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Dhawal Dhanani

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Hai market usi ka, Munafa usi ka

Leke bhool jaye shares, Achchhi company ka

Management ho honest, Ambition na kum ho

Challenges se khelne ka, Baajuon mein dum ho

Warna wo baja dega, Band company ka

Leke bhool jaye shares, Achchhi company ka

Product ki quality, Ho peers se better

R&D lagi ho, Karne aur behatar

Peers hi baja na de, Band company ka

Leke bhool jaye share, Achchhi company ka

EPS hai jhooti, Cash flow hai sachcha

Loan jitna kum ho, Utna hi achchha

Vyaz hi baja na de, Band company ka

Leke bhool jaye share, Achchhi company ka

Hai market usi ka….

Vijay Kedia, Managing Director, Kedia Securities Pvt. Ltd is a quintessential rag to riches story of India. He cannot be called any less of a self-made, prominent, trader turned investor of India. He is well known for his witty lyrics and his love for quoting Bollywood dialogues on national television. Mr. Kedia has seen giving point-blank lessons on investing (and trading) which other investment veterans seldom shares. He has been a keynote speaker in IIM Ahmedabad and IIM Bangalore.

In order to honor his love for Bollywood, the write up is divided into 3 segments: Lights (on his early life), Camera (on his strategies) and Action (on his investment rationale).      

Early Life

He was born and brought up in Kolkata to a Marwadi family. The family was in the business of stockbroking. His luck in education didn’t favor him and he was brought to fads and fancies of the stock market. He started his journey as a trader in the stock market at the age of 19. This was not only out of sheer passion but because of compulsion when his father passed away. He said that he was left with no choice but to join the family business of stockbroking.  He has been seen saying that the stock market is the only place where one can try his luck without much education, experience, capital, and savings at any time.

Beginner’s luck played its part and for the first six months, he flared at his work. In no time he learned the trick of the trade. However, soon his beginner’s luck started falling out and his losing trades outpaced his winning trades. Naive Kedia was also brought to a point where his mother was about to sell ornaments to do away his dues. Somehow Mr. Kedia was able to dodge the situation but the memories repeatedly flash when he shares this part, he said. And at this point in life, he learned that nobody is invincible. It is truly said that lessons which lasts, comes with a cost, a great one. Similarly, Mr. Kedia learned his biggest lesson to place a stop-loss while trading. He says without stop loss a trader cannot survive in the market. A trader can make money in many trades but can lose all the money in a single trade if he doesn’t use stop-loss, he says.

He planned to purchase an expensive stereo system, and a friend of him gave him a sound advice – Don’t buy depreciating assets, Buy appreciating assets. This lesson has stuck with him till date.

After a few years reclining on odd jobs, he was desperate to come to Mumbai, then Bombay to try his luck at the stock market and left Kolkata. Twice, he tried his luck in Bombay, but that did not paved way to be a member of the stock exchange. He came back to Kolkata and started supplying materials to tea gardens and quit dreaming to be a member of the stock exchange. He, again, decided to give a shot for the third time and stayed in Bombay for a year and a half which turned out to be a blessing in disguise. This gave him an opportunity to join the Bull Run fabricated by Harshad Mehta of the decade. He was quick enough to acquire knowledge about the stock and investing process. He also started following successful investors and read about different companies. He believes that ‘Passion is a greater force than luck.’ During the Bull Run, he decided to sell off his portfolio worth of Rs. 35,000 and invest in only ONE company. The investment shot up 10 times in a year. This was the start of a series of multibagger lined up which made Mr. Kedia an awestruck Indian investor of the time.

Investment Philosophies

Mr. Kedia made his career by investing in mid-cap stocks. He has never invested in large-cap companies and his love for mid-cap businesses is beyond one’s imagination. He lives by an investment mantra which he has coined as ‘SMILE’ approach to investing. In the acronym ‘SMILE’,

S stands for a company small in size. He says that this should not be misunderstood as a small-cap company. Small in size should be accentuated in terms of the Company’s market share vis-à-vis the total market size of the industry.

