Face to Face with Gurudatta Kamath
(A Chartered Accountant, working in the analytics world, Gurudatta Kamath uses the best tools from both these areas to develop his own investment style. He normally avoids crowded market places and looks for businesses which are run by passionate promoters. For that, he uses quantitative and qualitative metrics to evaluate a company along with the total market potential of the relevant business. Though not a complicated style, it involves a lot of ground work by way of factory visits, talking to suppliers, distributors and competitors and keeping abreast with industry happenings.)
Does one need to be a quant whiz or a mathematical genius to be good at value investing?
I think investing is simple if you know how to identify and control your emotions (Now, that is the most complex process!). In fact, I have seen friends, who are good at understanding the nuisances of running a business, and understand the mental state of the people they deal with, are far better investors. Take for example, Shri Radhakishan Damani or Dolly Khanna – they have run businesses earlier and are considered the smartest value investors. So, you do not need to be a mathematical genius, though it surely helps in quick number crunching to get going with your initial analysis.
Is “value investing” a good investment strategy for long-term investment goals like income during retirement years?
Though I do invest in momentum stocks to gain some quick profit from those investments, I would say my best returns have come from long term holdings. One of the first few investments I made was HDFC Bank, where I had coerced my father to put some money in 1994-95 after their IPO at Rs45 per share. Though, in the first 4 to 5 years, it did not go anywhere, once the bank achieved a particular scale there was no looking back. It has been a 200 bagger for my family in a little over two decades. Over a period of time, such businesses find it hard to grow exponentially, but they start giving hefty dividends to their shareholders which takes care of retirement income. Similar stories can be found in Colgate or TCS. The trick, though, is to identify such young companies and stick with them during bad times. Value investing is all about spotting the hidden value of a stock and to invest in it. By the time the general market notices it, you already have gained a significant head start.
What do individuals need to learn before they start practicing value investing?
Individuals need to continually read and learn about history, biographies, how nature behaves, how people behave. These are the most critical learnings for individuals before or while they practice value investing. At the end of it, the market is made by buyers and sellers and operates within the ecosystem of our over-arching nature. The businesses which we invest are also run within that same ecosystem and the actors (owners, managers, stakeholders, investors) also behave within those boundaries. The reason why experience matters in the market is because history, mostly repeats in cycles and knowing them gives you a sense of identifying values at different times within those cycles.
Should individuals modify their investment styles in a bull market or a bear market?
It really does not make any sense to modify your approach to investing during bull or bear market. If a system works for you, stick to it. We don’t fix a machine, unless it’s broken. One should, however, never miss an opportunity to fine tune or upgrade. In my case, 2010 to 2013 were more to do with omission mistakes where I did not build my conviction in many stocks or did not stay course with some of the investment identified by me. One example was Eicher in 2012 where I found out from a dealer in Pune about the changes introduced in their products, wait period for the product and most glaring of brand pull was when my colleague gifted one of the bike to his brother as marriage gifts. So, the opportunities are galore at any point in the market. Always be aware of your surroundings and rely on your common sense.
Warren Buffett has often talked about “moats” or sustainable competitive advantages. Could you explain this concept along with some examples?
Moats are very difficult to explain in many situations. A straight forward answer from my perspective is where a business occupies the leading position in an industry and others wanting to follow find it difficult. There could be various skill sets which the leader possesses and are difficult to emulate. These could be related to technology, marketing, channel management, cost management or people management (this not only includes employees but also buyers, sellers and contractors). An example, could be Pidilite – where the first puller is the advertisement which is always innovative and catchy. It makes a mark on your brain. It also sets the price in the market where others follow them. It has an efficient distribution system. It introduces innovative products always keeping ahead of the market – it created a niche for the kid’s artistic skill development which is a great pull for kids.
What are some of the most important things to keep in mind to succeed in long-term investing?
