Confession Of A Value Investor - Part 2 | Outlook Business
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Confession Of A Value Investor - Part 2
A tale of how intelligence and serendipity combined to create the killing of a lifetime

Chaitanya Dalmia

The next story is about a stock which was the best listed play in that sector at that point. This was in early 2004. This company was the 2nd biggest in its sector, and the sector had been beaten into oblivion for perhaps a decade or so. This company had a strong presence in the markets it operated in, had a good appeal amongst its consumers, its balance sheet was in good shape, and there was a macro tailwind on the horizon. It used to have a profitable book despite it being in a sector where it is not exactly customary to leave anything for the taxman. The best thing was that it was available at Book Value, with a lot of hidden value in the enormous amount of assets it owned. It had a maze of subsidiaries, associates and JVs. I requested the company for the balance sheets of all these, and the company officials parted with them after much fuss.

This time it was easier for me to take this call since I had made some money in the preceding few years, gained confidence, and developed some risk appetite. The general market sentiment was also upbeat, and there was a revival in the economy following many years of lull. This idea came to me through someone who later became a friend, and who had been in Mumbai circles for ages. Some relatives and friends talking about the imminent good things the sector was likely to see added to the confidence to take on this somewhat risky idea. The biggest risk was actually the liquidity risk. I had to raise the price by 30% to get the quantity I desired. And the risk was that if the stock languished for another decade as it did in the previous one, it would have caused me immense price damage to get rid of the entire holding I had accumulated. The other risks were the usual business risk as also the promoter risk.

Within a year, it became 2x, and in 2 years, 10x. I kept selling at all levels, and exhausted almost 90% of my holding. It became 250x (no, it’s not a typo) in the 3rd year and 500x (yes, pinch yourself, its five hundred) in the 4th. I was oblivious to what was going on as the stock went from circuit to circuit with rumour mills working overtime churning out all sorts of stories of promoters consolidating, to FIIs buying big-time to bonus and splits to vastly improved financial performance to the big daddy coming with an IPO etc. I couldn’t complain, nor did I bother to verify the truth or otherwise in all the market gossip. I sold 10% of my holding at 125x and a fraction of a % holding at 350x.

I got super-lucky in more ways than one. First, the stock kept hitting the upper circuit for weeks. So that made my decision to hold easier since the buyers were significant implying a severe shortage of available stock. Second, the company gave a big bonus, and due to some calculation error, I sold more quantity than I possessed pre-bonus. As a result, the stock got auctioned at a much higher price. But by the time the bonus shares were credited to our DP account, the price was far higher than the price at which the short-sold quantity got auctioned. Third, the biggest player in the sector announced its IPO plans at a premium valuation (as is usually the case); which had an understandable rub-off on this stock. All told, it was as if it was God’s own order that all stars must align to let me make the biggest killing of my career.

Today, the stock is 7x its original price, implying it is down by more than 95% from its peak of 500x, though still 7x in 12 years if someone bought it and forgot, which is still a pretty handsome return. I don’t own a single share today.

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

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