 M stands for management with medium in experience. He adds that the management should have a clean track record with fire in the belly to grow the company for the next 15-20 years.

L stands for management with large aspirations. This is the most important yardstick to be looked at in a management, says Mr. Kedia. He adds that for a company to reach from a small size to medium size, the management should aspire large enough.

E stands for extra large in market potential. He says that for a company to grow its size from small size to medium and so on, the market should have that potential to pan these out.

Given the above concept, it would be shocking to know that Mr. Kedia does not give much importance to return on equity, return on capital employed and other financial ratios. He tactfully adds that one cannot get a small company which is cheap and has prime return ratios too. Damn, that’s true! And given the illiquid nature of these companies, it helps Mr. Kedia to calm his reflexes and remain invested through thick and thin of the business cycle. His philosophy of investing hits a perfect cord into mid-caps as they are comparatively cheaper. Probability of multiplication is higher!

“Buy like a bull, sit like a bear and watch like an eagle”

Rationale

Recent investment in Sudarshan Chemicals (2019)(Rationale)

A small company, needless to say, is ringed on SMILE investment principle. Sudarshan Chemicals was a small company in the chemical space a couple of years back and aspired to become 4th largest player in pigment business which they achieved. Given the fire in the belly of management, the ball is set to roll to become the 3rd largest player in the industry. To this to happen, the company has to increase their turnover three fold minimum. And due to shut down of chemical industries in China, these targets are set to be seen achievable.

In his trading investing career of 25 odd years, he has always remained 100% invested in the market. There has not been a single time, he says, he isn’t 100% invested. When asked about his view on markets in bear times, he quickly said that he isn’t invested in the market or in stocks. He has invested in businesses. And this set a complete tone of his investment rationale. To him, what is the growth of the product being delivered along with sustenance over a longer period of time are the major questions one should ask while investing. He says that judging the management is very important. One should not forget to check how the company performed in bad times and how swiftly the management adopted the dynamic situation. 

Being a Bollywood fan, Mr. Kedia loves quoting a special dialogue from movie Om Shanti Om –

“Kehte Hain Agar Kisi Cheez Ko Dil Se Chaho… To Puri Kainaat Usse Tumse Milane Ki Koshish Mein Lag Jaati Hai”

“When you want something, all the universe conspires in helping you to achieve it – The Alchemist, Paulo Coelho

 Where there are ample of investment rationale to be learnt from Mr. Kedia, the one which struck the most is that he has never invested cyclical companies as he has never understood the business cycle. Hence, he says it is best to avoid, better to stay invested where one understands a bit. This is much similar to the concept of circle of competence laid down by Warren E. Buffett. If you haven’t want to know more about Warren Buffett, you can read it here.

That’s all for now.

Until next time.

Dhawal.Ghanshyam.Dhanani

Warren Buffett, the man who needs no introduction to my fellow investors. He is known for his investment philosophy and modest lifestyle till date. Presently, he is the Chairman and CEO of Berkshire Hathaway and has a net worth of around USD 85 billion (Rs. 6.10 lakh crore). Currently, Buffett stands at no. 4 on the richest people list. The exciting part that appeals to people is his ability to consistently beat the stock market for over 50 years, using what many people see as simple investment techniques.

(Source: https://www.berkshirehathaway.com/letters/2018ltr.pdf)

Buffett made his first investment in a stock at an age of eleven (‘I was wasting my life up until then.’ when he was asked about his first investment). He bought his first stock at USD 38 a piece. He started to panic when the price declined to USD 27 soon after buying. He promptly sold his holdings when the price rebounded to USD 40. However, the stock then shot up to USD 200 soon after he sold them. This experience taught Buffett one of the fundamental lessons of investing: patience is a virtue.

Buffett at an age of 19, read both The Intelligent Investor by Benjamin Graham and Security Analysis by Benjamin Graham and David Dodd. These books, to date, are considered a Bible for investing community. He applied to Columbia Business School, due to the fact that both Benjamin Graham (father of value investing) as well as David Dodd were members of faculty there. Buffett was a successful student and this gave him an opportunity to directly work under Benjamin Graham’s partnership firm. He enjoyed working with him at the core. He later claimed that working with him gave him valuable experience of a lifetime. 

