what assumptions were built into price. The calculation suggested that the stock was building in zero terminal growth. The company is a market leading player in the wood/related prods segment of the home improvement space.

This space was expected to grow rapidly at a run rate of 1-1.5x GDP. Particularly in the context of Covid, families were spending extensively on Home Improvement since they were working from home. The company’s strong balance sheet and large scale were huge strengths, especially in Covid induced tough times. It seemed highly pessimistic that this company would have Nil terminal growth rate. Not agreeing with this assessment of the markets, we bought into the name. Any growth would offer option value in this trade-off and act as a value unlocking trigger. We didn’t rely on any sophisticated future scenario building here. Rather, we negated likelihood of the current expectations built into price, panning out. This was proof by contradiction. The stock rallied materially, since market assumptions changed with time.

As one grows in their investment journey, correlation of past experiences with current situations becomes an inherent part of the investment process. Investors start seeing patterns in many situations, for instance how company managements interact with investors in bad times, how companies refer to competition, etc. We will dwell on patterns a little more in the following section

We use pattern detection consciously/subconsciously to simplify decisions. 1. The Punjabi community of West Punjab, had a famous aphorism which translates as follows, “A Girl is a reflection of her mother and her mother’s sister. After all a Wall is only as strong as the foundation on which it is built”. This is with reference to gauging a prospective bride’s personality in arranged marriage settings. 2. New born babies can recognise patterns of human faces. Their intelligence is not developed enough to do so. However it is evolution at play.

Detecting patterns has evolved as a safety mechanism for humans. We don’t have claws, venom or fangs to protect ourselves. The key tool available to us for self preservation is our intelligence. We are hence wired to detect patterns quickly and respond without hesitation when we encounter a threat. However what was a stone age strength can also become a digital age weakness. Since we live in a data rich environment, there is every likelihood of detecting patterns where none exist. Being aware of such tendencies and developing the ability to identify signal and avoid noise, helps prevent such eventualities

A few patterns that I have detected over the years have been mentioned in the above slide. Many times, in markets what cannot be counted, counts. For instance, if a promoter is selling equity in his business, it may have many connotations i.e. he needs the money, he thinks the stock is expensive, the business is at a cyclical peak, he is debt averse and prefers diluting equity, etc. However, the only reason a promoter buys his stock is if he thinks the stock is reasonably priced. Hence a promoter buying a stock is a better indicator than a promoter sale. There is no way of quantifying this phenomenon, however pattern detection can help here. Let’s discuss some of these patterns in more detail

Certain communities dominate the business landscape of the country. For instance promoters of Gujarati (lineage & mother tongue) and Marwari communities own nearly 40% of all businesses in Nifty 500. These businesses contribute almost an equivalent amount to Nifty 500’s market cap. Add Punjabis to this and the number rises to nearly 50%. This pattern suggests that likelihood of success of a business is high if you are backing promoters from these communities. The key reason for their success is the imbibed value systems. Besides other enabling factors, some communities are adept at building circles of trust with all stakeholders. This acts as a force multiplier and helps businesses grow.

Frugality in personal life is a way of being, and it gets reflected in business as well. Chanakya Neeti, in the context of governance of a kingdom, suggests, “Happiness is rooted in duty (Dharmah), and duty is rooted in wealth (Arthah). The root of wealth is governance (Rajyam). The root of governance is self-control (Indriyajayah) and the root of self-control is discipline and humility (Vinayah)”. The endeavour to acquire wealth is considered a just endeavour. However how that wealth is utilised determines whether one is following the path of Dharmah or not. Discipline and Humility (Vinayah) are the foundation on which wealth is used justly. The same concept could be extrapolated to corporate governance.

In Hindu philosophy, people having wealth are encouraged to see themselves as custodians of that wealth. The wealth belongs to the almighty and they consider themselves to be safe keepers. This mental framework prevents extravagance and imbibes frugality.

Personal extravagance, translating to business extravagance, reflects in inflated costs. In many instances, the costs are incurred without ROI targets. On the other hand frugality leads to lower break even points in business, less stress when margin pressures occur and are less reliant on external funding.

