Pithy and witty observations on the market, usually laced with sarcasm, have earned @contrarianEPS a huge following on Twitter. No highfalutin quotes on investing, or stock recommendations for that matter, just plainspeak. “Don’t follow my views, but at least start doubting others'” reads a line on his Twitter page.
CEPS prefers to remain anonymous and that was the condition for this interview with CNBC-TV18.com. In response to an email questionnaire, CEPS talks of investment philosophy, stock market journey, mistakes that new investors must avoid and essential reading to sharpen one’s ability to spot investment opportunities.
Below are the edited excerpts:
Your Twitter handle says ‘Full time in equity investing’. When did you start investing in the stock market?
I started investing full time after 2004. Before that, I would invest occasionally, but mostly in blue chips. I was fortunate enough to have built a decent pile of savings, and besides, I had family funds as well. So my focus was on compounding my wealth. The return on my investments has been better than that of an index fund, but the gap has narrowed over the last decade. In my early days of investing, like many others, I too felt that earning above-market returns was no big deal. Having been around for a long, I have learnt that the market eventually catches up with you.
What motivated you to become a full-time stock market investor?
When I started off, I used to put in so much effort for growing just 30 percent of my total networth. I had inherited some real estate investments, but those were yielding peanuts. I soon realised there was no point in beating the market by 7-10 percent, when close to half my networth was locked in low yielding assets. I decided to shift those investments into companies I understood better than the rest of the market. It also required a mindset change because I had to accept the risks that came with putting in a lot of money in stocks. I had a few sleepless nights early on, wondering if I had made the right decision. Now stocks don’t keep me up at night, Twitter fights do.
What are some of the common mistakes, according to you, that most newbie investors make, and how can those be minimised?
Buying stocks without research: There are whales in the market who are much ahead of us in knowledge, analysis, information, experience. Most of us can’t win the game over the very long term. Put the bulk of the money in index/mutual fund/through advisor and invest only a small portion using own research. As you gain experience, you can manage more and more wealth on your own.
Falling in love with stocks/narratives: You are in the market to earn money, not have a relationship. This doesn’t mean you sell out your HDFC, Nestle etc, but be objective. Analyse numbers and see how the stocks are priced. Look at the past, no company grows to the sky. There is a price to buy and a price to sell. Whoever doesn’t believe that has either an incentive or is an idiot.
Short termism: Equity must be held for the very long term. You can change stocks, change funds but don’t bail out on equity. Short term bets make people either greedy or fearful. The market is not going to shut down tomorrow. You will get many opportunities in future to exercise your greed and you will earn good returns if you’re fearful enough.
Not booking losses: Some companies simply can’t get out of the mess they have gotten into, however hard they try. The reason(s) could be anything. You have to book your loss and find another company to recover your money and compound it further. I sometimes wish I had exited some companies earlier instead of holding on to them in the hope of recovering my investments. That would have certainly improved my overall portfolio returns. To use a cricketing analogy, you can’t score off every delivery. And there will be the occasional unplayable delivery that gets the best of batters out.
You have written in your blog that value investing is not necessarily about buying stocks cheap. What is your definition of value investing?
At a philosophical level, value investing is buying something below what it’s worth. But that does not mean you have to buy bad stocks at a low price to book value or low price to earnings. The approach I follow is to sort stocks by quality and then by valuation, and not the other way round. More often than not, you have to wait for the company to get cheap.
The reason value investing recommends avoiding stocks trading at 50-70 PE multiple is that very few companies have generated good returns from such high valuations, over the long term. There will be exceptions, but on average, highly valued companies disappoint. If you are betting on high growth for the long term, very few companies have grown at high rates for long. When you overpay for something, the odds are against you making decent returns.
Of late, people tell me good companies are no longer available cheap. This shows that they have not spent enough time in the market to be able to spot inefficiencies, or that they are not doing enough due diligence.
I recommend reading the book ‘Inside the Investments of Warren Buffett: Twenty Cases‘ by Yefei Lu. He has evaluated the price Buffett paid for quality companies, mostly in the range of 7-18 PE. That’s why his returns were magnificent from 1970-2005 when his portfolio size was still reasonable. Value investing is painstaking and often boring, but it is quite profitable and less risky compared to some of the other styles of stock investing.
What are the filters you use to identify investment ideas?
When I started investing, I soon realised that just buying blue-chip stocks doesn’t help make big money. I read up some good books and realised that I have to work on building a portfolio of stocks with similar characteristics. I came across value investing and read Joel Greenblatt’s book, which talks about the ‘magic formula’.
I keep an eye out for potential investment ideas. I take help from some advisors who follow value investing and regularly scan newspapers/magazines. I closely track news and quarterly results of sectors that have done poorly in the last 3-5 years. Research by David Dreman or Richard Thaler says odds are highly in your favour if you focus on underperforming sectors.
What are your rules when it comes to booking profits, or booking losses, as may be the case?
I have focused on valuation, and because of this approach, I miss the momentum run when the moves are the fastest. My returns could have been higher if I held my past winners longer, but I am not looking for optimising everything. I am fine selling stocks where I can’t see much into the future; I am not reckless as I have substantial money invested in equity. I am not competing with any fund manager nor with my neighbour. I do what I do.
