The Art Of Selling Kuntal Shah Oaklane Capital Cfa Society India

TITLE: w6A9uKMRhOg CHANNEL: Unknown DATE: ---TRANSCRIPT--- thanks JC and the CFA Society for inviting me to uh moderate this session of an investor who I look up to a lot one of the best investors I know uh very dear friend Kunal sha he has more than three decades of uh experience uh in equity investing he’s also uh one of the key members on the board of flame Institute uh and he also has lot of Enterprise uh uh seed investing and also is found co-founder of uh needle. a uh which all of us are using uh a lot and has has helped us a lot to make our task uh easier uh Kunal is interested in further enhancing skills and apply experience cultivated over multi- business cycle tracking and analyzing of Select businesses and knowledge of what to focus on and what not to do apart from that kunel also uh does lot of talks with IIT uh am I Mumbai I am aabad CA Institute and Flame University also what I’ve seen is he’s one of the sharpest investors who catches Trends quite well I think everybody should read the recent uh note they have put out on solar uh a huge very very detailed note everybody should read that I think it is on value picker uh so uh this is the kind of work which uh uh Kunal does and his his team does is currently uh at Oakland Capital founding partner there uh managing uh funds for uh family offices so without Much Ado I would like to invite Kunal sha uh for an excellent presentation something which is close to my heart which is the art of selling I think it is not spoken about too much but uh it will be very interesting and I’m looking forward to it so as we last sessions uh the star batsmen have come they’ve batted all-rounders have delivered knockout punch and it’s now left to the tail Enders like me to close the sessions so uh please bear in mind that this is a tail end session and keep your expectation extremely low uh when this presentation was getting made uh markets were at alltime high gold was at alltime High real estates were all time high most of the asset classes were at alltime high uh some of the fro seems to be gradually unwinding but coming to this presentation uh there’s lot of literature and material on what to buy when to buy how to buy so on so forth um but investing is a very dark continent for the investors uh the selling part at least so uh this presentation talks about how do you see the selling decisions you know once you bought and hold the stock what what do you do when the time comes to sell the stock so there’s tons of advice floating on the buy side uh and there are no takers for anything on the sell side and it’s very obvious because when you are talking about buying it can appeal to a wide audience but when you are talking about selling it will only appeal to people who own the stocks or a particular stock or so on so forth so it’s a very a symmetric discussion buying versus selling also um many of us have uh heard the uh lit that abhimanu who was the son of Arjun learned about you know getting into the abhimanu chakra uh as it called um very early while actually he was uh a baby in the womb of the mother but he never learned how to exit the chakra View and then what happened during the time of in uh the battle was obviously fought BR valiantly he uh really um put on a brave show but he couldn’t come out of the chakra view so the question is uh do you allow Market to dictate your exit or you dictate your exit that’s a that’s a fundamental question which we are trying to address here the Journey of investing consist of predominately these five decisions what to buy when to buy how much to buy sizing it up as the company delivers a long holding period so every investment which does well every business which does well has a great initial window of purchase a long holding period as Rajiv said and probably sometimes a narrow sell opportunity window so the point of discussion of this sem is we are aware of the pitfalls which occur at the time of buying and holding but what happens streaming suppose a stock becomes exceptionally large portion of your portfolio and the stock owns you rather you owning the stock what do you do then also what uh what do you do at the time of selling and the selling decisions can be from multile vintage point some of them could be you know purely on the valuation some of it could be a better opportunity appearing on Horizons sometimes it could be uh uh some management discretion which has happened in the process and so on so forth so we are going to talk about you know how does one take a sell decisions also please understand that this is a game where you can’t borrow somebody else’s Playbook so on the screen are many esteemed uh investors who have done very well practicing their art in the domain which they were experted but they had the right ingredients the right temperament the right Capital base the right stability of the capital Etc to execute their craft copying their playbook may not be viable for an average share holder because the circumstances and the Arsenal at their disposal are quite different and so is the temperament and the ability to do the analysis and take the risk these are different these are not homogeneous these are highly heterogeneous and highly people dependent so you just can’t blindly copy somebody’s Playbook and let me illustrate further with the example of people we all talk about waren buffer and Charlie mener like we copy their what they say verbatim without realizing the context and I’m showing going to show you some of them the context how they are different so bakire hatway has waren buff has spoken about air that airlines are bad business but he has owned all the four Airlines at some point of time sometimes two or three times in his career number two he said diversification is hedge against ignorance you know but if you see bshar portfolio is one of the most Diversified conglomerate you can find uh in the investing World also he’s talked about technology that change of uh you know change of Technology underlying makes it very difficult for investor to make money long R but Apple has been one of the biggest performer in his portfolio and also when you see he’s spoken about derivatives that derivatives are weapons of mass destruction but buckshire is also one of the biggest underwriter of complex derivative and insurance products in the whole world basically what I’m trying to tell you is what he practices is a craft which he is answerable to himself but what is teaching is to General masses which applies to Broad category of investor in general you can’t just verbatimly quote him out of the context and make it applicable to your own also he said the famous quote you should have a you know card with a 20 punching holes and each time you make an invest in fill the holes so that make less number of decisions but you know well thought of the decisions but if you look at his own record record average holding period of 60% of the stock has been less than a year so he’s been actually actively churning his portfolio this just to highlight that you can’t blandly copy paste somebody else Playbook and apply in your own game there are many ways to skin the cat the pre PR there are many previous speakers who have spoken about this so when you look at the uh buying uh and holding and the selling decisions you got to be mindful of what kind of mandate you have what kind of structure you have what kind of uh investment philosophies you you do what is your style of investing what is the duration of your investment Horizon is what is the