Normally, when novice investors like you and me walk up to stock wizards to compliment them on their mega-bagger stock picks, they (the stock wizards) like to strut and preen a bit and pretend that their superior skills helped in homing in on the stock.
However, Chaitanya Dalmia, the whiz-kid of the Renaissance Group, is of a different mould. He smiles sheepishly and credits “serendipity” (good luck) for his enormous success.
Chaitanya homed in on LIC Housing Finance only because it was quoting at a 52-week low and was offering a high dividend yield. He wanted to invest in a stock which offered “capital preservation”. He candidly admits that he knew nothing about LIC Housing Finance’s business fundamentals at that stage.
To his utter surprise, the stock took off like a rocket. In two years, the stock doubled. In another two years, it multiplied another ~4x (7x from original price). Thereafter, it went into a prolonged period of hibernation. For five long years, it remained within a 20% range. And then in the next 16 months, it jumped another 5x (35x from original price).
Today, just 11 years later, the stock is an incredible 80x from Chaitanya’s purchase price.
However, he rues that he did not have the patience to hold the stock. As the stock price surged, he got restless and booked profits. So, while Chaitanya did make a lot of money, it was nowhere close to what he would have pocketed if he had just held on to the stock.
In the case of Unitech, the situation is exactly the reverse. Chaitanya explains that in 2004, the stock was dirt cheap and also highly illiquid. He had to hike his price by 30% only to be able to grab the desired quantity.
Such was Chaitanya’s good luck that within a year, Unitech became 2x, and in 2 years, 10x. As he began his selling spree, the stock surged 250x in the 3rdyear and 500x in the 4th.
“I got super-lucky in more ways than one” Chaitanya says with a big smile on his face. “All told, it was as if it was God’s own order that all stars must align to let me make the biggest killing of my career” he adds.
The important part is that unlike in the case of LIC Housing, Chaitanya was lucky to have sold off Unitech when he did because today it is down 95% from its peak of 500x.
Chaitanya explains that in picking a stock and deciding whether to hold on to it, a number of variables are at play and need to be answered cumulatively. Some of the questions are: Will the business fundamentals remain intact? Will any competitive or policy pressure compress margin? Can demand keep growing at a robust pace? Will there be many blips along the way? How might the management handle the same? On the valuation side, who is to say whether the right valuation is 0.5x P/B or 3x P/B? Or the valuation parameter should be EV/EBIDTA or EV/Sales or P/E. And within these parameters, what is the ballpark number close to which a company’s true value lies?
He emphasizes that with so many variables at play, to get all these variables right together at the same time is a low probability event. To attribute it to pure skill without any role of luck would tantamount to being ‘fooled by randomness’.
He adds that it is not as simple as buying something at a good price and going into hibernation.
Chaitanya warns that it is naïve to continue holding very richly-priced stocks under the garb of quality. He advices investors to sell even a quality stock at a particular price than cumulatively run the risks as described supra.
In the end, your return as an investor is determined by what you buy, the price you pay, the industry doing well, the management riding over a tough period, Mr. Market finally deciding to take notice and changing its mood, and you having the tenacity to hold-on until such time, Chaitanya says.