7 key learnings from Mr. Chaitanya Dalmia

“Most stocks have a life cycle, just like businesses or products. At one point, they are either undiscovered, misunderstood, or ignored by the markets for some reason. The realities change, and the markets take time to first notice and then believe them. Once markets discover or re-discover, most of the stock return is made” – Mr. Chaitanya Dalmia

Mr. Dalmia is a deep-value investor who likes to buy out-of-favour businesses cheaply. He tells us to be wary of holding richly valued stocks and long-term investing where one just “buy-and-forget” about the investments.

Here are 7 key learnings from Mr. Dalmia:

1. Approach to Investing

We are value investors. We look for mispriced assets in the markets. We look harder into the past than crystal-gaze into the future and hope to strike gold. We don’t like paying the price of gold for gold. We are happy scrap buyers, buying stuff cheaper than it’s worth.

2. Buying Low P/E Vs. High P/E Stocks

We would much rather play a game where the earnings are doubling/tripling in four to five years and the P/E is consequently re-rated from say, 5x to 10x. We find that to be a less risky way than betting on something 35x, growing at 12-15%, where our performance comes from the P/E going to 50x.”

In other words, if a stock is bought at 25x P/E and its P/E does not go to 40x P/E at some point in the future, the investor in such stock does not make a lot of money. That is an auction-like game, fraught with grave risks, and we leave that game to be played by the ever-growing community of asset gatherers or foreigners whose opportunity cost of capital is non-existent.

3. Generating Investing Ideas

Running screens is the oldest method to generate ideas. The mundane screens are called low P/E, low P/B, and Dividend Yield - these are so boring that most people have stopped looking at them, and that’s what presents opportunities for us.

4. Tracking List Filters

New companies (for tracking) are added to the list only if they make it through our filter of decent businesses, run by basically honest and shareholder-friendly managements and leveraged moderately at best. We have made errors of omissions due to strong filters, but then we are in a loser’s profession - we either lose money or we lose opportunity. We’d much rather lose the latter than the former.

5. Selling Mechanism

a. In terms of selling, we are more Graham or Buffett of their partnership days. We start trimming when the stock approaches intrinsic value in the bear markets and when it crosses intrinsic value in the bull markets. We keep selling in small tranches to try and maximize our proceeds.

b. Another time we start trimming is when a stock goes beyond a certain weight in our portfolio. We don’t wait for a new idea to deploy capital before we decide to sell. Those decisions are distinctly independent, and we are fine sitting on cash for as long as it takes.

6. Analyzing Cyclical Stocks

a. They are not going bust. They will remain in business for at least the next decade.

b. Their balance sheets are not damaged beyond repair.

c. They are making some money even in bad times.

d. Most importantly, their valuations are pricing in only their current earnings, as if the recent trend will continue in such a state forever. They are undervalued even on an asset value basis.

So, if we get something at half P/B, and even if the book value is crawling, it should be fine over a few years. That’s when we make our money.

7. Portfolio Allocation

a. A relatively moderately risky idea gets a 3-4% weight that can be ramped up to 5-6%.

b. A relatively safer idea gets 5% to start with and can go up to 8-9% on a cost basis.

On an MTM (Mark-to-Market) basis, we feel uncomfortable when a stock crosses 15-20% of our portfolio.