stability of the capital is it long-term is it shortterm and what is the stability of your own temperament how how how skilled you are what is your reaction to draw Downs what is your reactions to adverse circumstances all these factors are converging at the same point of time and that’s why this is a simple but not an easy exercise generally I’ll pause here on this side this is an important slide our Behavior towards risk and reward changes with time it evolves it’s not a static phenomena there are times when you are very greedy there are times when we are highly fearful of losing money so we behave very differently in different risk reward Frameworks as they evolve to just highlight sometimes we behave like a u you know a ship that we buy what the her is buying this is the fashionable story or a theme or a Fed at this point of time sometimes we sell what the herd is selling sometimes we are like a coner that we happen to come across a very good business and we hold it for a long period of time sometimes we are just like a Raider we just buy for a quick gain and sell sometimes we behave like a uh you know a rabid that you you just buy and you avoid selling a company at a loss because you want to recover the money and break even so investing investor is not a uniformly rational at all point of time because of simple reason is that most of the investment decisions are not taken on fundamentals alone there’s a lot of emotions attached to it and sometimes we do be behave like a deer with headlights flashing in your eyes we know something is wrong but we are frozen sometime to act and that is the time actually if you see most of the investors start paying real focus on their PL portfolio at the time of stress they are very careless when when the going is good it’s only in the time of stress they put a leer sharp focus on what’s went wrong or what’s going right this is a human tendency because when the going is good nothing sedates human bind like dose of easy money but it’s it’s the losses are highly painful it’s very B demonstrated that loss of $1 is four times more painful than a gain of $1 so it’s only when the losses start come coming to the portfolio that is the time we start pay paying lot of attention to the portfolio Dynamics so this is the Dum guide of selling uh it mimics the tech meme which says you know there are experts who know they have the Insight they have the timing they have the Frameworks they have the temperament they have the uh zero remorse in selling and and they sell what is insightful and the stocks go down and there are some guys who are just as you told go with the H they are momentum players when the when the markets are rising they’re are extremely adventurous when the markets are falling they’re extremely cautious they become fixed income investors at that point of time and and they behave but large majority of the analyst community in general actually tends to get caught into all these things valuation terminal value DCF competitive Advantage float Mo all kind of you know stuff actually if you really look down uh nothing new has been written in the investing world since 1940s uh the terminology changes I’ll give you an example what was statistically Six Sigma event became outlier in Malcolm gladwell’s book became a Black Swan in talib’s book and so on so forth it became outlier it became uh uh you know all kind of names it’s the same concept repeated in different language nomenclature changes but the facts remain that b basically ownership of good businesses held over a long period of time creates wealth that nothing new has emerged since 1940 uh since the book on the security analys and the investment um intelligent investors came through so to conclude the first part of the presentation selling is a blind spot of the investor not much is written about it in the mainstream media while there is tons and tons of literature on the buying side also selling is very emotionally difficult decision to make because when you are selling at loss sometimes you are realizing you have made a mistake and when you when you are selling a stock which is done very well endowment bias Crypts in that you become the owner of the stock you treat yourself as the owner of the stock and selling is emotionally extremely hard decision to make if you look on Bloomberg prior to Mid regulations came in only 1.7% of UMO report broker reports were on sale and there are nuances based on that because if Brokers were to write sales report on the company they would lose access to the company which they require for a long period of time so there are many underlying currents which which results that selling is a very non talked about Topic in the investing world let’s let’s try to address some Frameworks this is by diff most difficult decision to sell which I will explain to you why so let’s go on the right side of the panel so if you are selling a multibagger or a winner there is a probability of sellers remorse that you sell the stock and price goes up it go it keeps going up and and this is a company you understood the management you trusted you held on for a long period of time and the regret sets in that you sold out too early and look at the decisions when the sell is at a loss it forces you to a recognize your mistakes B it results into loss of capital which is very painful decision or also sometimes you don’t sell but you wait for break even and then you’ll end up incurring the alternative cost of deploying that Capital somewhere else there’s a Time correction also it creates lot of self-doubt that are you capable are you are you doing your job you do you know the topic well so selling at loss triggers of all kind of self-doubt and issues while selling the winners creates a sellers remot kind of a phenomena and even the best in the markets have ER on selling so if you look at Stan dren Miller he probably got one of the greatest track record of you know performance uh since he’s been investing in at the start of tech boom he shed Tech stock because they were getting expensive by his yach stick he incurred 600 million loss but then he happened to meet some young Engineers who you know taught him that uh uh internet and all is going to change the world so he covered the loss and and the market kept going up the tech got going up and he actually entered on the day when the market the NASDAQ picked he invested close to $6 billion and he lost half half of it within 6 weeks and he quit uh the J Soros firm where he was a portfolio manager so even the some of the best Warren Buffet if you see in peak of covid times he sold off his airlin stocks and all them ried after the covid uh became a lesser of an epidemic even Bill gross in in fixed income he is considered you know the father of fixed income investing kind of thing R Ren Pimco he headed on to a large position which was which was a Arbitrage position where he was betting on the convergence of the spread and he lost 44% of his AUM so so you are not alone there are experts who also make errors of commission on sell decisions if you look at this person Isaac Newton probably he was the smartest human being alive also many of you may not know that he was very well connected he was almost ranking cabinet minister and Al he was officer of mint which is functionally equivalent to a position just below the governor so he was very well informed uh individual with one of the highest IQ so just like East India was company was set up to exploit Far East there had a south sea company to exploit the mediteran and he entered very early and he made a something