My approach towards my investors is that of a partnership. In the current setup I am the Managing Partner while my investors are the limited partners. However, my key consideration is always to ensure that structure (fees, communication) would be acceptable by me if our roles were to be reversed. This principle borrows heavily from what Warren Buffett has laid out in his Owners Manual – “Though our form is corporate our approach is partnership.”
In a world where everyone has all the information, we have to stake out our competitive advantage. The key one that we have is long-term orientation. We primarily invest in companies where the thesis may play out over many years. This reduces the competition and allows us to enjoy our returns over the long-term.
We carry the same approach when we work with our investors/partners. We would rather have one investor for ten years rather than twenty investors for one year. This allows us to take long-term view in our relationship with our investors
We invest majority of the portfolio in the top 5–10 positions. These positions are chosen based on their attractiveness from a future return perspective. In following this approach we subscribe to Charlie Munger’s dictum in spirit, “A well-diversified portfolio needs just four stocks.” Key advantage of this approach is that it allows us to know our top positions better than most people and take advantage of the decent returns that will come from those positions.
We like to buy good stocks when they sell at a discount. This approach, by definition, forces us to go where the crowd is not going – selling things which are going up and buying things which are falling. We are able to have this contrarian bias because we always keep the forward return in mind whenever we invest in any security i.e. what % return we expect from the security from the day of investing to the day the price will match the value.
However, we are not contrarian for sake of being contrarian. We will sell the stock even if it is falling, if we feel that some new information has changed our thesis.
We take seriously the dictum that the art of making money is to not lose money. Warren Buffett has expressed the same through his famous rules on investing. There is the simple maths that if we lose 50% of our portfolio we need to make 100% to get even. The more pernicious impact though, is psychological. We start doubting ourselves a little more; we don’t invest in our best ideas to the extent we should and we start looking for social proof.
To guard ourselves we ask for a high Margin of Safety in our position. This has led us to miss many opportunities. However, we will rather miss opportunities than get into sub-par opportunities which could later turn out to be value traps.
Most of the mistakes we have made in our investing journey have been where we misjudged management or business quality of the company. Since many of the Indian businesses are owner operated, quality of the management becomes paramount. However, judging the quality of management is very subjective.
The best we have been able to do is to create mosaic of information about management and use that to reach our decision. We continue to increase the weightage of this element as we consider investing in potential ideas
To us Value Investing is more than an investment approach; it is a way of life. This approach requires us to keep learning so that we become a better investor; but more importantly, a better human being. In our experience Value investing draws us towards the “right crowd.” This allows us to learn not just from our investment but also from our investors who are a self-selected group of individuals.
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