Managements who have a chequered past in capital allocation are likely to continue that trend. The above illustration is of a company which has undertaken many acquisitions in the past, with the promise of significant business gains. However, in each instance the company has fallen short of the promise. Despite the same, investors invested in a fund raise of Rs 800+ Cr in FY22, on a promise of business turnaround. However this time was not different. The company fell short again. Further there were charges of financial misdemeanor from SEBI and the stock was delisted for sometime.

Behaviour change usually requires generational change (in business families) or management change in professional run businesses. Hence its safer to remain cautious of managements with a chequered history. However the urge of many investors to get rich quick and tendency to get carried away with lofty promises (without worrying about past history), entices them to invest in questionable managements repeatedly. In this race to the bottom, chances are reputation (or lack of it) of managements would remain intact, while deployed capital reaches the bottom.

While there is a belief that fundamentals drive stock price, the reverse is also true. Take the instance of Bajaj Finance – the company’s stock price moving up, favorably affected its credit rating, which in turn favorably affected its ability to raise cheap capital. With capital availability, the company could hire quality management and the company became a sought after house for peers to park their businesses through mergers/ acquisitions. The stock price going up also raised consumer trust. Stock price appreciation affected the business favorably. There is Reflexive interaction between perception (as reflected in stock price) and reality (as reflected in the business).

Economic, Business and Stock Ownership cycles have patterns. Buffett and Munger are not proponents of factoring macro analysis in bottom up stock identification. However, detection of these patterns, particularly business cycles, have proven to be quite lucrative for successful investors. This can be an additional leg in bottom up analysis of opportunities. Typically, as the economic and business cycles peaks, so does the stock ownership. As these reverse, the ownership cycle follows. There is two way interaction in this phenomenon also. In post covid times, the Economic cycle reversed from its lowest ebb. Alongside that we witnessed business cycle and ownership trend reversal in the Defence sector, PSU Banks, as also in many other sectors. This trend offered many opportunities.

The PSU Banking NPA cycle had peaked in 2018 i.e. before Covid hit. By then the worst in NPA accretion was behind and data points were showing a reversal in trend. By FY21 there was ample evidence of a cycle reversal with NPAs trending down and profitability ratios rising. Further 14 PSU Banks had been consolidated into 5 large Banks by RBI. These 5 Banks were the chosen ones, behind which GOI stood with an implicit backing. These banks had also been well capitalised and CET1 ratios went from 8% in 2017 to 10.5% in FY21. PCR Ratios had also trended up in this period, albeit they were lower than the mandated 70% number.

While all this was on, most PSU banks traded at 20-50paise to the Rupee (Book Value). Bank of Baroda for instance traded at 0.4x PBR as late as Sep 2021, 18 months after the first lock down was imposed in March 2020. Numbers were improving steadily and the bank had traded at 1.5x-2x in better times. The Bank also was well capitalised and was a scale player, with a Balance Sheet nearly 7x Kotak Bank’s. Kotak Bank traded at c. 4x PBR, due to its exceptional management of the Bank down cycle between 2013-2020. BoBs provisions were 75% of its Pre-Provisioning Operating Profits. This meant that if the provisioning eased off, profitability would see a disproportionate expansion. Between 2021 and 2024 NIMs witnessed a 16% compounded growth, while Net Profit went up at a CAGR of 127%, since provisioning contracted materially. The stock rallied 5x over the next 2 years.

Correct assessment of a change in trend in the business cycle, would’ve allowed to see the favourable risk-reward tradeoff in this opportunity.

Investors can also identify patterns in type of opportunities and take advantage of the same. For instance, in 2013 we identified NBCC as an attractive opportunity. The company is a Project Management Consultant for building & construction contracts of GOI. It received a PMC and marketing fee from the customer for helming these contracts. Part of this fees was received in advance, which meant the company had a large float (nearly 70% of the market cap). The company was cash rich and had own net cash of approx. 30% of market cap i.e. cash on books was greater than market cap. The company’s order book was over 4x revenues and growth expectations were over 15% CAGR over the ensuing 2 years. Return ratios were robust (ROCE of 35%) and valuations were pedestrian at under 8x PER/ 5x EV/Ebitda.