functionally equivalent to a fortune when he sold and he was happy at that time but what happened afterwards he saw his friends getting richer and he couldn’t withstand that and he borrowed the money entered at the top and almost became bankrupt and that’s what forced him to say that I can predict the motions and the movement of the stars and the Sun but I can’t predict the human Madness and this is a this this is the problem and you sell at the profit what you what you own looks like a dumpyard and what you don’t own looks like Tesla cyber truck right but there’s a there’s a deep amount of data points here look at this Buy and Hold doesn’t mean buy and forget I’m now coming to sell decision we have been told the our our investment period is forever wealth creation in Long Run compounding in long run but guys it’s good in long run we are all dead longterm is a series of shortterm and you have to live through that shortterm so if you had invested in msai China what uh Rajiv alluded to you would have not made any return for three decades almost in real terms also Buy and Hold doesn’t mean buy at any price b b investing their valuations don’t matter in long run a good quality business will create value uh one of the only thing you can control is your entry price and your future returns are function of current price you pay if that is and not thought through carefully examined decision you will have this kind of un undented consequences that you could have three three decades of zero returns and three decades look look like nothing but if you have to live through it it would look like eternity it will be created it will be functionally equivalent to a Lost Generation of investors who would never enter the market again again Buy and Hold doesn’t mean you keep waiting for break even so I hope this concepts are very clear that while wealth gets created in long term and the compounding equation n is the exponential function and longetivity is everything that matters but it’s very rare animal and I have data points to show you how rare it is in the coming slides so look at selling from different ventage points selling is not a decision which suits there’s no magic formula which I can give you which will fit to everybody because circumstances context everything differs there’s no uniform formula so it’s something functionally equivalent to blind man looking uh you know looking and touching at elephant and coming to a different inclusion let’s examine some of them selling decision also depends upon what ventage point you are looking at let’s look at government government if it is to sell its stocks has to worry about politics has to worry about trade unions have to worry about deficits so on so forth promoter when he sells he has to worry about you know his personal needs he his diversification and so on so forth a a p fund or a VC fund or a mutual fund has to worry about you know liquidity has to worry about end of life of the fund or change in fund manager redemptions Mandate of the fund restrictions regulations so on and so forth and if you are an investors who’s investing through a vehicle be it a PF or a mutual fund or a some kind of a structured product you have to worry about the strategy the style drift the commissions the taxes redemptions and so on so forth so there’s a wide range of decisions and input points which go into sell decisions and people behave differently so sell by somebody doesn’t mean a negative endorsement on your stock and same way a purchase by somebody however reputed doesn’t mean an endorsement on your stock either ways one thing I’ve learned hard way is you know there is only one reason to buy but many reasons to sell and I learned this the hard way when the page industry IPO came through I I I bought because uh I was aware of Fruit of Loom I was aware of jockey I was aware of Kelvin Clan Brands and so on so forth but promoter kept selling in drips and I kept thinking to myself that this guy knows better than me and he’s selling why should I stay invested and I sold out and the stock has probably gone up some I mean I stopped counting so one thing is clearly created that promoters have genuine reasons to sell at times and sometimes sell by promoter doesn’t translate obviously you got to revisit your decision at that point of time but it just doesn’t automatically becomes a sell if promoter decide to sell a small fraction of their ownership if you ask an ordinary audience what are the reasons to sell they will normally come out with a four hypothesis which I call Four BS either the valuation is bizarre or the business model is broken or your initial hypothesis is busted or there is a banded management that management character has changed that they have done something minority unfriendly or some capital location mistakes but underlying this Iceberg there are many issues ranging from tax leakages to macro issues to personal lead to sharing markets loss to loss harvesting and let’s revisit some of them briefly so this is a slide which gives you that reasons to sell are inversion of reason to buy if you are confident about the company’s business prospected then the inversion of that is Manifest in selling so it’s actually a mirror image of buying decision the reason to sell are mirror image of reasons to buy if any of the reasons to buy no longer remain valid then it’s a sell and when your facts change or when your conviction changes or when management changes that’s a time to sell this is a this is a framework I think so most of the investor will intuitively get it but what I want to discuss was something else let’s learn from the mistakes of others many people learn by committing mistakes themselves and I one of them but I’m sure all of you are smarter than me and you will learn from the mistakes of others I take this uh slide uh carefully reasons to sell I explain the macros shock like an inflation or a war or a currency or this thing it could be sell if in your process there is a gross overvaluation of stock or entire Market or you want to switch into something more better or you you bought a cyclical business which is at Peak margin and at Peak valuation or imagine you have a very poor initial sizing it has happened in me in many cases that I couldn’t buy all the quantity I know and then it becomes a rounding of error of the portfolio what do you do with this kind of companies or reverse that a position which was meaningful position taken becomes outperforming suddenly becomes a large percentage of your portfolio it becomes 20 30 40% of the portfolio and it becomes dominating driver of the portfolio what do you do on those decisions also so when the instead of you owning the stock this is the when stock starts owning you also you have borrowed somebody else’s conviction and the stock price is down what do you do or you have a personal deal or there is you know you need to harvest tax to officer law so there are many reasons why one could sell let’s look at some of them a macro event every rise in interest rates always results into some kind of a financial accident this is a history of last 100 years I can go back to 600 years and show you the same whenever interest rates rise obviously the valuation of the other assets has to fall because interest rate is the center of gravity which pulls down the valuation of all the asset class imagine if you bought the market at a wrong valuation so look at this Japanese bubble which happened in early 1980s land bubble was so big that the Palace of Emperor was valued more than the entire state of California and if you had bought in any