Dinesh, an active participant of Valuepickr Forum, is the creator and blogger of the blog Valuation in Motion. He started his investing journey in 2013 and has come a long way since then developed his own process and models on the valuation of companies and when to sell them. Today, he shares an in-depth look into his life, gives anecdotes to becoming a better investor and confesses some of the mistakes he committed early on in his journey. So, without further ado, let's begin.
1. Tell us a
little bit about yourself.
I’m an MBA in
Finance from Xavier’s, Bangalore. I’m currently working as a Risk Analyst in
CRISIL’s Global Research & Analytics business. As an investor, I admire
every step in the investing process, but I am particularly passionate about
Valuations. I have been running the blog ‘Valuation in Motion’ (www.valuationinmotion.blogspot.com)
for a little more than 2 years now.
2. How did
you start your investing journey What got you to the markets?
This is a
two-pronged story. My very first introduction to stocks came with an External
Project I undertook during my Under Graduation in Commerce all the way back in
2013. I was travelling to Chennai by train to attend an Investing Conclave. My
neighbor was coincidentally an experienced Broker and Trader out of Mumbai. He
taught me the basics of the stock market and the need for savings. I started
investing since then, but it was mostly out of my pocket money.
Fast forward to
2016, my MBA in Finance helped me consider seriously about investing in stocks.
I owe it to the few brilliant Professors that taught me all the theoretical
aspects of investing. I was still investing out of my pocket money, but this
was the time when I decided that I would most definitely get into the markets
once I get a job.
3. The first
stock you bought, first loss and what did you learn from it?
first purchase was Britannia Industries. It came highly recommended by the
Broker/Trader I met in the train that day. So when I got back, I compelled my
Father to invest some token amount in the company. Since then, the stock has
made a 10x. But apart from this dubious claim, the first investment I made out
of my own Demat Account was in a little-known IT company called COSYN, which I
purchased somewhere around the beginning of 2016.
My first big
loss came in Mirza International - about 40% from my average price. My
investment thesis was based on the assumption that the management will focus
more on furthering the footwear business, because I believed (I still do) that
the footwear industry has a massive opportunity size in India. Unfortunately,
the management had other plans. They invested heavily in their retailing
business and co-branded it with their 'Red Tape' brand. I don't mind companies
experimenting new businesses - in fact, I encourage it. But the capital
commitment is key. In this case, it was heavy and they were running head first
into an industry which already had crazy amounts of competition. I sold the
shares a few weeks after I decided against the management's commitment to what
I felt was the wrong business. The company is still into retail and I wish them
success, but for me the risks simply far outweighed the rewards. The lesson
here is that regardless of your level of preparedness or financial acumen, you
can still be blindsided. If you’re investing in Equities, as Mike Tyson would
put it, prepare to get punched in the face.
4. What are
the basic metrics you look at a business when you are valuing or looking at it
company requires a complete understanding of the business and its transactions.
It’s difficult to put it in a framework because the requirements will change
based on the industry and company. For instance, if you’re studying a B2C Dairy
company, researching the Supply Chain may be of utmost importance. But if
you’re researching a B2B Auto Parts Manufacturer, the focus will not be the
same. Still, if I had to give you a broad framework, I generally look at a
company in the following sub-sections of Value:
- Redundant Assets
- Competitive Advantage
a business based on an overview is quite easy. As Charlie Munger would say,
“Tell me where I’m going to die, so I won’t go there”. I generally look for the
following as soon as I start getting interested in the company:
- It must be a business with at
least 10 years of operation (Eliminates Early Stage companies)
- The business must have at least
Re. 1 of Operating Cash Flow in all, if not most, of the last 10 years
(Eliminates companies with large Working Capital requirements or loss-makers)
- It must not be a
Commodity-seller, a Public Sector Unit/Bank (Eliminates cyclicals)
- The industry and company must
be within my Circle of Competence (Eliminates companies whose businesses I
- The Average Return on Invested
Capital / Return on Equity / Return on Capital Employed must be above twice the
Risk-free Rate consistently for the last 10 years (Eliminates poor Capital
- The Growth in Free Cash Flow,
Sales and Profits must be at least twice the rate of Inflation (Eliminates
- The Margins should have a
consistent, if not increasing trend and the Margins should have a low
Correlation with Raw Material prices (Eliminates companies with poor pricing
- The company must have little to
no Debt / Debt Coverage of at least 4 (Applicable only to Non-BFSI firms -
eliminates heavy leverage)
- The company’s Promoter/MD/CEO Ownership
should be higher than 40%-50% and there should be little to no pledging of that
ownership (Eliminates businesses in which the Management has little to no ‘Skin
in the Game’ or incentive to make the business better)
- There should be no shady
Related Party Transactions, Private Holdings of Promoters in a competing
business, high ESOPs / Salaries to the Top Management and other basic
scuttlebutt checks (Eliminates ‘Bhangaar Caps’)
Of course, these are just thumb rules. One
or two points in this checklist can be ignored if a satisfactory reason for the
failure is found on initial research. But the majority of the checklist should
pass for me to further continue the research on the company. As you can guess,
many companies I come across get eliminated this way – and that’s fine.
5. In your
investing journey – one thing you did which you think you did great and one
thing you regret doing?