The stock rallied 15x over the next 3-4 years

Fast forward to 2019 and we came across a situation, similar to NBCC, RVNL. The company acted as the government’s arm, undertaking PMC contracts for Indian railways. GOI had indicated that it wanted to transform Indian Railways and would leave no stone unturned (capital/effort/ focus) to ensure the same happened. This stock traded at 7x trailing PER, 6x EV/E and over 5% div yield. It had investments in government rail projects which offered substantial value. Order book to sales ratio was 7x and revenue growth expectations were 25% over the next few years. While we estimated margin compression, margins remained steady, leading to over 2x EBITDA growth over the next 4 years. The stock took a beating in Covid (halved from our purchase price) and then rebounded handsomely to rally nearly 60x (at peak) from Covid lows.

Having experienced NBCC earlier, we could identify this opportunity as a lucrative one and spotted prospective value unlocking triggers

RVNL’s situation was similar to the NBCC situation. The company was a PSU, having negligible market interest. Its prospective growth trajectory and near monopoly status were severely underestimated. While there were uncertainties regarding competition and capital efficiency, those were more than covered in the rock bottom valuations. Having experienced the NBCC situation in the past, we could see a pattern in RVNL’s current situation. Understanding this pattern turned out to be highly lucrative.

In markets contradictory ideas or paradoxes can both be accurate. It is difficult to reconcile these paradoxes

In the remarkable book Alchemy, the author Rory Sutherland, suggests that the opposite of a good idea can be a good idea. For instance purchasers like to buy products which a few have, think Louis Vuitton Bags. Contrary to this, purchasers also like to buy what many have, think Parle G biscuits. These are contrary ideas but both hold true.

Many contradictory ideas hold true in equity markets as well. Some of those have been elucidated above.

Buffett is a proponent of few investments and long term holding. He made a famous statement regarding long term investments, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.”

In 2006 a study was conducted at UCLA on Warren Buffett’s investments. What came through is that 60% of Berkshire’s investments, through his career, were sold within 4 quarters. Some of these investments would have been short term cash proxies, in the form of Risk Arbitrage opportunities. However it would not be too off the mark to assume that some quick profit taking was undertaken and some mistakes were exited early. Taleb says, “It is much, much better to panic early than late”.

These contradictory ideas on holding for the long term and selling fast, both hold true in appropriate contexts

Businesses that generate high Returns on Invested Capital are widely coveted. To be owned as a business, as also to be held as an investment opportunity by minority investors. Conversely, staying away from low ROIC businesses is widely believed to be a good strategy for investors. However, I personally know a few investors who have made fortunes investing in cyclical and low ROIC/ ROE businesses. The trick, as they would tell you, is to buy such businesses when the cycle is at bottom and is likely to turn. Markets penalise declining ROEs and reward rising ROEs. Hence if conditions are ripe for ROEs to rise, which is generally paired with accelerating growth, stock price follows.

Buffett acknowledges Munger’s role in moulding his investment strategy favorably toward high quality, high ROIC businesses. However, in certain contexts buying low ROE/ cyclical businesses can also be lucrative.

There is a general belief that diversification protects portfolios against volatility. In fact, the strategy of portfolio diversification has accomplished proponents, for example Joel Greenblatt. Greenblatt says, ”You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term”. Greenblatt’s inclusion of the word “enough” in this statement is important. A study conducted on the benefits of diversification suggests that diversifying beyond 20 stocks (See chart above), has limited value in reducing volatility of portfolios.

However, bases one’s temperament, concentrated or diversified strategies, both can be appropriate. Walter Schloss, widely regarded as one of the super-investors following Graham and Dodds style of investing achieved a stupendous run of investing performance (see above slide). He famously liked to diversify into many stocks (80-100). On the contrary, Buffett is a votary for concentration and his investment record, clearly, is nothing to be scoffed at

Those familiar with Mumbai’s landscape would be aware that property prices rise as we go down South West Mumbai. Wealthy Mumbaikars prefer living close to the sea and in communities which have similar strata of people. This pricing trend reflects in rentals and outright purchases both. Hence Malabar Hill is more expensive than Worli, which is more expensive than Lower Parel and so on.

