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Swimming against the tide
Raamdeo Agrawal
12 February 2016
What is the tide?
Tide refers to current investment headwinds —
 Global deflation
 Economic stagnation in India
 Stagnant corporate profits
 Flattish markets
2
Flattish markets for 5 years
9,000.0
8,500.0
8,000.0
NIFTY
5 year CAGR : 6.3%
3 year CAGR : 6.9%
1 year CAGR : -16%
7,500.0
7,000.0
6,500.0
6,000.0
5,500.0
5,000.0
4,500.0
4,000.0
As on 10th Feb 2016
3
How to swim against the tide?
(i.e. earn at least 15% absolute return for
investors, irrespective of market conditions)
4
What helped us swim against the tide …
… Knowledge First – 20 years of Wealth Creation Studies
5
… and how we swam against the tide
Focused-35 v/s Nifty
12
MOSt Focused 35 Multicap Fund
12
Last 1 year F35 down by 3.3%
NIFTY
11
11
10
10
9
9
Last 1 year Nifty down by 16.4%
8
Feb-15
Mar-15
As on 10th Feb 2016
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
6
General insights into investing
7
Importance & Knowability Matrix
Knowable
but Unimportant
Important
& Knowable
Unknowable
Unknowable
& Unimportant
Important
but Unknowable
Unimportant
Important
Knowable
8
Warren Buffett’s Investment Process
a) A business we understand;
b) Favorable long term economics;
c) Able and trustworthy management; and
d) A sensible price-tag.
— 2007 Annual Letter
9
Powerful Mantra for Wealth Creation
To make money in stocks you must have –
 the Vision to see them
 the Courage to buy them &
 the Patience to hold them.
Patience is the rarest of the three.
– Thomas Phelps in 100 to 1 In The Stock Market
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Short-term v/s Long-term
“In the short run, the market
is a voting machine …
… but in the long run, it is
a weighing machine.”
– Benjamin Graham
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Short-term v/s Long-term
Irrational in short-term, rational in long-term
Rationality
Rational
Irrational
Short-term
Long-term
Time
12
Market performance v/s Stock performance
HDFC Bank outperforms, while peer SBI underperforms
250
Sensex
HDFC Bank
SBI
200
150
100
50
0
As on 10th Feb 2016
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Stock performance v/s Portfolio performance
Maximum loss on wrong stock is 1x
Limited downside, Unlimited upside
Stock 1
Stock 2
Stock 3
Stock 4
Stock 5
Stock 6
Stock 7
Stock 8
Stock 9
Stock 10
PORTFOLIO
Weight Performance
10%
-20%
10%
-50%
10%
-100%
10%
10%
10%
20%
10%
25%
10%
30%
10%
35%
10%
50%
10%
500%
100%
50%
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3 sources of value
Growth Value
Only if growth is in the same franchise, and
benefits from the competitive advantage
Earning Power Value
Franchise value from current competitive
advantage
Asset Replacement Value
When entry is free, and there is
no competitive advantage
15
Equity allocation & Market levels
How investors allocate
Index
How investors should allocate
High
Index
High
Low
Low
Equity Allocation
Equity Allocation
16
QGLP:
Our Investment framework
17
QGLP in a nutshell
 Q : Quality of business & Quality of mgmt
 G : Growth in earnings
 L : Longevity of Quality & Growth
 P : reasonable Price of purchase
18
QGLP frameworks
 Quality frameworks
 Growth frameworks
 Longevity frameworks
 Price frameworks
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Quality frameworks
20
Q – Quality
Quality of Business
x
Quality of Management
1X1=1
1X0=0
0X1=0
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Quality Frameworks
Great, Good, Gruesome
RoE Distribution of
BSE 500
FY15
RoE
No. of
cos.