of Japanese stock at that point of time or the indices the probability was you would not have made again made zero return for almost next 40 years so wrong entry point has a huge bearing on your future returns or imagine a bubble in Nifty stocks in 1980s the banks in us were allowed to sell the shares to General Public and they sold all the good names there was nothing wrong with these businesses these businesses are strong moted business even today many of them but they were bought at wrong price starting PS were very egregious and 10e annualized return afterwards were negative in fact most of the investors lost 70 to 80% of their capital in a decade in spite of being the right right business they bought the right business but at the wrong price or when a sector becomes very agly valued so if you see during Tech bubble technology became 33% of the index onethird of the economic activity became Tech TMT this was something you could not have sustained again infotech today is becoming almost 30% of the of the market cap so whenever there is a large spike in any sectoral market cap versus its profit pool you know the forces of M reversion will act and and correct their nothing wrong with this stock just similar to story to what Rajiv said he CHS in forces I chose Vio vipro at one point of time was 4% of India’s Market uh GDP One stock was 4% of India’s GDP and the company has done everything right in subsequent years but it has taken again almost close to two decades to break even so as an investor you have three decisions to make first is you ignore the bubble completely I married to my process I don’t care about what is happening in the outside world let me be a stoic let me be a sage don’t do anything or a second okay let me ride the wave I got on this wave early let me ride it to the glory and the fortune so they say now in in every man’s life there comes a time when taken to extreme creates a fortune something similar to that but the worst thing is to getting trapped in the in the bubble where you land up buying at the wrong time and selling at the wrong time resulting into permanent loss of capital this is something we have to avoid it’s fine with the first two it’s not fine with being the last outcome and also please remember the arithmetic is not equal on buying and the selling side if you lose 50% of the capital it requires 100% clawback to break even the mathematics is very uh harmful on the downside compared to the upside so especially imagine if you run a concentrated portfolio and one of your positions which are large give you very large losses which impacts into portfolio so concentrated portfolio this could be also a reason to sell because large concentrated positions creates very huge amount of econom u mental dissonance this is one thing which has helped me and I think so all of you should play attention we are all most of us are investors in listed markets and in listed markets the valuation is already given to us every day by the market Enterprise Value is known debt of the company is known market cap which you are paying is known so you can use the DCF in a reverse way where you can solve for the embedded growth rate given the certain assumptions you can play around with the sensitivities and and you can realize that certain things are not possible so at the peak of coaching Shipyard Market it was almost factoring that India would make 13 aircraft carriers while us today has 11 aircraft so so the problem was when invest us investing in coaching Shipyard at this valuation you are giving a very long telescopic view of valuation and the problem with the telescopic valuation is even if you shift your telescope by one degree you start looking at a new Galaxy forget new star you you are in a different galaxy same thing you can work out backwards in multiple at sector level and at aggregate levels and at indices level so if you had just looked at this one thing that price to sales of global defense companies 1.8 sales they earn return on capital of 11 but they have 51% of exports and Indian defense companies have 1% export 11 times sales and this kind of return on Capital were they would they be sustainable will the government of India allow 25% return on Capital going for couple of decades that’s a question you got and if the answer is right good stay invested but without questioning this framework that what are the embedded expectation in current gold prices it would be meaningless to stay invested perpetually at all point of time invert always invert this car jaob statement so these are again the inversion if you really look at it accor group with 5,000 property and 8 lakh room has probably same valuation as Taj with 24,000 rooms so already lot of future growth is baked into current price that’s a conclusion one draws and then the selling decision is left to individual but you can’t fight these conclusions these are empirical evidences this is a slide taken from IC Prudential mutual fund they run this as a public service this is past statistic data that whenever overvaluation companies either through the forces of Market or through the forces of creative destructions mean reversion please remember profit margins are mean reverting valuations are mean reverting they always mean RT there’s nothing known as you know we are this new new thing is is a very dirty world this time is different these are four dangerous word in the market as far as valuation is concerned and as far as the profit margins of the aggregate economy they always mean rward that’s been the case so far also one of the toughest decision to sell is switching when you are selling to buy something where probably the risk is lower or reward is much higher look at this decision of waren buffet when he sold apple and he when he sold IBM and he bought the Apple this was a right decision to do but it required you to force you to have a view on IBM as well as view on Apple’s Prospect going further doubly compounded and a doubly hard decisions to make I have been particularly guilty of many of these decisions another thing is importance of stop-loss whenever we are buying Securities uh we are in a way telling the market that we know more than the market right we are trying to be little more um aggressive that we know better than the market but at times Collective wisdom of Market is also better than yours because you are not praed not to make mistakes and that’s why every time there is a meaningful correction in the stock prices one has to take a feedback that market is disagreeing with you and revisit the assumptions it’s a time to revisit the Assumption I’m not saying that you you you sell out the issue is but please do revisit that all your hypothesis which you entered into the stocks remain valid at that point of time and if you don’t have a stop-loss some funny things have happened in the past uh all of you are aware of the statistical significance of investor failing to consider price loss time loss and tax loss all these three losses one has to be mindful of and this is another thing where you know bill liman was considered baby Warren Buffet Nick slip we heard all of them they bought concentrated positions and they lost a lot of money and concentration is a double-edge sword it amplifies a gain but it amplifies the pain also so when when this happens psychologically it becomes very difficult and many I’ve seen many investors losing their bearing when this kind of situation happens so concentration coupled with large losses is an extremely volatile position where maximum mistakes are made in the investing career