"Max you can lose is 100% but there is no limit for gains in investing," says Prof Sanjay Bakshi, a well-known investment guru. He was speaking on "The Mathematics of Investing in Quality" at a program at Bombay Stock Exchange organised by Moneylife Advisory Services.
Explaining why buy and hold works in quality investing, Prof Bakshi, popularly known as ‘fundoo professor’, says, “One of the most counter-intuitive ideas in value investing in high-quality businesses is the power of averaging up. Very few value investors appreciate this power. If you have picked the right kind of business, which will be worth several times current market valuation in a few years' time, do not hesitate in buying its shares simply because they are selling at an all-time high market valuation. Focus on the potential future value a decade or so from now and how much money is there to be made between now and then.”
Prof Bakshi also explained how one can evaluate management of a company. He says, "You need to look at the operating skills, including efficiency, capital allocation for future growth and integrity of the company management. Sometimes for a personal gain, the management may sacrifice long term goals of the company. One needs to evaluate management on these parameters."
According the Fundoo Professor, good portfolios are like good airplanes. He says, “They (good portfolios) do not usually crash as they have multiple engines. If one engine fails, there is a fallback option. In portfolio management parlance, a crash would be equivalent of decimation of earnings (and not decline in market value) of any position in the portfolio.”
“To have robust portfolios, one should create redundancy, which is actually nothing but a margin of safety. The weights of various investments in the portfolio should be restricted to a maximum number (say 1/6th of the total portfolio) so that any unexpected negative outcome does not threaten its very existence,” he added.
Professor Bakshi feels that profit/earnings (P/E) multiples should not necessarily be a deterrent for high long-term returns. “Too many investors look at the score board; they tend to focus on the current stock price, the current P/E multiple or the percentage gain in the stock price in relation to the gains in some index or some other stocks. That kind of thinking works well with other types of value investing. Buy great businesses at reasonable valuations and sit on them for a long-long time. After that avoid overdoing the excel modelling to keep calculating future expected returns based on current stock price. Also stay away from worries about selling a stock simply because it was not quoting at a P/E multiple that made the stock look expensive.”
Many a times, investors are tempted to get rid of current holding as they find some other stock better. Prof Bakshi says, “If something is working for you, and you do not have cash and if something else turns up and you like it a lot, then you should sell what is working for you only when what you want to buy will give you a significantly higher expected return. Otherwise, just hold on to your great businesses and let them compound your capital for you.”
In order to become successful investors, Prof Bakshi advised the participants to avoid things that do not work and seek good businesses, run by good people, at good prices and hold it for long term.
The programme was attended by several top executives from brokerages, investors and students, who are interesting in learning long term investing.