Q: How many stocks would you recommend and what would be the frequency?

We would at least recommend six stocks per annum. However this number and the frequency might change depending upon market conditions. There might be times when we find more number of undervalued stocks and hence the frequency might go up and there will heated up times when we prefer to sit on the sidelines and wait for better opportunities. We do not recommend 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 frequency for sharing ideas like monthly or bi-monthly will only be counterproductive.

Q: How much should I invest in each stock idea?

SA Basic Plan 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 report 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.

Q: What return can I expect from these stocks?

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 loose 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.

Q: Would there be stop loss? Do you recommend based on technical indicators as well?

All our stock ideas are fundamentally backed and are only for investments, implying a long term horizon (at least 3 years or longer). 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.

Q: Would there be target price?

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.

Q: What kind of stocks do you generally cover?

While researching stocks we do not constraint 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, its advisable to have a multi-cap and diversified portfolio.

Q: Can you please share a recent report as a sample?

We shared a stock-idea on Amruntanjan Healthcare, an FMCG company, in November 2014. You may access the report Here . This is a classic example where we were amongst the first few to pick up an emerging story. We find it perfectly fitting our ‘Growth at Reasonable Price’ framework, its an interesting story and can be a decent compounder for long term.

We shared another interesting small cap idea ‘Tasty Bite Eatables’ in April 2015. Another instance where we were able to identify the potential in this emerging processed foods company early. Though the stock has been a 2.5x already, we believe the stock has multiple triggers in place to make it a multi-bagger over next 4-5 years.  Please download the report from Here.

You may also read our report on EPC Here. Given the poor state of agricultural economy, the company hasn’t done very well in last three years, however we believe micro-irrigation is a must given acute ground water scarcity and potential food security issues. Being a Mahindra group company, it can have huge synergies as Mahindra is a household name in rural India.

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 Advisory’ page. Also, you may read our blog where Mr. Khemani has shared some of his old work and thoughts on investing.

Q: Everybody talks about their winners, kindly share your misses, where have you gone wrong?

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.