also many reasons to sell would be to set off the capital gains tax to avoid paying the tax it’s a very sound strategy many of us don’t do it some of us do it very clar but a penny saved is a penny earned and whatever you have sold you could theoretically buy it later on right it’s no no harm in Booking temporary loss and buying it back again easier said than done when you once you sell the stock it’s quite difficult to buy it back coming to the last uh portion of my presentation I wanted to not just give you theoretical framework I just wanted to share my own personal experiences and my biggest mistake has been this I have sold stocks too early the acts of selling stocks early far outweighs any of the bad Investments I’ve done till date let’s see some of them so when you sell this kind of a flowchart is what is my decision-making frame work you can take a picture of this slide this is my framework works for me may not work for you so whenever there is a stock Mark to Market loss of 25% there is if you have not added to the position I’d sent to sound out my position to some good colleague like I would I would reach out to probably Rajiv or Dura or somebody and take an independent valuation this works for me but if I have added then then it’s fine also a stock has become multibagger you know super compounded gain then one has to keep asking will the PE multiple will expand or the earning per expand and again if the markets are at all time then again you see whether they so this is a flowchart which kind I kind of run it’s it’s a probabilistic scenario planning there’s no sanctity to any of this decision because what could be positive for me could be negative for you and vice versa but this kind of simulation is what keeps me agile and aware of the kind of risk I’m taking or kind of opportunities I’m forgot also single biggest mistake that many of the investors make is they buy businesses which are ccal at PE margin and have large balance sheet leverage at overpaying Price this is a killer combination it results into to if if not losses it at least even result into you know a Kuma kind of a situation you will you will get an opportunity to exit the stock after 12 years or 14 years one was if that what suits you but phally it’s a very painful process if you make this kind of a mistake personally look at the reasons of mistakes stupidities I made and here I have a fortune to stand here and speak to you but these are my own mistakes so so so just shows how bad an investor I am I’ve sold to to to avoid paying short-term capital gain I held on to ACC and lost almost lot lot of upside this is the company which I own meaningfully it became became very expensive float was low sold off stock ran up I used to own uh 1% of this company by the way at one point of time the promoter uh the the CEO left the promoter was not aware of this business I sold the showes and and stock it say just nothing has happened nothing has happened but in inter CEO of this company left the company took PE investing and floated a competing company and he was considered a rockstar at that point of time again page industry is an example I’ve told you position error I couldn’t buy meaningful stock and it become a small position and we sold off and the stock has run up regulatory risk this is a company uh where suddenly overnight government announced a price control on the selling price of seed they they froze it to 850 rupees a seed no matter which category of seed what quality of seed who whose seed nothing and we sold off right s decision early in the when I was in the college I bought hiroa shares I sold them to buy my house and that has been the biggest costliest mistake house purchase I made ever in my life if I had not sold those shares uh I would have been in a different orbit and there are some certain stock which I know they are cyclical and I have traded in and out three times so selling is inbuilt at the time of purchase because of the cyclicality of the underlying business and sometimes you get the decision wrong I sold good horses to buy stupid donkeys well sometimes I’ve sold good horses to buy pedigreed studs so it’s an probabilistic error you can’t aspire to get all your decisions right that’s the key takeaway I want to get but You’ got to be mindful of the framework when when you are selling now Mex Max M kalpa this is Latin word it says my maximum mistake this is the mistake which pains me the loss uh the the most these are all the companies which I held for decent amount of time but I sold because they became expensive by my yard stick at some point of time all these stocks and one thing I I was a stupid guy you know for 20 it took me 20 years to realize this and I’m going to tell you free I used to Value the stock based on my perception of what was cheap or what was expensive so my cost of Capital was very high little did I realize that there could be some guys like government of Singapore who are happy with $ 4% returns annually so expected return of lot of investors are different and as the company scale as they become liquid as they become scaled businesses it attracts investors with lower expected return than yours the it’s the incremental buyer which sets the price once I had bought the price and I was not doing I was I was I had no opinion on the I I mean I had no impact on the share price it is the last marginal buyer and the last marginal seller we determine the price of the share and I I completely ignor the fact that larger investment with lower threshold of return expected would enter the market and drive the price I was arrogant that I was I was the settler of the price I was the arbitrator of the cheapness or expensive of the stock and that was the stupidest mistake I been making making in 20 years and the compounding of stupidity is very cruel and this is visible on the chart to you had I held on to this talks um probably I would be sipping something in Bahamas right now not here giving lecture to you so so this is a learning that as companies evolve it attracts companies this is the important Slide the expected returns by marginal investors keep dropping and only in Decline then things changes this is a most important takeaway of my selling mistakes till date that I used to view the stocks with my yard sticks of statistical cheapness and expensive not the incremental buyer again markets have a way of making you regret your decisions but regrets are inevi suffering is optional I urge you not to suffer let’s look at this I’m just coming to my last portion of the slides look at the Three Musketeers okay these are the founders of the same company who knew everything about the company but based on on the entry and exit time their fortunes were very different same thing here Microsoft Bill Gates entered early but kept selling this guy entered very late but never exited and this guy entered and exited very softly and the outcomes of the all the three they knew the stock as much as anybody in the market same thing happened to to bakar in Warren Buffet they had a third partner called Rick grian but Rick grian was heavily levered in 1970s and he in fact he had to sold buckshire sh to Warren Buffet at price of $40 what I’m trying to tell you is markets have a way of finding you or weakest link and exploit that against you be careful be careful of selling as much as you are careful of buying and holding decision with this uh I have summarized uh you can take a picture of this this is what my learning over uh last 20 years no 30 years of investing in the stock market is one thing I also urge you is go to