Buffett Partnership Years  

After his stint with Graham came to an end, Buffett started setting up investing partnerships and the most important one was Buffett Partnership Limited (BPL). As an obedient student and disciple of Graham, Buffett run partnerships focused on ‘Bargains’. These were companies that traded at a discount to the value of their net asset. This is also popularly known as ‘Cigar-Butt’ approach. In this approach, Buffett purchased a large stake in bargains and waited for market sentiments to improve. Improvement in market sentiments would drive the share price up and the bargains could be sold for comfortable profit. Buffett also used his holding in these companies to try and speed up the process of extracting value. One-third of the BPL’s portfolio was also invested in what Buffett called ‘workouts’. These companies were in the process of being taken over by another company and giving him merger arbitrage.   

Soon, the stock market started to become too expensive. Buffett’s probability of generating above average returns and cigar-butt style of investing was turning increasingly difficult. So, he decided to wind up BPL.

During his partnership years, Buffett would write a letter to his partners every year. These letters would convey his investment rationale, philosophy along with partnerships performance. These letters (Buffett Partnership Letters) are available in the public domain and are a must read for investors. 

Berkshire Hathaway Years       

Buffett started focusing on Berkshire Hathaway, a textile manufacturing company. He originally bought it as a value investment (bargain) in 1964. He then realised that the company was getting stiff competition from domestic as well as foreign plants and did not have any future. So, Buffett turned Berkshire Hathaway into a holding company for his investments which he operates as a hedge fund. 

Expensiveness in stocks made Buffett to shift his philosophy from the idea of bargains to stocks that were merely cheap and had wonderful business prospects. Understanding the changes in the economy, he currently has adopted a philosophy which believes that ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’. Buffett’s strategy on investing in a wonderful business at fair price is built on staying away from anything that seems complicated. He says that it is most important to know one’s circle of competence and to stick with it. He added that the size of that circle of competence is not very important, however knowing the boundaries is vital. Understanding and sticking to his own circle of competence favored him to stay away from technology stocks during the maniac technology boom popularly known as the ‘dot-com bubble’ from 1995-2001. He focuses only on companies which are easy-to-understand businesses for him like insurance (GEICO). GEICO generates large amount of consistent cash flow that he reinvests in Berkshire Hathaway. 

Even though we see that Buffett revised his investment philosophies a couple of times. But he, never inched a bit from the philosophy taught by Benjamin Graham: ‘Price is what you pay, Value is what you get’

Warren Buffett has placed a great deal of importance on investing in companies having ‘moat’. These are companies with an advantage, legal or operational which prevent competitors from entering and affecting margins of business. He has developed an expertise for looking at businesses as a whole and chooses companies solely based on their overall potential. He is seen holding companies for long-term and seeks ownership in quality companies only. These companies are capable of consistently generating free cash flows. When Buffett invests in a company, he is hardly concerned with whether the market will recognize its worth. His only concern is how well the company can make money as a business. Buffet also concentrates on buying companies outright as buying these companies outright allows him to keep his portfolio relatively concentrated. He is known for his early investments in companies like See’s Candies, GEICO, Coca-Cola, American Express etc. which was based on his circle of competence.  

He continues his legacy of writing at Berkshire Hathaway too. He writes to his shareholders every year as Shareholder Letters. These letters are full of wisdom (that nearly anyone can understand) on various topics such as investing, money, life and much much much more. These letters occupy a very special place in business and finance. 

What should I learn? There is an ocean of wisdom with this billionaire investor. Few things that I would love my reader to inculcate in their investment philosophy are to start investing (very) early, (always) invest in wonderful businesses with economic moat, and invest keeping long term horizon in mind (without fail). This would help investor’s start their wealth compounding journey in the right direction.  

And lastly, for Warren Buffet fans/ disciples, CNBC.com has created ‘The Warren Buffett Archive’ which is the world’s largest collection of Buffett speaking about investing, money, business and life.

I am sure you’ll love it. 

That’s all for now.

Until next time.

Dhawal.Ghanshyam.Dhanani 


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