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Knowledge, Wisdom & Temperament

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The three most important things required if one wants to significantly outperform the markets, says Ashish Chugh

Ashish Chugh is a familiar face to viewers of CNBC and was doing a programme – Hidden Gems every Monday on Prime Time – which was a very popular programme. He also used to regularly contribute his research to poweryourtrade.com and moneycontrol.com.  Ashish has a knack for picking stocks from the small & microcap segment and most of the stocks recommended by him have done phenomenally well. He picks up stocks that are beaten down because of short-term negatives, but have the inherent strength to bounce back once the negatives are out of the way. In fact, many of the companies he picks up for investment are noticed by the market players only after they have become 5X or 10X.
He says his best investment so far was Rs11,000 he spent in 1992 to subscribe to The Stock Exchange Official Directory by BSE, a compendium in 18 volumes. This enabled him to get balance sheets and other information about all the companies listed on the BSE, which was not so easy to get at that time.
He has a long list of stocks, many of which have gone up 20 to 100 times. Some of these are Natco Pharma – which has gone up 70 times, Avanti Feeds – 100 times, Greenply – 60 times, Bajaj Finserv – 50 times, Heritage Foods over 50 times and many more. And the best part is all his recommendations were not private, but all in the public domain, because of which many investors also benefitted.
Indian Economy & Market caught up with Ashish Chugh to understand his Investment Philosophy and the thought process behind selecting stocks for investment.

 

What is your recipe for selecting Multibagger Stocks?

There is no secret recipe honestly. Multibaggers are not created on Day 1 – they evolve over a period of time. The clear focus while we hunt for them is whether they carry the potential to evolve as a Multibagger over a period of time. I generally follow a bottoms up approach while identifying stocks for investment. The focus is to buy into such companies at much lower than their fair value and therefore the time to hunt for them is when these companies are not enjoying the best of times, there are short term negatives or concerns. That is the time most investors shun such stocks and you get them at cheap valuations. There are various factors which one has to consider – Brand, Pricing Power, Potential of the product/ industry and of course the valuation that you are going to pay for the business. Also, it is very important to look at the Big Picture rather than get too involved with number crunching on Excel spreadsheets.

There are two characteristics which are common to most of my stock picks which have turned Multibaggers –

Investing is nothing but a mind game, the problem here is that stock price movements tend to mess with one’s mind. So, it’s important to keep one’s temperament under control. Focus on company performance rather than stock performance.

ONE, most of these stocks were hammered down to low levels because of certain short term negatives – either the sector going out of fancy OR some event which was “perceived ” as negative by the market players & the stock hammered down significantly OR because of a bad numbers for a few quarters. To give a few examples – Natco Pharma was hammered down by over 50% only because the markets didn’t like the company’s acquisition of Drug Stores in US. However, the valuations came to a point where the Mcap was only 7 times Annual PAT and lower than the land assets that the company held. This was for a company which had discovered molecules which only a handful of companies in the world used to sell. Likewise, Greenply was hammered down to low valuations only because the construction and hence Ancillaries to construction went out of favor. This company was available at Mcap which was less than 3 years PAT.

Many a times when stocks are available so cheap, you start doubting your conviction. The key is to develop your own conviction and the only way to do that is to work hard and study the company well.

A good investor needs to be flexible, should have the ability to see the changes happening around and should be able to and willing to adapt to the changes.

THE SECOND important factor is Growth – Future Growth is one of the important parameters for the stock to evolve as a Multibagger – I believe that a value stock remains a value stock unless there is growth. Therefore, sustainable Long term Revenue and Profit growth with little or no Equity dilution is an important characteristic of a multibagger. Also, it is very important to differentiate business performance with stock performance.

What has been your learnings in the markets and where did they come from?

Knowledge, Wisdom & Temperament are the three most important things required if one wants to significantly outperform the markets. The process of one’s evolution as a seasoned and mature investor only comes with time and after witnessing periods of depression in the market.

In my case, my evolution as a better investor became after I went through a few bear markets. Bear markets change your entire perspective about investing – most investors who have not seen or experienced a bear market would get seduced by the rising stock price and are focussed entirely towards returns & stock price (risk management is not important). It is only a bear market, which makes you think and rethink your investment style and strategy, sobers you down and you evolve as a mature investor. In my case too the focus in investing switched from chasing stock prices to managing risk. Also, what is more important is to focus on the performance of the business rather than the performance of the stock. This will help you.

Many of our readers are young people, new to investing. What would be your advice to them to become better investors?

Control of temperament is an important factor in investing. Investing is nothing but a mind game, the problem here is that stock price movements tend to mess with one’s mind. So, it’s important to keep one’s temperament under control. Focus on company performance rather than stock performance. Try and keep your Greed and Fear under control. Most investors tend to over-analyze when stocks are going down (fear) and under-analyze when stocks are going up (greed).

Many a times when stocks are available so cheap, you start doubting your conviction. The key is to develop your own conviction and the only way to do that is to work hard and study the company well.

Also, it is important to keep an open mind while investing – A good investor needs to be flexible, should have the ability to see the changes happening around and should be able to and willing to adapt to the changes.

Reading & thinking is an important trait in investing. Try reading Annual Reports of companies since they provide great insights into the business. Also, don’t get distracted by the information overload era that we live in today. FOCUS, FOCUS, FOCUS – Focus on the business, its potential and its valuations. And as some wise man has said – Spend as little time as possible, trying to analyze the big things in the world.

(Reprinted from First Special Initiate of Indian Economy & Market)

About the author: IE&M Team

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