For a value investor, conservatism comes first, not fear of missing out. Holding on to an expensive stock is like giving up returns from lower risk, undervalued stocks. I don’t regret my decisions because returns are fungible, doesn’t matter where they come from.
I track quarterly results and sell out if the company is not delivering good results for a few quarters. If I don’t find any other idea, I may stick with existing ideas for some more time even if the experience has not been pleasant.
How do you look for value in this market, where on the face of it, everything looks expensive? Right now the line between value investing and momentum investing appears to have become blurred?
I find many companies rightly priced even in this market, of course, they may not be deep value anymore. Many sectors have not delivered returns and their prospects are looking good after a long time. They are still not well recognised. I find old economy stocks and real estate exciting. I learnt a few things about these stocks in the 2000s and so this time I have exposure to them. I hold a diversified portfolio.
Momentum stocks were value stocks once. Under recognised stocks often see sudden buying which makes vaults them into momentum screens and then it is a self-fulfilling prophecy. Stocks like Infosys, Reliance Industries, Bharti Airtel, Brigade, Tata Power, to name a few have suddenly become momentum plays. They delivered no returns for the last 5-10 years and then quadrupled. One has to keep looking for such stocks. Past underperformers are fertile ground for asymmetric returns because a large part of the market just focuses on current themes.
Do you invest in IPOs? What are your benchmarks for investing in new issues?
I have invested only token amounts, that too in a handful of few IPOs. I have realised that IPOs are always expensive with few exceptions. Once again, the odds are against me or any public investor for that matter.
I don’t blame promoters because had I been in their place with the choice to sell my stake at a higher price, I would have taken it. So I am not saying it is illegal, but I don’t want to be on the other side of the trade. I have studied the markets long enough to know that I don’t need to own the next big thing to earn a very good return in stocks.
In a world that is changing much faster than before, does a buy and hold strategy work anymore?
Buy and hold Asian Paints would have done well and buy and hold HUL would have done terrible between 1998 and 2021. The same goes for Amazon v/s Cisco in the US. It all depends on what stock you buy, and when you buy, and how long you hold it. Winners and losers can be known only in hindsight. There will be always a few who end up making an obscene amount of money by buying and holding just a few stocks and then there will be those who lose their shirts. Winners write books and get interviewed on TV, you never hear of those who lost by following the ‘buy and hold’ approach.
I would say that a buy and hold approach works well, but not necessarily for every stock.
In hindsight, people say if you had invested Rs 1,00,000 in Pidilite in 1995, then you would have…..blah blah. The fact is 25 years ago, Pidilite was Rs 100 crore market cap company. Even on an inflation-adjusted basis, it was a microcap company then. I don’t think it is a good idea to search for the needle in a haystack. It is better to look for favourable odds in good companies trading cheap and sell them if they rise too much in value.
Do you see any parallels right now between this bull run and the ones seen in 1999-00 and 2003-07?
I was not in the market during the bull run of 1999-00 but prima facie, the current market rhymes with few elements of both bulls run.
In 1997-2000, valuation in FMCG, media and IT were high. The same is true today except that instead of media, platform businesses are in limelight. IPOs are hot, just like they were in previous bull runs. Gurus like those seen in 1998-99, who think no price is too high for growth stocks, can be seen and heard today.
Also Read: How to invest in international mutual funds
The similarity with 2003-2007 is that cyclicals are back in favour. Large mutual fund inflows are similar to those seen in 2007. Fund managers would know better as they have a 360-degree view.
Any elements that are different from the previous bull runs?
This bull run did not start after a recession, like the others before it. There was no disruption or wiping out of excesses which is what happens before a bull run starts. One can say that India had a lot of cleaning up already done before 2020. This is why I found many value investors are not scared and holding on to stocks as they see the start of the economic cycle than the end. Except for consumer and chemical stocks, that are pricing very high growth, other areas might be only half-way in the cycle.
Do you see this bull market ending in the same way as the bull markets of 2000 and 2008?
All bull markets end in a correction or crash. So will this one. I stick to my style of investing and stock selection. Bad times come and go. Over owned stocks are hit hard in corrections. My portfolio will go down too, but it has a higher chance of recovery as I don’t have bubbly names. In the past, I have never timed the market correctly but managed to get many sectors right.
I don’t time the market except for psychological reasons. I feel being fully invested during a crash can have a negative impact on my psyche. Even if you can’t find the next big idea, as long as you avoid stocks that are most extended compared to their intrinsic value, you should come out fine on the other side of correction.
Which are books that have helped you grow as an investor, and something you would recommend to new comers in the stock market?
The Little book that beats the market, by Joel Greenblatt.
Five rules for successful stock investing, by Pat Dorsey.
Value investing by James Montier, and also a similar title by Bruce Greenwald.
One up on Wall Street, Lean to earn, Beating the Street, all three by Peter Lynch.
Besides these books, I have gained much from investment newsletters from advisors, academicians and hedge funds.