Safir Anand is an Intellectual Property lawyer, a brand strategist, and well-known investor.
At the 2020 Morningstar Investment Conference, Safir engaged with Sanjoy Bhattacharyya, and drew some pertinent insights from him.
Sanjoy is an avid bridge player, investor, columnist and the managing partner at Fortuna Capital.
- All investing is value investing. Growth is the single largest component of value.
The aim is to own a business at a price less than what you think it is worth going into the future. When we invest, we buy businesses that over time will have an advantage over their competitors, sustain and increase their advantage, and earn a reasonable growing rate of return on the capital they deploy in their business.
The single most important consideration is the quality of the business, and if your interests are aligned with the people who manage it. Once you are sanguine about the prospects of the company, then you look at what you are paying for it. This is when you look at valuation.
To say that value investing is low PE stocks is the farthest thing from the truth. Quantitative metrics such as PE and PB and dividend yield are statistical measures to test hypothesis; they do not define what is value.
- When a stock is priced to perfection, there is not a sufficient margin of safety. Adversity throws up the opportunity to buy in a sizeable way.
When stocks are priced to perfection, or prices are daunting, one is left out. The trick is to summon the courage to buy when it goes through a period of difficulty. If you think that the business from a long-term perspective is well run, profitable and growth oriented, has a strong dominant brand and a sustainable competitive advantage, don’t let a nasty surprise hold you back. The company may run into rough weather for any reason - a temporary hike in raw material prices, a problem with one of the brands, etc. Nestle, for instance, had to recall Maggi Noodles a few years ago. That would have been a good time to buy Nestle.
I did not buy Nestle at that time, but when I see the opportunity to buy a business at a significant discount to what it is really worth, I don’t buy gradually and scale up. I go all in if the odds are in my favour.
- Differentiate between Signal and Noise.
Time is the most important variable.
Short-term changes that are likely to be temporary (quarterly earnings announcements, one-off events, changes that are unlikely to have a substantive impact over the longer term) are inconsequential.
The moment there is a significant long-term impact, you have to evaluate whether it is damaging or beneficial. For instance, let’s say Company A can manufacture its product with two sources of raw material. One is gas and the other is crude; the former being a cleaner and cheaper option. Company A now gets a significant allotment of gas at a plant. This is not noise. This has far reaching consequences and a long-term implication on the value of the business.
Take Kajaria Ceramics. They did not have the allocation of gas to run their plants at full capacity. When it did happen, it was obvious that it would have a dramatic sustainable improvement on its operating margins. Of course, using the same example, there is a lot of “noise” regarding Morbi and Chinese imports.
- When you look at disruption, ask: How profitable will disruption be? Uber is tremendously disruptive but has shown no profits in a decade.
We favour businesses and industries unlikely to experience major change. The reason for that is simple: Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength 10 or 20 years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek. - Warren Buffett
Warren Buffett’s thoughts many years ago still have incredible value. Where the rate of change is slow in terms of how the business evolves going forward, there you have much less to be worried about. A company that makes biscuits or bread, for example, is likely to change at a slower rate, is less likely to be disrupted and remain relevant longer. When you look at these kinds of businesses, you ask whether that competitive advantage will hold up and how much money will they earn going forward.
I stay away from dramatically changing businesses. Since my understanding of the future of these businesses is poor, I would like to see the change coming before I step in. I am not a brave heart by investing in businesses where there is rapid change and dramatic disruption.
While the above two are obvious, the tricky businesses are the ones which are not overtly disruptive, appear less vulnerable to change, yet will change dramatically going forward. Some examples are the automotive, pharma and construction industries. Large significant businesses which seem to be well entrenched with no evident risk in terms of being affected by disruptive change. Not only does one have to figure out the nature of that change and how it will affect the businesses that are leaders today, but also consumer expectations and aspirations in a changed environment. An electric car, for instance, may cost a lot more to own and run over a decade but it also appeals to the socially responsible and environmental conscious.
- Don’t personalize your mistakes.
Humility is a very beneficial trait to have as an investor. I am not perturbed when I have to sell because my hypothesis is wrong. But neither am I in denial. It is not so much the loss of conviction as the recognition of where I went wrong.
Recognize your mistake. Accept it. Don’t beat yourself up. Think about why it happened. Use that as an opportunity to develop new adjuncts to your mental framework as to how to think about businesses.
- The cost of liquidity is a significant cost.
Be disciplined about what you think is the right price to pay for the business. Stick to it. Be patient. Don’t get swayed by the Fear Of Missing Out (FOMO). Don’t buy because you are afraid of being left out. Your impatience and lack of discipline will cost you dearly.
It is easy to get into a stock, but it will come to haunt you when you want to exit. In India, the impact cost can be very, very high, especially in small and mid caps. It is important to buy at the right price, rather than be punished after you buy it.
On this note, it is worth ending with a quote of Sanjoy Bhattacharyya from the Morningstar Investment Conference of 2013.
People treat the stock market like they treat brothels – they want sex appeal. You can make money in any market if you don’t participate in the madness. Because investing is not about the state of the market, it is about owning a business.
Also read: Pandemic Investing: Insights and Lessons from Sanjay Bakshi
Investment Involves Risk of Loss.
