While researching stocks we do not constrain ourselves on market cap or sectors. We look at small caps, mid caps as well as large caps. Wherever we see value and find opportunity to make high absolute returns with limited downside risks, we go ahead with researching it in more depth. In the long run, it's advisable to have a multi-cap and diversified portfolio.
By nature equity markets are extremely volatile; in times of panic it throws mouth-watering opportunities whereas in case of frenzy sometimes valuations go way beyond reasonable levels. So there will be times when we find more number of undervalued stocks and hence you would frequently hear from us and there will heated up times when we prefer to sit on the sidelines and wait for better opportunities. We do not invest in something till the time we are convinced on investment thesis as well as valuations (downside protection) and by nature we are patient enough to wait for such anomalies to arrive and then act based on that. Markets are supreme and we believe imposing any fixed number of stocks and fixed frequency for sharing ideas like monthly or bi-monthly will only be counterproductive.
We manage risks by investing in opportunities where we feel downside risk is limited, business prospects are good and management is ethical, even if that means buying at fair price (rather than cheap). We get 6-7% post tax return from fixed income securities, so we will be satisfied if in the long run we make 16-18% CAGR on our reasonably diversified portfolio; though the number might look small but compounding does magic over long periods of time. To put things into perspective, the richest and most renowned investor in the world Warren Buffet has been able to compound wealth at 22% CAGR over his investing career spanning over 50 years.
Not all our stocks will do as expected; but even if six on 10 do well, we will consider it a good outcome as long as we don’t lose much on the other four. Ours is a long term view and hence the right time frame to judge our performance will be over a cycle i.e. 4-5 years or longer.
Stock Ideas is for investors who manage their own stock portfolio but lack time to do in-depth research and want to get interesting fundamental stock ideas. We share detailed research on stocks we like along with suggested allocation so that investors get a sense of our conviction. Generally, we put ~3% of portfolio in low conviction ideas, 4-6% in medium conviction and 7-10% in high conviction ideas. As a risk management practice, we do not suggest putting more than 10% of portfolio in a single stock.
Outcomes in investing are never certain, rather probabilistic in nature. We too have had our fair share of mistakes; however, mistakes have been more in the form of opportunity costs rather than capital loss. Case in point- few of our core holdings like Agro-Tech Foods and EPC Industries have not yielded any meaningful returns over last many years, as the thesis is taking longer to play out.
Fortunately, we haven’t experienced any meaningful loss of capital on any of our investment till date due to our strong processes which filter out businesses dealing in pure commodity, with leveraged balance sheet, in sectors experiencing high rate of change, turnaround cases and those run by managements with questionable integrity or bad capital allocation history.
We have also committed series of errors of omission wherein we let go of seemingly obvious multi-baggers because we spotted some negative with business quality or management integrity. We did that with ceramic tile stocks in 2013 and we all know how stocks of Kajaria and Somany performed over the next two years. We believe this is a trade-off we have to bear if we want to follow a ‘process’, which in our case is looking at downside before upside. To continue to follow the process religiously we would have no option but to take our attention away from outcomes and continue to be consistent with the ‘process’, which makes the probability of frequent errors of omission high.
You may signup for free and see some of the our existing holdings with detailed initiating coverage reports at http://investor.stalwartvalue.com/users/sign_up
We hope these reports will give a fair idea on our research process and indicate the kind of depth we go into.
To know more about our process, we suggest you to go through Our Focus on website’s ‘Stock Ideas’ page. Also, you may read our blog where Mr. Khemani has shared some of his old work and thoughts on investing.
Price is a function of two aspects- Growth in Earnings per share (depends on how well company does) and Valuation (like P/E multiple; depends on market sentiments). We prefer to invest in companies where earnings growth prospects are high and valuations have scope of re-rating. Having said that, being human we understand our limitations in predicting the future and hence refrain from sharing any target price or any kind of excel-based forecasting where next quarter’s EPS is forecasted to second decimal point. We will stay invested as long as the thesis is playing out well or till we find better opportunities. Either ways, we will keep you posted with our thoughts through regular (generally quarterly) updates on all our stock ideas.
All our stock ideas are fundamentally backed and are only for investments, implying a long term horizon (at least 3 years). We will indicate the price range at which we are comfortable entering it. We do not issue any kind of trading recommendations and hence no stop loss.