INVESTMENT PHILOSOPHY

    Investment principles

    When we make an investment decision, we always strive to generate above average returns (out performance over benchmarks) measured over a long period of time while minimizing the probabilities of losing the capital. In order to achieve these twin objectives, our whole investment philosophy is centered on Ensuring Margin of Safety.

    We broadly adopt different investment strategies that will help us achieve adequate margin of safety.

    Invest in high quality businesses with competitive advantage available fair/discounted price.

    The central premise under this approach is that intrinsic value of high quality businesses keeps growing over a long period of time. Thus, even after paying a fair value for a high quality business, an investor derives the margin of safety from high probability of compounding the intrinsic value of the business. Thus, over a long period of time, an investor reaps the benefit of this compounding even after paying up near full value at the time of buying. However, how do we ensure that the business that we selected will continue to increase its intrinsic value?

    We look for following things at industry and individual businesses before making an investment decision for this category of business.

    Investment process

    We recognize that for generating risk adjusted above average returns consistently over long term, it is imperative to have a robust Investment Process. However, just having a good process is not good enough! It is equally critical to have discipline to follow the process. We have seen many examples, where extreme mistakes are committed either due to lack of robust process or due to discipline to follow the process. We strive to avoid committing such mistakes by having a robust process and following it religiously. Key focus areas in the investment process are as below.

    We recognize that for generating risk adjusted above average returns consistently over long term, it is imperative to have a robust Investment Process. However, just having a good process is not good enough! It is equally critical to have discipline to follow the process. We have seen many examples, where extreme mistakes are committed either due to lack of robust process or due to discipline to follow the process. We strive to avoid committing such mistakes by having a robust process and following it religiously. Key focus areas in the investment process are as below.

    Idea Generation: A steady stream of new ideas is essential for creating and re-balancing portfolios. There are two stages for the idea generation Origination and Filtering.

    Origination: There are multiples sources of idea origination. Few sources of idea generation that we commonly rely on are: • Periodic screening of the market based on some key parameters using screening tools. • Following the positions taken by well known value investors whom we admire. • Network of likeminded value investors we interact with • Ideas generated through some high quality Investment blogs and forums

    Filtering: As we work with the set of ideas available with us at the origination stage, we try to ascertain that basic quantitative parameters of the business aligned with our investment philosophy and there are no apparent question marks on management’s integrity.

    Idea Generation: A steady stream of new ideas is essential for creating and re-balancing portfolios. There are two stages for the idea generation Origination and Filtering.

    Fundamental Analysis:

    In this step, we try to determine how sound the business fundamentals are how they are reflected in numbers. We carry out detailed quantitative analysis based on the projects, the developer, the marketing team, the venture capitalist and many more parameters before choosing one. - Sustainability of Business model- Ability to grow at high rate without resorting to excessive leverage. - Business Economics –Capacity to sustainably generate above average return on capital for a long period.

    - Nature of growth – Secular vs. Lumpy vs. Cyclical. - Profitability & Pricing Power- Constant /Improving margins vs. fluctuating/Declining margins - Cash generation and Utilization – Free cash flow generation from business and management’s ability to effectively allocate cash.

    Qualitative Analysis:

    As we carry out the Fundamental Analysis, if there are enough reasons for us to believe that it is a high quality business, we move one step further in the process and seek an answer for following question.

    As all the historical data suggest that the business is of high quality, how likely is it for business to sustain this superior quality and hence match or exceed past performance sustainably over reasonably long period of time?

    We ascertain the business quality to develop better understanding on following

    • Industry analysis (Opportunity size, industry growth rate, replacement cycle, rate of obsolescence of firms/products)

    • Current competitive landscape and mapping of competitors against each other

    • Sources of Competitive Advantage (brand power, distribution network, network effect, high switching cost, lowest cost producer, intellectual capital)

    • Strength and durability of “moat”

    • How strong is it and how long is this sustainable?

    • Business Strategy- what makes/is likely to make this business perform better than its peers?

    We are convinced that to win a race, betting on good “horse” is necessary but not sufficient condition. You also need a skilled and committed “jockey” on your side. Hence, we lay utmost importance on management quality in making an investment decision. This is the area where we have almost zero tolerance. If we are not convinced completely about this, we make a pass, irrespective of the business quality. We try to evaluate the management quality on following

    • Corporate Governance track record

    • Capital allocation history

    • Disclosure norms and information flow to shareholders

    • Contrarian streak for the long term benefit of the business

    Valuation:

    As we come to a conclusion, that the business is indeed of high quality, we then try to determine the intrinsic value of the business. However, we do understand and acknowledge, there is no perfect method for determining the intrinsic value of the business. As Mr. Buffet says, it is better to be broadly right than to be precisely wrong. If the price of the business is less than or equal to the “discounted” intrinsic value arrived at in the above step, we consider investing the business.