To succeed in long term investing, one needs to be a voracious reader – whether of history, current happenings, annual reports, stock exchange announcements or industry magazines. Without this, you will just invest with shallow knowledge or based on others’ conviction. Best of the investors spend lots of time learning and listening and less time looking at the stock prices. Though I work as an analytics professional, I try to attend a few of the AGMs in Hyderabad and whenever possible, try to visit some factories. More you do these things you will get a better perspective and understanding of the businesses. This in-turn will either bolster your conviction to stay put in/add to, or prompt you to get out of, an investment.
What are the essentials of due diligence when investing in any stock for the first time?
Due diligence is required while investing in any business. It is our hard earned money and we need to ensure that our capital is well protected.
Basic due diligence from Annual Report includes–
1) Does the company generate cash from operations commensurate with the profits and other non cash expenses?
2) Whether the per employee expenses make sense?
3) Are there suspected related party transactions?
4) Whether the appropriate amount of tax is being paid after considering tax credits?
5) Company address is not located at some unusual locations
6) Does the company pay the PF dues and TDS to the tax authorities in time?
7) Are the auditors qualifying their reports with some serious discrepancies?
There are many factors one needs to look outside of Annual Reports, but if you consider these negatives and then start your analysis, an investor will not be biased by (false) positive news floating around.
Carefully learning from the mistakes of others is an effective way to accelerate the learning process. Could you share some of your mistakes and lessons over the last couple of years?
Most of my mistakes are more psychological aspects of investments. Let me give a couple of examples. I had invested in DFM Foods, which manufactures small packaged snacks for kids. This was after I learned that a Private Equity Player with a good track record invested in this company. Being the only listed company in that sector and having presence only in certain regions of the country, it had potential to grow substantially over the period of next 3 to 5 years. Incidentally, it did not perform well for two quarters and I thought it was a mistake from my side. This is one side of the story. Obviously, when whole channel expansion started bearing fruit, it gave one good quarterly result and I ignored it with my bias against the company and did not buy again. It turned out to be a 10 bagger in next one year. So, the learning was to keep an open mind towards a business with fresh eyes. There are many more learnings from earlier times out of which the best learning was to avoid borrowing conviction.
What are the key attributes of a great investor?
The most important attributes of a great investor are Emotion Management, his/her hunger to learn new things, his ability to evaluate the potential of a business and passion of an owner/manager who manages the business. I always believe that great investors are great businessmen. If you understand the nuisances of running a business, you can ideally become great investor. Having said that, some great investors are astute financial re-structuring experts, who know how to unlock the value of a business.
What are the best books about investing?
Most of the learning about investing can come from three books. The Intelligent Investor by Benjamin Graham, The Most Important Things: Uncommon Sense for the Thoughtful Investor by Howard Marks, and Common Stocks Uncommon Profits by Phillip Fisher. This, along with the annual letters of Warren Buffet and letters from Howard Marks are good for investors to learn about investing, the psychology at play and its nuisances
What are the best websites to follow for value investing-oriented investment ideas in India?
I do not follow any blogs, but I do follow some very astute investors in India. Few of the best hidden investors whom I track and make sure that their ideas are explored and dug deeper are – Vinod Ohri, Neeraj Marathe, Nooresh Merani, Aditya Deorah, Rajesh Agarwal, Laxmikant Kabra and Abhishek Singhvi. Of course, Arun Mukherjee is my favorite in the nano cap space. These are the guys who are value investors and very humble to learn from. For the most part I do not coat-tail any of the big investors like RJ and others unless I convince myself to invest with my own reasoning, though there are successful investors who just coat-tail some smart and savvy investors.
What is the best investment advice that you would like to share with young investors?
Having developed my investment style by trial and error, I would advise young investors to not stick to any one way to invest in their initial days. There is value in each investment at a certain price point and that keeps changing with different situations like – management change, younger generation taking over, capex plans, rights issues, buybacks, etc. Another learning tool could be coat-tailing big investors or to find good growth stories in the SME segment. Over a period of time, everyone gets a good sense of what fits their risk taking profile and what comes close to their natural thinking. Once identified, they should stick to that – obviously honing the skills with new learnings every time.