Worli, selling at Rs 80,000/sq ft is not cheap on an absolute basis. However, it is cheaper than Malabar Hill (Rs 100,000/ sq ft). If Malabar Hill properties were available at Worli prices, they would not be cheap on an absolute basis, however they would be cheaper than what they are truly worth. On the other hand, extreme suburban localities like Mira Road (Rs 15,000/ sq ft) are available at far cheaper prices than Malabar Hill. It would be highly improbably for Malabar Hill properties to be available at Mira Road prices, for reasons of closeness to the sea, a community of wealthy neighbours in Malabar Hill, etc. Such an eventuality would happen only if a catastrophic event occurs, like war, tsunami, etc.

Similarly certain equities trade at significantly higher valuations versus others, for reasons ranging from quality of earnings, high return ratios to strong corporate governance, etc. To expect such companies to trade at valuations of much cheaper/cyclical businesses, would be impractical. However if they traded at cheaper valuations than what they’re truly worth, they become bargains. These cheaper valuations may seem expensive on an absolute basis though.

As an example, we bought Britannia in 2013 at relatively expensive looking valuations of 30x ttmPER (Nifty traded at under 15x at the time). However our assessment was this company’s earnings are hugely underestimated by the street. EBITDA margin expectations were 6%, however per our assumptions EBITDA margins could top 9% over 2 years. In that scenario, the stock should get re-rated. Over the next 3-4years, the stock went up 10x since earnings beat estimates by a mile and multiples expanded.

Companies with scale have many competitive advantages i.e. access to cheaper capital, cost benefits, consumer having knowledge of the product, widespread usage offering proof of product relevance, network benefits, etc. However, scale also builds in inertia and bureaucracy. Other nimbler players can bring narrow specialisation and offer significant competition to their larger peers. Larger players can get afflicted by over confidence, leading to avoidable capital allocation decisions.

Hence scale is a double edged sword.

Let’s look at some contradictory investment ideas we engaged with. Karnataka bank had weak return ratios, ROA of 0.6x. However, it was evident from their commentary and recent results that the worst was behind. The company’s Provision coverage ratio had risen to 70%, up from 58%. Provisions had peaked and as a result profits had bottomed. The Bank had changed its loan policy and paused all large ticket loans, to prevent accretion of NPLs. The result was GNPLs fell from nearly 5% in FY18 to under 4% in FY21 and guidance was for progressive improvement in this metric. EPS went from Rs 16 in FY21 to Rs 27 in FY22, Rs 38 by FY23 and the stock rallied 5x in the same period.

By mid FY24, it was evident that the reversion to mean of earnings was mostly done (in a mediocre bank) and the bank would need to transform to exhibit performance thereafter. It wasn’t clear from their business strategy and entrenched business attitudes that this transformational leap was possible. We exited the position completely.

Polycab was a diametrically opposite investment opportunity, in comparison to Karnataka Bank. In 2019, Polycab listed on the exchanges and the listing price was close to Rs630 (IPO Price of Rs 538). The stock traded in a similar range Rs 550-600 till 2020. It did spike to Rs 1000 before Covid hit, however it reverted back to the same range post Covid. While peers were trading anywhere between 35-50x, this company was trading at 15x PER. The reason, as we understood it, was two-fold – 1. Nearly 92% of the company’s business came from one product i.e. cables and wires (C&W) while peers were more diversified, 2. There was concern about the company’s capital allocation policy, since they were backward integrating into businesses which were perceived to be non-core.

The company was growing its FMEG (non C&W) business handsomely with contribution to revs rising from 4% in 2016 to 8% in 2019. Further the C&W business itself was growing at a healthy 15%+ clip. The company’s backward integration into areas like Copper Wire Rods, PVC, Rubber, XLPE Compounds, etc. offered stability of supplies and price. This in turn helped in maintaining margins and ensuring efficiency of operations were not compromised. Further, discussions with stakeholders suggested the company had a win-win relationship with dealers, distributors and employees. For a strong cash generating company, with high return ratios (ROCE 28%), its business seemed under-appreciated at prevailing valuations. The stock rallied over 10x and we retained our position through most of the ride.