this flame website library of mistake it has chronical business mistakes and investors mistake it would be a good source of learning for young young investors in this room some of the books I’ll be putting up this presentation online you can download it and look at it and just thanks to the team at flame which has helped me pres deliver this presentation thank you now my first question to you is out of the three three decisions which a investor makes buying holding and selling which is the most difficult depends on time I today I think so buying would be the most difficult decision uh as the market see as an investor we have to respond to opportunity sets which come externally we I can’t dictate oh I want quality or I want value or I want I can’t Market decides what opportunities sets are so there are times where buying is an extremely difficult decision and selling is easier decision which is today probably for various reasons we can debate about holding is also an equally decision because there is a temptation to cash out the chips and you know redeploy the company which comes with the reinvestment risk so depending on the phase of the market cycle and your past performance each buying holding or selling all three can be very extremely difficult decision and that’s why they say investing is easy but it’s simple but it’s not easy very good answer uh so what about in these kind markets forget the last one week but let’s say we are one week back and lot of investors including me and are experiencing what is what I call as foso which is the fear of selling out because whatever you sell keeps on going up now how do you overcome it and I mean especially with you know you not having uh you’re having difficulty in buying something uh because of the value framework you have or most of us have so how do you how do you address that so investing boils down to handling contradictions investing is bundle of contradictions right I’ll give you simple example one on one end you have to be confident that you know more than what Market does and on other hand you have to have humility that you could be wrong and Market is collectively on one hand you have to be you know of a mindset that I know everything or one thing that I don’t know nothing and Market knows everything so investing is a bundle of contradictions to begin with and especially when it comes to selling a winner which is what you are describing fear of selling early the the the key is what I told that at the current price what are the future embedded growth rates embedded into the business so a business can make money only in five ways actually seven ways actually one is pay lower taxes I don’t think so companies have control over that pay lower interest cost by and large no control that dictated by market increase margin increase turnover of the using the same asset turnovers or you know fund the assets cheaply the two other ways to make money is if you can repurpose assets to a greater better use use like you know dem merger or successful spin-offs or something or if you can raise money cheaply at favorable terms and when I’m saying money it is both debt and Equity so with this Arsenal you can play around with you know sensitivity analysis of past the peer set comparable peer about and take a view whether you are you are paid to take that risk from this valuation ahead and market being Market would overshoot the valuation and you would land up taking an early exit but when in the selling the winners I I like what Rajiv said you start drip selling earlier I would just sell and mass you know I would dump the stock in two days and I would be out but now when when I’m just selling for the overvaluation reason I’ve started taking meaningful small small drip exit some you will end up exiting early some you would end up exiting late but over a period of time you would neutralize the average selling price that’s so this is a strategy which I call a foot in the door the same happens in the buying side you put a door so that your bias of the valuation gets eroded and then you start averaging up or you start averaging down okay so the next question is how do you what do you do when the stock goes far beyond your original thesis and I’ll give a example a personal example of mine uh if I’m permitted uh I invested in a in a PSU stock nbfc the thing is it was very cheap just couple of years back 6 Price to Book I mean obviously zero NPA and I think lot of people know about the stock now this stock the the the thesis was you know that it I I’ll sell it at maybe 1.2 Price to Book dividend deal was 7% so it was kind of a no-brainer right and uh and obviously the book was increasing now what happened is down the line the stock did go to 1.2 1.5 Price to Book and actually the numbers started declining or there was no growth and so the thing is that you know I did start selling obviously I sold all the way to let’s say 2.53 Price to Book and the stock goes to six Price to Book now what do you do in such kind of instances that how do you how do you process this information or maybe learn from it and how you can do it better you know you can sell better in the future what is what is your thought behind this so valuation of public sector banking lending companies has been always an enigma and one thing j I have learned is you know why they don’t get a highp multiple is because of or or Price to Book or whatever the valuation framework you’re using is because of three reasons first of all decisions are not taken in the best interest of the investor because the decision maker has other incentives or is answerable to somebody or that somebody’s is responsible for his appointment in first place and so on so forth o call that’s the first thing secondly public sector Enterprises are forced to dilute at the worst of the time they get they tend to get recapitalized when the earnings are out of back the multiples are out of back unlike a private sector borrower lender who always raises money in good times and creates a buffer for the bad time so that’s a second reason and the third reason is obviously the public sector Enterprise are losing market share because there’s no incentive to fight for the profitability uh given their mandate so all these three reasons would ensure that in long run the they ought to trade at a discount to the private sector now always there will be a time where somebody takes a fancy and Market would temporarily overshoot but uh you can’t Bank on it so the the decision can’t be considered wrong because something else happened based on the empirical data and based on the logic the decision to sell was the right decision perfect uh that’s what I also uh tell myself uh so uh learning from historical mistakes in selling like selling soon or holding too long uh if you can give some empirical uh I think you have already slides I showed there were tons of mistake of premature selling right uh where where I just sold because of the statistical reasons the the worst part was you know I didn’t take the cost of capital of the market I I I I took my expected return as the arbitrator of the you know whether it was cheap or not and I was a fly on the wall you know uh didn’t didn’t matter so when you sell just for statistical overvaluation one rule which which really helps is you know you got to see the behavior of the market participants if the Thematic funds are getting launched if if uh uh CNBC anchors are talking about it that Euphoria is perceptible and you should take advantage of the Euphoria because the fortunes are made because of the Euphoria if Market