Our Thinking

We THINK long term. We are investors, not speculators.  

We BELIEVE in :

- Intellectual honesty: Being honest about what we know & what we do not know.

- Keeping things simple & clear.

- Giving as much importance to Qualitative factors as Quantitative factors (Not everything that counts can be counted)

- Avoiding false precision: It is better to be approximately right than to be precisely wrong.

- Changing our minds when the facts change.

- Admitting mistakes when they happen, Correcting them promptly,  Learning from them, Improving the process further going ahead.

HOW WE THINK ABOUT:

INVESTING:

Investing is to lay out cash now in order to receive more cash in the future. 

We invest only when we are certain that we'll end up with more "purchasing power" than we have now. "Real after tax return" is what matters. We always invest with a time horizon in mind (i.e. a holding period). 

Stocks and Real estate have almost always beaten inflation over long periods of time.

We combine Growth & Value approaches of Warren Buffett, Charlie Munger, Benjamin Graham.

It is better to buy a great company at a fair price than a fair company at a great price.

A great investment = Great business, great people, bought at a great price.

While Investing, we always consider: Safety, Margin of Safety, Opportunity Costs

Our goals while Investing are:

No.1: To avoid permanent loss of capital (i.e. keeping principal safe)

No.2: To achieve long term compounding of capital at high rate of return (Beating inflation, benchmark indices by a significant margin) 

STOCKS:

Stocks represent part ownership in an underlying business with assets, and earnings power being guided & run by people (Management & Promoters) 

We prefer owning businesses that are profitable, cash generating & internal compounding machines with above-average returns on capital employed.

We value the business for its intrinsic value from franchise growth value, earnings power value (future free cash flows), intangibles & asset value. 

Stock price reflects Sentiment on top of business fundamentals.

We actively seek to benefit both from current Mis-pricing  in markets (Under-valuation due to poor sentiment, business not being well understood, appreciated) and, Future growth in intrinsic value

MARKETS:

Markets are only rational some of the time. 

Markets are Cyclical: Mr. Market is an emotional pendulum. Mr. Market has mood swings from extreme optimism (Greed) to extreme pessimism (Fear).

Markets behave like a voting machine in the short term, but a weighing machine in the long term.

Markets are predictably irrational many times, when the herd mentality is at play in both directions (Excessive Greed & Excessive Fear)

Markets often go down very fast (like the elevator), but move up rather slowly (like the staircase)

RISK:

- Risk is the possibility of harm over our holding period

- Risk comes from the possibility of a permanent loss of capital

- Risk comes from the possibility of an inadequate return. Risk comes from the possibility of ending up with lesser in purchasing power

Low risk = Downside protection i.e. "Low downside" from purchase price (due to Purchase price being lower than the intrinsic value of business)

Buying a dollar worth of value for 60 cents is far less riskier than buying a dollar for 80 cents.

In a "Value" portfolio, Lesser risk = Higher return. To earn a higher return, we must lower risk.

Beta (Price volatility) does not measure Risk. 

High price variability does not mean high risk (Example: a stock whose return varies from year to year between +20% and +40%)

And Low price variability does not mean low risk (Example: Fixed income instrument that returns 10% a year every year but has inflation risk, interest rate risk, default risk)

Risk cannot be calculated with precision but it can be judged with a degree of accuracy based upon factors such as:

1) Certainty with which the Long-term Economic characteristics of the Business can be evaluated

2) Certainty with which Management can be evaluated for its Honesty, Capital allocation & Operating skills

3) Certainty with which Management can be relied upon to share benefits (dividends) with the shareholders

4) Purchase price of the business

5) Inflation rates & Tax rate (over the holding period) will determine how lower our "Real after tax return" will be from our "Gross return"

RISK  MANAGEMENT:

1) Common sense:  Avoiding dumb behavior.  Avoiding strategies that can cause a lot of harm. Avoiding difficult businesses with bad economics, dishonest management. 

2) Asking: Are the odds in our favor?

3) Margin of Safety: Not over-paying. Paying what it's worth or lower.

4) Intelligent diversification: Position Sizing. Not betting it all on one company. Diversifying "non-market risk" by owning enough Themes / Sectors with lower correlations.  Also, Avoiding too-much diversification.

TEMPERAMENT & BEHAVIOR:

Staying Rational amid price volatility. Focusing on business fundamentals. 

Not getting influenced by envy, fomo, greed, fear & psychological biases.

Independent thinking & Avoiding herd behavior: Taking advantage of excessive fear & excessive greed in the markets