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Confession of a value investor - Part 1
A tale of how intelligence and serendipity combined to create the killing of a lifetime

Chaitanya Dalmia

This is a story about two stocks that I have owned in my as yet brief stint with investing. Let me start with the story of the first one. This is a few years after I had started out about 15 years ago. The setting was thus. The tech bubble had burst. In the run-up to the bubble, it was IT sector all the way with donkeys and horses alike dancing all the way to the sky. There were two other sectors which had a rub-off from Information Technology (Tech); media and telecom. The three together became the invincible Trinity, and were collectively branded ‘TMT’ by the glorifying media. Some people who could not join the song-and-dance tried their hand at two other sectors, FMCG and Pharma. Besides these sectors, every other sector and every company in those sectors were touted as the old economy ‘touch-them-nots’. Once the tech mania fizzled out as it ought to have, the whole market collapsed, and took the already battered old economy stocks even further down. It was hangover time.

Being faced with a situation which I had obviously never faced in my life in any capacity, I was like the harrowed citizen of a war-devastated country whose psyche has been terribly bruised. The general mood was such that the very mention of stock market initiated nausea. I went back to my basic tenets of value investing. After spending much time on books and contemplation, very reluctantly I started looking out for cheap stocks. Cheap means simply cheap, without really bothering about whether they were good businesses or simply trash appearing cheap. I came up with a few ideas, but didn’t have the heart to go and buy in truck-loads. However, I somehow managed to pull the trigger in a few stocks which had a handsome dividend yield, which bordered or in some cases even surpassed the yield than that offered by a bank fixed deposit. The sole objective was preserving capital, and the yield on offer somewhat guaranteed capital preservation since the sustainability of already meager earnings was not much in doubt. At that point, I didn’t know much about different businesses or various industries and the people running the show at respective companies.

Home run

One of these stocks went on to become a multi-bagger over the years. And fairy-tale-like as it may sound today; it was discovered when I was scanning the newspapers for the lowest P/E stocks (yes, as basic and mundane as that; and that too while on a flight to Lugano for a holiday with my wife, who was disgusted with me for working on a holiday; that got me even more petrified!). During these years, I went through an extended period of anxiety, lots of circumspection and plain disarray. It was like waiting for this one sparkling day in the whole year when the dividend cheque would arrive in the mail – Teen sau chaunsath andheri raatein aur ek chandni raat – This kept happening for a couple of years. I held on to my conviction on the basis of the checklist suggested by established successful veterans on the subject like focus on earnings, ignore daily stock price movements, ignore noise, investing is like watching the grass grow, be greedy when others are fearful, etc. It’s all very nice to read, but let me tell you at that time, it all felt gibberish.

When I had made the investment, besides preserving capital, I had done some numbers for the following three years with very basic assumptions. I concluded that if the stock doesn’t move in three years, it would be at a ridiculous valuation, cheaper than a net-net as suggested by Graham, which is visible today only in case of stocks of companies which are either fraudulent or on the verge of shutting down. So it would be worth something more in three years than the price I paid; or alternatively: I completely missed the plot and invested in a company which is going bust.

Over the following two-odd years, the stock almost doubled, and I wiped my sweat, heaved a sigh of relief, and trimmed my position. I surely was not feeling like a partner in the business, but more like a holder of a piece of paper which should be sold as quickly as possible before it again got converted into worthless paper. This is despite the fact that in these years I had learnt much more about the industry and the business, and I still knew that on any valuation parameter, it was still ridiculously cheap. In another two years, it multiplied another ~4x (7x from original price). I sold more. This time the valuation was ‘richer’ than in the past but nowhere near Intrinsic Value. I thought the stock had re-rated enough since the valuation had more than doubled! Thereafter, it went into a prolonged period of hibernation. For five long years, it remained within a 20% range. And then in the next 16 months, it jumped another 5x (35x from original price).

Long story short, I was lucky to catch this stock cheap, and had the patience to keep holding ever smaller quantities despite market apathy. And that I did for 10 long years. Had I sold it after 9 years, I would have made 7x. I actually held it for 10 years and got 23x. Had I held it for 11 years, it could have been 35x. But hindsight is always 6/6! And ex-ante, it’s all a matter of chance, since the difference between 7x in 9 years and 35x in 11 years is a vastly different outcome!

I am left with a miniscule quantity till today, which I have buried deep into the ground, in the hope that one day I don’t feel left out when some high-profile money manager proudly proclaims he has a 100-bagger. Today it has reached 80x as I write; but I don’t know whether to feel good or bad about it.

This is the first of a three part series. You can read part two here and part three here

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