Kenneth Andrade, fund manager of IDFC Premier Equity Fund and IDFC Sterling Equity Fund, is famous for the consistency with which he has picked multibagger stocks. He has a long list of super-duper multibaggers like GlaxoSmith-Kline Consumer Healthcare, Page Industries, Kaveri Seeds, Bata India, Asian Paints and Blue Dart Express to his credit.
It is obvious that this consistent success is not the result of chance or good luck. Instead, there is a carefully thought out strategy behind it.
In his latest interview to ET, Kenneth Andrade has disclosed his strategy for buying winner stocks:
(i) First identify the sectors doing well and then the best stocks in it:
There are two well-known strategies for buying stocks – the “top down” approach, in which you focus on the Industry/ Sector (e.g. consumer non-discretionary), and the “bottom up” approach, in which you focus on individual stocks (e.g. Page Industries).
Kenneth Andrade follows a unique method that is a combination of both methods. He buys only the best stocks in the best performing sectors. Applying this method, Kenneth Andrade has avoided investing funds in dud sectors like realty and infra even though individual stocks looked promising.
(ii) Buy stocks only if the requirements in the check-list are met:
Kenneth Andrade follows a rigorous process of checks and balances before he trusts a stock with his money. These are:
(a) know the management and its credentials/ pedigree;
(b) understand the business model and growth prospects of the company;
(c) the company must have positive cash flows;
(d) the debt must be Nil or negligible;
(e) the company must have pricing power and not be vulnerable to excessive competition.
(iii) Focus on information & not on hype:
This is level headed advice from Kenneth Andrade. In times of boom and bust investors tend to carried away by the noise around them. Kenneth Andrade advices investors to be rigidly focused on tangible information in the form of financial statements. “Never get carried away by the cacophony and hype on Dalal Street” he says. He adds that investors should “identify the nuts and bolts that drive the growth and profitability of the company”.
(iv) recognize your mistakes and cut your losses:
This is important advice from Kenneth Andrade. Most investors suffer from “loss aversion” and like to be in denial that they have made a mistake. If they want to raise money, they will sub-consciously sell the stocks where they have a profit but not those where they have a loss.
Kenneth Andrade cites his own experience where he made the mistake of buying PSU banking stocks SBI and PNB. Once he knew he had committed a blunder, he dispassionately and swiftly cut his losses before they could do further damage to his portfolio.
Innovative Industries is another example of a stock pick that went horribly wrong. Though the IDFC Mutual Fund held a massive lot of about 30 lakh shares, Kenneth Andrade dumped the shares when he realized he had made a mistake.
Following Kenneth Andrade’s “old-fashioned” style of picking stocks after doing thorough research should help all of us become better investors.