The above opportunities were diametrically opposite in their nature:

1. They were businesses with vastly different business strengths. However both were lucrative opportunities

2. One was a compounder and the other a reversion to the mean story. Holding periods, hence, needed to be calibrated according to the situation

In investing, “context” is important and different types of situations become attractive in the right context. What seem like conventionally unviable opportunities may be lucrative under a set of conditions.

It is widely believed that analysts and investment managers at asset management firms have a distinct advantage over individual investors. Their advantages emanate from some combination of the following (and more) factors:

1. Access to managements,

2. Superior analysis of same information

3. Access to databases and experts

However, the individual investor can overcome these shortcomings through behavioral advantages

In his book In his book ‘Seeing What Others Don’t’, Gary Klein suggests that performance enhancement in decision making is a function of two things: Error Minimisation and Insight Maximisation. The process of identifying insights is bound to cause errors as it involves risk taking. But if we eliminate all errors we haven’t created any insights.

Investment management business is a business of credibility, where the Key Result Area is outperformance over benchmarks. Risk, is believed to be, an adverse deviation from the index. In such an eventuality, the investment manager risks losing client/ management confidence in his skill and as a result AUM & even his job. Hence deviations from stated objectives can have severe consequences. For that reason, inordinate amounts of energy go into Error Minimisation. Insight Maximisation (or Differentiated ideas), on the other hand, involves risk of failure and is bound to cause errors. Hence Insight Maximisation is not the focus area. This phenomenon is loosely termed as the “Institutional Imperative”. It is, in effect, a loss aversion strategy.

Since individual investors have no such pressures, they can enhance insights in investment decisions and create differentiated investment results.

There are many pockets where individual investors have an advantage over institutional investors and hence competition for ideas is limited:

- Stocks with low liquidity – most investors (esp institutional) stay away, even if fundamentals are strong, since entry and exit would impact price

- Temporarily underperforming businesses – due to performance pressures, most investors are seeking returns in the near term. If a business’ performance has been weak lately, there is possibility the investor’s short term investment objectives are not met. Hence they forego such opportunities and seek businesses where performance is not a challenge

- Sectoral biases – investors have biases against sectors which periodically render such sectors attractive i.e. Public Sector Undertakings, Real Estate, Basmati Rice, etc.

- Forced Selling – index reclassification, rights issues, regulatory changes, adverse news, etc. can cause forced sale of stocks. This offers opportunity to the individual investor since valuations become attractive

- Insider Action – individual investors can be nimble in spotting, analysing and acting on insider action

- Corporate Action – Demergers, Spin Offs, IPOs of subsidiaries, etc can offer interesting pockets of opportunity for a few key reasons – forced selling in demerged names, focused execution which enhances future business performance, true business metrics coming to the fore leading to appropriate valuation of the business, etc

Having said that, there is another invaluable luxury a full time individual investor has – the freedom of time. Since money is making money for individual investors, they free up their time to acquire various experiences. These could range from spending more time with family, learning a musical instrument, reading, travel, learning a martial art, working for the under-privileged, etc.

In the exceptional book Die With Zero, Bill Perkins espouses the concept of using accumulated wealth and not just accumulating more of it. He suggests that if individuals build a mental framework whereby by the time they die they have used all their wealth, their current choices would be very different. The book starts with the lazy grasshopper and the work-horse ant, story. The ant survives the winter due to hard work in warm weather, while the grasshopper struggles since he relaxes during summers. However, in its urge to survive, the ant forgets to thrive, since its life becomes the “hard work”.

The book ends with two hard hitting statements:

- “People are more afraid of running out of money, than wasting their lives.” The realization that we have only one life, makes this statement more pertinent

- “Remember, the business of life is the acquisition of memories“

Charlie Munger said, “Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris—I wanted independence. I desperately wanted it.”