I am currently reading the book “Masterclass with superinvestors” which features interviews of Ace Indian Investors.
Here are my notes from Chapter 1 - Interview with Ramesh Damani Sir
(1) We should be forward-looking
The stock market is about looking ahead and not looking behind
Investing in markets is about looking ahead. Focus on where the puck is moving. The following passage from Prof Bakshi’s blog caught my attention which resonates with Ramesh Damani Ji’s advice about looking ahead.
At a price, everything is captured. Basically as a fundamental investor, one should look at where downside risk is limited i.e. the price already captures all the negatives.
(2) Atoot Vishwash (Unshakeable Faith) in India Story
Countries never go bankrupt - they can raise taxes, appropriate wealth, do anything they want, and also force hard changes
The opportunity of the last 30 years will be dwarfed by the opportunity of next 30 years
(3) Focus on Position-sizing
When you have a great idea, you need to back up the truck and buy
Further, when stock goes up, a smart investor will keep adding at various points, while an average investor might not.
Damani Ji writes about backing up the truck aka position sizing multiple times in his interview in the book.
This is how position sizing takes you to a completely different trajectory:
In 2000, when the tech bull market ended, about 95% of my portfolio was in technology stocks
You only need 1-2 big winners; if you size them you will see the magic….
I would say I was riding the trend - I was bullish on Technology, I happened to be in technology and the bull market was in TMT. Infosys and CMC had gone up 100x each and the rest of the portfolio was dwarfed.
Journey to 100x
“The next Xerox is Xerox”.
It meant that Xerox was one of the glamour stocks in the 1960s and it doubled multiple times. You don’t sell it just because it doubled or tripled. You just keep it - “Next Xerox is again Xerox”. I remembered that. I had realized the size of the opportunity. I understood that the Indian Industry was a billion dollars in size, while it is a trillion-dollar Industry in a Global Context.
If you are a smart stock picker, you will have some leadership stocks. You will typically have one or two among the top 50 stocks that are moving. The trick in position sizing, is to let those stocks run because in a bull market, they can go a long way.
Don’t cut your winners just because they have increased more than a certain percentage of your portfolio. Infosys was 90% of my portfolio once - you want to keep riding the winners.
(4) Independent Thinking
Do your homework and have the integrity of independent thought
Borrowed conviction will not help.
No one rings a bell when a great investment idea comes. In fact if everyone disparages it, probably you are on to a good investment idea!. If everyone applauds you for your pick - it’s probably not a great idea. There has to be spectism in what you are buying. Finding picks is a lonely job - that integrity of independent thought you need is very lonely.
To be great in the stock market - you need to find your own path
(5) Follow the leaders
I had learnt that when a bull market gets over, the leaders are squashed completely
This advice is more apt at the start and end of a bull market. Similar thoughts are echoed by Mark Minervini in his book "Trade Like a Stock Market Wizard" where he takes one level further where he advised to look at leaders and not the indices.
Stocks can top out well before the bull market ends.
(6) Process
There is no point in regretting - there are many stocks that I have missed. How can you be so stupid, I ask myself! Despite that, it doesn’t matter if you can double money every three years - it’s pretty cool.
My criterion is an enormous value on the market cap of the company - I see how the market is valuing that company and if I am happily willing to buy this whole company at that price. So I wear businessman’s hat. I might be willing to overlook and tolerate some issues in the hope that they will change.
The first filter is the market cap - how cheap the company is relative to the size of the opportunity or where it could be after 10 years.
Looking at PE only is futile.
eg E-Serve International. Mcap 150 cr, Profit 1 cr i.e. PE 150x
I often find that I am more bullish on the company than the management are! I understand the long-term potential of the business a little better, as they are running the company on a day-to-day basis, bogged down by the short-term, and unable to think of a 3-5-year horizon. Typically when that happens, it is a great bargain - you are getting something really cheap - managements themselves are shaken about the prospects of the business.
Management
Our job is to judge the management. They can tell us anything they want. If they say that there will be a 40% growth, you don’t have to come and buy the stock.
You have to judge the management - you try and understand, look at the body language and see if their talk is credible. You should look at the past track record and see where they have delivered.
Generally, the people who talk in big round numbers are what we tend to avoid. We realize that the business is full of uncertainty and we are looking for someone who tempers that uncertainty.
Portfolio Construction
Don’t care about portfolio construction vs. the benchmarks. I don’t care about sectors - I want to find stocks that are cheap.
“If I can find really cheap stocks, I can put 80% of my money into technology. I don’t balance my portfolio using some mechanical formula”
Signals from the market
At the extremes, a market gives you the invitation that it’s ending or starting and good investors pay a lot of attention to that. Most of the time, timing is a futile exercise, but at extremes, it can be a very profitable exercise.
How the market reacts to news is a very important factor that I use. At the top of the bull market, news headlines will be very positive but the market goes down. It reacts negatively despite good news coming out. It indicates that there is selling going on out there - the smart money is anticipating bad times.
At the bottom of the bear market, the headlines will be very negative - the individual stocks however instead of going down, go up.
“So the principle is that when the public gets smart, the smart get out”
Resource: Masterclass with Super-Investors
Regards
Pankaj Garg
(Learning from Superinvestors #1 - Ramesh Damani Ji)
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