We believe in “Value Investing” philosophy of buying stocks which are trading at a significant discount to their Intrinsic Value (Fair Value) and holding it for the long term.
However, a mere discount to Fair Value is not the only criteria for our decisions. We evaluate each idea on several parameters and make a commitment when we are satisfied with our evaluation of each of those.
Our stock selection is driven by the following parameters :
High quality of business: We define quality companies as businesses which can earn a high return on invested capital for a considerable period of time. These businesses are capable of consistent and predictable performance in the future.
Competent and ethical management: We prefer to invest with managements who are ethical in conduct with all the stakeholders of the business and would treat them as they would like to be treated if the positions were reversed. In addition, these managements also display a high level of competence in allocating capital into the business to generate value creating growth. We attach very high importance to this factor and have rejected stocks which were rated high on all other parameters.
Above average Growth: The business should demonstrate the capability to deliver an above average growth for a long period of time by operating in structurally attractive industries.
Attractive valuation: A company which satisfies all the previous criteria on business and management quality, with excellent growth prospects needs to meet our threshold of attractive valuations. We define an attractive valuation as one which will allow us to earn above market rates of return at lower than market risk.
In building a portfolio from the selected stocks, we are guided by the following portfolio management principles :
Bottom-up portfolio construction: We build the portfolio completely from the bottom up, not based on any Index. Because of this, our portfolio’s overlap with indices tends to be very low and sector exposures tend to be very different from the Index.
Long -term investment horizon: We are patient, long-term investors. We seek to take advantage of significant stock price declines due to poor near-term business results, focusing instead on the long-term intrinsic value of the business.
Flexibility to invest when opportunities are most compelling: We are not afraid to hold cash at times when underlying valuations are elevated. This provides us with the ability to act quickly when market sentiment swings to the other extreme and short-term market disruptions provide compelling opportunities from panicked sellers.
Risk Management: We limit exposure to a specific sector / stock to a certain level to manage risk . While this may lead to lower returns, it allows us to manage the portfolio risk within acceptable level.