While there are various styles of investing, we can categorize them under three key heads:
- Special Situations (Arbitrage): Open offers, rights issue, mergers would all fall under this category. One is betting on a specific corporate action with well-defined timelines and aim to make a certain return independent of what happens to the company’s fundamentals or market sentiment. Typically aim is to beat fixed income return while not taking any material risk. Holding period ranges between few days to few months. Re-investment risk is high as one has to keep looking for new opportunities which also involves sitting on cash in between. (Suggested Reading: You Can Be A Stock Market Genius By Joel Greenblatt)
- Statistical Bargains: These are average businesses which are available very cheap – below liquidation value/cash, at a high dividend yield or low price-earnings multiple. The focus is largely on quantitative parameters rather than qualitative; analysis starts with valuation followed by financials and involves little assessment of business quality or management quality. One is betting on mean reversion either in business performance or valuations or both. Cyclical and commodity businesses would fall in this category. While the downside is low, the upside too is restricted to mostly the undervaluation part with little scope of any significant increase in intrinsic value over long periods of time. Hence, these are short to medium term opportunities with an investment horizon ranging from a few months to as long as 3-4 years. (Suggested Reading: The Intelligent Investor by Benjamin Graham)
See thesis on one of our current portfolio holdings Gujarat Ambuja Exports Ltd.
- Moat Investing: This involves studying business fundamentals in depth and trying to spot ones which enjoy a high return on capital employed because of durable competitive advantages (economic moat) like brand loyalty, access to raw material, distribution, strong research & development, switching costs, economies of scale, network effects among others. Besides quantitative analysis, this style involves significant qualitative analysis in order to assess the reasons behind superior financial performance i.e. to spot what is the source of the competitive advantage, if any. Interacting with customers, vendors and competitors often lead to such findings, which can later be discussed with company management as well. These businesses often trade at valuations which optically look high and one needs to dig deeper and think differently to value such high-quality businesses. Investment horizon here can be fairly long, sometimes as high as 10-20 years or even longer. While initial research could take months but maintenance research is very limited in moat investing. This also has the lowest re-investment risk as investment horizon is longest. (Suggested Reading: Berkshire Hathaway Letters to Shareholders)
See thesis on one of our current portfolio holdings Wonderla Holidays
Stalwart Advisors’ Model Portfolio has 20 stocks currently and a majority of these would be from 3rd category of Moated Businesses with remaining from 2nd category of statistical bargains, we don’t do special situations. Our focus area is moat investing while opportunistically when we are able to spot businesses that are available cheap we deploy some capital if these meet our other key parameters around management quality (integrity & capital allocation) and balance sheets (unleveraged).
|Current Portfolio||Portfolio Characteristics|
|20 Stocks in Model Portfolio||16 Market Leaders|
|15 Stocks in Buying Range||14 Owner-Operators|
|Deploy 75% Capital Immediately||14 Debt-Free|
We rush to shopping street when there’s a sale, unfortunately, we often do the opposite when it comes to stock markets. One such sale is going on right now and we believe it is a good time to start deploying meaningful capital and also increase allocation to equity asset class – Jatin Khemani
Initiating Coverage Reports on Gujarat Ambuja & Wonderla Holidays along with all updates can be freely accessed on the dashboard
Disclaimer: This is not a recommendation to Buy/Sell. Read complete disclaimer here.