was rational there wouldn’t be a phenomenal money-making opportunity so you instead of you getting swayed you should take advantage of it is what the real art of investing lies about uh would you sell at a loss any company and it could be obviously because of you know company not performing but how much time would you generally give to the management to perform I mean how much time would you give a investment uh uh for you to decide you know whether that okay I need to get out of this be it at a loss or break take one or whatever so stupid as it sounds um if a stock Falls by 20 25% and I don’t muster courage to buy it more it is the first indicator that I don’t know my investing company that well or do I have a conviction or my homework is inadequate number one it’s a first warning signal okay secondly you are an active investor so you are always looking for new opportunities to invest so at that point of time such companies become a swift decision where you you tend to recycle your Capital because person like me don’t have infinite Capital we I don’t have inflows and inflows like Rajiv does so capital is scared so recycling of the capital is the opportunity to take at this point of time coupled with tax loss harvesting so so what you’re saying is that your decision would be based on a percentage fall or or those those are statistical point of you know triggering an introspection so the first question is it was good at this price now it is 25% cheaper are you buying more right are you buying more are you allocating more if that answer is clear then then it’s a it’s it’s a decision taken but if that answer is not clear then there’s there’s something wrong it’s a first early morning indicator as far as I’m concerned okay now assuming that you know let’s say it doesn’t fall I want to stretch a bit more and try to get more out of you on this assuming that it doesn’t fall let’s say it remains static how much time would you still give the management for it to perform 3 to 4 years 3 to four the reason is uh normally Cycles tend to correct in 3 to four years time um on an average now I can’t I can’t generalize certain if if the excesses were very high in the past like your GFC crisis or Tech bubble then time would be longer but obviously since excesses have happened you would be aware of that so but in a normal condition I think so 3 years is a decent time for a management to apply its you know changes and correct uh I think after 3 years it would be again a time of introspection and deep revisit of the idea so next is what if a managment does a capital misallocation uh would you sell just for that I mean would you assess you know what is the uh so I expect my partner in that business to deploy money and the future returns are lucrative and I would want them to stay on the sidelines when they are not and that’s also again a function of Market opportunity stress in the sector and so on so forth um minor capital misallocations I tend to overlook uh but anything which substantially moves the needle by 20 30 40% of the capital deployed that would be a reason again to sell under related diversification uh over L price uh acquisition so on and so forth so let’s look at something like for example ITC just as a example uh obviously we know the business it was in when it spawned the fmcg business or something I mean uh what would you look at it I mean would it be a diversification in your mind or it would be you know getting future ready because cigarette is a dying business what which is the lens you would look at it I mean assuming you were a shareholder at that point time or something what is the way you will look at so firstly Jen ITC is a company I wouldn’t own because one of the filters I have is the company which I own which I consider to be a owner myself has to be good for society and there are enough literature that tobacco consumption is not good in aggregate for society so I would tend to not be the owner of the share but if I had if I had to uh the reason is very clear ITC can’t return the capital because of the political issues and so on so forth and uh uh and my decision to buy ITC or sell if I if I had two would purely depend on you know how cheap it is and and and and if they were to get serious about you know spinning of the businesses and and and be mindful of the capital allocation then I would hold on to it okay now you have done lot of work in Ai and and you uh obviously have a company in that now can you just throw some light you know how AI can help uh uh investors uh can it be like a assistant for you or I mean how far we are in into you know getting something out of AI right now which can help us in making better investment decisions if you can throw some more light maybe a detailed answer on this will be since you are there in this field there are three aspects about AI which investor should be aware of and all these three are beneficial to the investor actually none of them are harmful first AI automates lot of grunt work grunt work of pulling in information from thousands of platform doing it day in day out processing large amount of data this is a grun work it is not a decision making part of the work it is just synthesizing the information getting the information updating the information or you know looking for certain predefined checklist so all those things can be quite automated which is increasing the productivity of the investor so what has happened is as the noise see fundamentally Jan what has happened is the cost of creating data is becoming zero the cost of transmitting data is becoming zero the cost of storing data is becoming zero so there is huge amount of noise any Tom de and Harry can today put some pointers in chat GPT and write a blog and post it online or tweet it online so how much do you you how much do you so so a automating it B filtering noise and C consistently applying your Frameworks and process on large data scale today you can upload you know complex excels and you know ask simple queries so AI is an assistive tool which can make investor improve the breath reduce the noise and automated start flow it’s a it’s a it’s a very beneficial tool and I think so just like any other tool just like transport or steam engine this is a tool which is going to improve the productivity of average uh investors by lips and Bounds so dwelling a bit more on that let’s see I mean it is you know you give it a input you ask the right questions it will give you output let’s assuming that you know you’re putting you and me are you know putting the same input in this and asking a similar question the output will be similar right now the inference from that let’s say you low you you give it the uh annual report you give it the con call you give it the uh uh analyst report or something and and then you ask for output now the output will be same for you and me whereas if I were to look at this place things in isolation my inferences would be different and your inferences would be different now here we are getting a situation where the inferences which the AI is generating is is same now what will be the differentiator now uh in investors that is my question I’m so so the processing tool is going to be an infrastructure layer which will be available to everybody perplexity is available to everybody chat jpt is available to everybody co-pilot is available to everybody it’s like a car a Formula 1 car in my hand is very useless but Formula 1 car in the hand of racing expert is highly valuable so how do you use the tool matters three things asking the right question getting the