> 25%
68
15-25%
120
< 15%
312
Only 14% of BSE 500
companies
earn RoE higher than
Cost of equity
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Quality Frameworks (continued)
Uncommon Profits … Emergence & Endurance
Uncommon Profits in companies
=
Uncommon Wealth Creation in markets
1,400
1,200
4000
Asian Paints PAT (Rs crores)
3200
Asian Paints Stock Performance
(both Asian Paints & Sensex Rebased to 100)
1,000
2400
200
Oct-09
Oct-08
Oct-07
Oct-06
Oct-05
Oct-04
Oct-03
Oct-02
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
0
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Oct-15
Sensex performance
0
Oct-14
800
Oct-13
400
Oct-12
1600
Oct-11
600
Oct-10
800
Quality Frameworks (continued)
Uncommon Profit & Company lifecycle
24
Quality Frameworks (continued)
Value Migration
“Value migrates from outmoded
business design to superior
business design.” — Adrian Slywotzxy
100%
Private Banks
Profit share up from 23% to 49%
80%
60%
40%
PSU Banks
Profit share down from 77% to 51%
20%
0%
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
25
Quality Frameworks (continued)
Quality v/s Growth
26
Growth Frameworks
27
G – Growth
Understanding 2 years Growth is a
science but Understanding
long-term Growth potential is an art
28
Growth Frameworks
India’s NTD
(Next Trillion Dollar GDP)
Linear growth …
Every successive NTD of GDP takes fewer years
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Growth Frameworks (continued)
India’s NTD
(Next Trillion Dollar GDP)
… Exponential opportunity
When per capita GDP doubles, discretionary spend becomes 10x
30
Quality Frameworks (continued)
Winner Categories, Category Winners
• Winner Categories = Consolidated sector + Scalability
• Category Winners = Winning Categories
+ Entry Barriers
+ Great Management
• Great Investments = Category Winners
+ Reasonable Valuation
31
Growth Frameworks (continued)
100x
Indian benchmark indices rise 100x in 30 years
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Growth Frameworks (continued)
100x
47 enduring 100x stocks over 1994-2014
Note: Price multiples are based on stocks being bought at the low price in the respective year of purchase,
and held on to Mar-2014.
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Longevity frameworks
34
L – Longevity
Longevity of Quality & Growth
 Extending Competitive Advantage Period CAP
(CAP framework covered later)
 Delaying mean reversion
35
Longevity Frameworks
Longevity of Quality
Extend CAP (Competitive Advantage Period), Delay mean reversion
Companies enjoy CAP of some years …
… but high-quality companies extend it
36
Longevity Frameworks (continued)
Power of Compounding
Longer the period, exponentially higher the multiple
37
Longevity Frameworks (continued)
Longevity of Growth
Sum multiples for different growth rates over different periods
38
Price frameworks
39
P – Price
Reasonable Price which is
significantly below the intrinsic
value leaving good Margin of Safety
40
Price Frameworks
Quality & Valuation Matrix
Identify Quality stocks at reasonable valuation and hold on
Quality
Low
High
Valuation
Low
High
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Price Frameworks
Market Cap to GDP
India’s current mkt cap > LPA but below peak of 100% of GDP
103
95
88
82 83
80
Average of 52% for the period
70
53
42
30
33 36
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY00
FY99
FY98
FY97
FY96
FY95
FY01
26 26 23
FY94
FY93
FY92
FY91
45
23
19
55
52
41 42 43
64 66
42
Price Frameworks
Payback ratio
Less than 1x is almost a sureshot formula for multi-bagger
Payback ratio =
Market Cap
Next 5 years PAT
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Conclusions
 You can swim against the tide (i.e. make money in flat
markets) … provided you have the requisite skills.
 The requisite skills come from a good investment
philosophy, and pig-headed determination of practising it.
 A good investment philosophy evolves after years of
research, practice, and fine-tuning.
 We believe our investment philosophy – QGLP and its
continuous improvement – should help us deliver
sustained superior performance.
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Thank you !
Happy investing using frameworks
& best wishes for
swimming against the tide !!