When I started
investing (Again) in 2016, I did something very embarrassing. I had just built
an impromptu Valuation Model, thanks to my MBA education. I “valued” several
businesses based on historical numbers alone, with no context of the business
itself. Based on this, I found that the stock COSYN (Mentioned earlier as my
first ‘real’ purchase) was “undervalued”. I bought the stock somewhere around
the beginning of 2016. I ended up making a 5x in 6 months, but by that time I
realized how stupid I had been. Thankfully, the raging bull market back then
was kind and I made a 333% IRR (Yes) in 2016. Despite this, I consider
everything I did in 2016 as incredibly naïve. I regret it and I hope to never
repeat any of it in the future.
following my realization, I sold off most of my stocks in 2017 (Except HDFC
Bank). I call 2017 my ‘lost year’. I forced myself to regroup and rethink how I
should invest. During this time, I had the amazing opportunity of going through
the several blog posts, videos and website content of Prof. Aswath Damodaran.
This would allow me to build better Valuation models (Which I use to this day)
and a have very clear view of ‘Value’. I also read the works of several
investing greats like Warren Buffett, Charlie Munger, Philip Fisher, Peter
Lynch and Benjamin Graham in 2017. Hence, in stark contrast to 2016, 2017 was
the best year in my investing life (At least, so far). By the end of 2017, I
had come up with a basic framework of how I wanted to approach investing. You
will find that the post ‘Purchasing Common Stock: A 7 Step Code of Conduct’ was
the very first one I made in my blog, which was right around the December of
2017. In 2018, I would get back into the market.
6. When do
you sell a stock? What are the criteria according to your rationale that a
stock has reached its life? When do you know it’s time to get out of stock?
There are only
three reason why I would sell a stock:
- The fundamentals of the company
has changed (Ideal reaction is to sell and re-evaluate the business)
- The stock is overvalued beyond
reason and/or you can find a better business with similar or better
fundamentals (This is really iffy – one solution suggested by the legendary
Walter Schloss is that you should only switch when the other option would yield
twice the returns. Maybe twice is too much. But the idea is that you should not
flip investments for a mere 1%-2% in incremental expected returns)
- The story you had imagined for
the company is not playing out as you envisioned (Remember my Mirza
example where patience has paid off for you?
It's too early
to tell. I have been an investor for only 3+ years. Within that, I've invested
big money only for 1.50+ years. But I suppose one example could be Ion
Exchange. Ion Exchange was one of my earliest picks. For about 2.50 years, the
stock went nowhere. In many forums, I was getting 'advice' left and right that
I was investing in a mediocre business and incurring Opportunity Cost. But
recently, Ion Exchange doubled in Price. The Government of India has just
started looking at water treatment as a policy measure. I still believe the
company has a long, long future ahead.
8. Tell us more
about your services and what are your future plans for the same?
I will continue
writing in www.valuationinmotion.blogspot.com
for free, as long as time and work permit me. Recently, I went on a 2-month
break with no posts, because I got really busy with work. There were also other
times when I took some personal time-off for a month or so. But apart from
these, my aim is to write at least once a month there.
I always tell
myself – if Prof. Aswath Damodaran can find time to write in his blog, make a
video explaining it, update his website and do all of it for free – then I can
do it too.
to pick favorites, but just for the sake of the question, let me pick 5:
Strategy" by Michael Porter
- "Security Analysis"
by Ben Graham and David Dodd
- "The Model Thinker"
by Scott E. Page
- "Poor Charlie's
Almanack" by Charlie Munger
- "Principles" by Ray
Apart from the
books, Warren Buffett's letters are a timeless classic. I have them printed and
bound. It goes without saying that Buffett’s letters are a treasure trove of
business and investing knowledge.
I love playing
Chess, reading Non-Fiction, watching Science, Psychology and Philosophy videos
on YouTube, travelling to unknown places with friends and taking casual drives
on my Royal Enfield.
11. How do
you increase your market knowledge?
Compared to just
a few years back, we have an abundance of information, thanks to the internet. One
can choose to read, watch or listen to gain knowledge on most topics. Investing
forums like ValuePickr have been of great help. These days, there are also
WhatsApp Groups on investing, which allows us to connect directly with
like-minded people, and investing veterans around the country.
But the key is to
differentiate between expiring knowledge and lasting knowledge. Learning about
the inner workings of the Auto industry, for instance, creates lasting
knowledge. Reading up on research reports, technical calls or rumors about
specific Auto stocks creates expiring knowledge. So, just as junk food destroys
your body, junk or fast expiring information dumbs down a person. We should
make it a habit to learn a lot, but more importantly, to learn worthwhile.
12. Who is
your role model in investing?
specifically. I love gathering knowledge from several places. Everyone ranging
from Warren Buffett to Vijay Kedia have contributed something to my investment
knowledge and I am forever grateful for it. I am thankful for anyone who
teaches me something new.
Disruptions – What do you think of them and how do you evaluate if a business
you are looking at as a prospective investment won’t get disrupted easily?
I believe the
word 'disruption' has been abused a lot in recent days. Regardless of whether
disruption is becoming more prominent or not, I tend to pick out businesses
that have a very slow rate of change. In other words, I look out for businesses
that don't necessarily change with time. As Warren Buffett once said: "Our
approach is very much profiting from lack of change rather than from change.
With Wrigley chewing gum, it's the lack of change that appeals to me. I don't
think it is going to be hurt by the Internet. That's the kind of business I
advice you would like to give to younger people who have just started
earning/saving/investing in the financial freedom journey?
Save, save, save. Calculate how much you can reasonably save every month and save more than that. Good investing begins with good saving.
The above is for educational and informational purposes only. It is not an endorsement or a stock recommendation. The author may be holding the securities mentioned above. Do your independent and thorough research before investing.