right data inputs and data inputs are very important 70 to 80% of the mistake happens because of the faulty data or incorrect data or inconsistent data in fact machine learning and AI is all 80% of the thing is non- glamorous work called Data cleaning and you know getting it uh in in sorted forer so right data coupled with right question which is the right prompting coupled with right in es will be a distinguishing factor in my opinion okay uh so there’s a I’ll take some audience questions there’s a question from jendra whether the decision to sell was the right or wrong we know only in hindsight but you have to look at your own experience which reason to sell a stock has led to least amount of regrets and which reason has led to most amount of regrets so uh decisions to sell with low regrets are where you could the if you were to ask the question again the justification s remain the same so when we sold because of regulatory issue or when we sold because of you know overvaluation or whatever as long as the underlying reason so the best thing an investor could do is create a what is something known as jendra a premortem journal you assume your decision has gone wrong and you tried to see what could what could be the reason of it and how would you feel at that point of time so now what I do is when I decide to sell I mentally ask this question oh this stock after a year is going to be a smack on your face 30 40% higher what would you wrong and how would you feel about it and as long as still answers keeps coming the same I think so then you shouldn’t torture yourself to death because that’s your limitation that’s your DNA that’s your karma and investing is not about maximizing everything it is about sleeping well at night and you can sleep ear at night if you know that your decision has considered pros and cons and still you have come to the same outcome would you consider yourself as a lazy seller like pulak puts in his book that we are very lazy s exactly opposite of pulak I’m a hyperactive investor uh he’s got the capital which is on call okay he can demand capital from the investor when he wants to he demanded it in GFC he got it he demanded it in covid he got it unfortunately I don’t have that luxury so again going back to the same thing I can’t copy paste his Playbook what works for him doesn’t work for me me he has Capital available on a phone call I don’t have copying his idea would ensure that I get ruined so there is a question from gorov do you have a framework on selling of a multi-asset class portfolio or a multi- geography portfolio as well unfortunately I’m mared to equity as an asset class but I do look at fixed income when the equity not become invest but it’s a plain vanila Equity investing uh fixed income investing so unfortunately no I don’t have the experience of multi asset and multi geography because bulk of our Capital because of capital control unlike Rajiv who can export capital and buy person like me can’t in meaningful way so it’s a binary portfolio Equity default when the valuations and the understanding permit you to and when you find everything expensive some amount of fixed income and yeah that’s that’s what it is for my investing career so there’s another question you mentioned which company you sold and what mistakes you made can you name some stock you you help and have had great returns and why did you hold it for long it would be stupidity to I mean I I won’t go into names some of you know some of you people know the stocks have been owning for decades the reason to hold the stock for a long period of time would be be four in my opinion a addressable Market is very large and the competitive intensity is not too high if intensity if addressable Market size is high but the competitive intensity is high then it’s off and I’ll give you example of Telcom when I got first mobile phone there were 26 mobile operators and everybody was profitable and today Telcom has been a vertical growth story of India but there are two and a half players of which only one is making profit the remaining to our either an accounting loss or an actual loss so there has been a growth in the underlying uh addressable Market but nobody’s made money so please remember that all form of growth are not value accretive for investor cancer is also growth but it’s unwanted growth please remember this cancer is growth so don’t blindly Chase growth growth is value accurity to investor only if it beats the expected return return on Capital and there’s no dilution so so that’s one framework second framework would be you know the management you can trust the management skills and you can take them to navigate the changing water the changes are very rapid technological opulence business model so and so so you are comfort with the management to navigate the troubled waters is second third you keep saying that your third or fourth or 10th better alternative is still worse than the current opportunity and fourth is you know just simply that your comfort with the stock is there where you are okay to have some lower return but you want to prolong the longetivity of the growth so this is the framework with which one can hold uh I’ve been fortunate uh to hold certain companies for a couple of decades also and they’ve delivered good returns but I’ve been more guilty of selling good stocks very early rather than so number of stocks which I’ve held are far lower than the number of stocks I’ve sold to prematurely so that’s that that sums of how how much of a bzo I am no no you are excellent investor we all know that you’re being modest uh so I think last question I will ask what about all the investors who have come into the market postco they’ve only seen a vertical rise and you know uh seen their portfolios uh blooming now with some hint of a correction setting in what is your advice for them because you see lot of lot of people asking questions already lot of people are panicking just with one week of Correction uh all of us who have been in the market for long times we know that this is nothing I mean this is uh part for the course or you know obviously I can’t time it but it can go far longer what is your advice to uh all these investors I have a very simple advice whatever you are going to go through your predecessors in the past have gone through it history is littered history of stock market is history of human behavior with money and the business in the past and nothing new has come so learn from the mistakes so read about history I have specifically three books I can recommend to you read a book uh it’s not a popular book it’s called bull by Maggie malar secondly is also another not popular book but what I consider one of the best book in risk management is called devil takes the hinder most by Edward uh no huh devil takes the in most uh I think so it’s it’s a very good book and read about you know Howard marks things on cycles and you got to read about history because whatever we have gone through our human race has gone through it and the best way is to you know learn from the mistakes of other rather than committing mistakes and if you have not seen a bare Market uh unfortunately thing is you know you can’t become a romantic just by reading Mills and Boons novels you got to experience the love to become a romantic so either you will go through the experience or you learn from the mistakes of other and avoid it and I wish second would be less costlier than the first one great I think time is up uh we can stop I think I don’t think there are any further questions so thank you so much thank you and