Mahesh Patil, Co-CIO, Aditya Birla Sun Life Mutual Fund shares the lessons he has learned in 28 years he has been in the markets.
During the last 28 years I have been in the markets, I have seen various market cycles, starting with the Harshad Mehta boom (while I was in management school). Every cycle is a learning experience and teaches something new, shaping one's investment philosophy and style.
Some of these lessons are:
In my investment journey there are some interesting lessons which moulded my investment philosophy. For example, when I first identified an NBFC, the company had emerged from a chequered past and was reinventing itself as a technology-driven NBFC with a robust risk-management framework. It was an easy decision at that point in time once the big picture was in place as valuations were reasonable.
Over a period of time, the company became a gold standard in the industry and grew rapidly. It was a big multi-bagger (the stock rose 30 times in seven years) and the valuation multiples kept on expanding. I partially booked profits and started trimming the stock at every rise as the multiples went beyond my comfort zone. The stock continued to outperform big time. The key learning was that with certain stocks one should rather take a long-term view, say five years forward, considering the big picture and factoring fully the structural change in the growth trajectory and profitability. Then re-evaluate the target price rather than selling it early when it reaches the estimated target price.
Sometimes the most-hated stocks can provide a great opportunity if one is willing to move away from the crowd and do some original deep-dive work. After the scam erupted at Satyam in 2009, the stock crashed more than 90 per cent and was virtually an un-investible institutional stock. When we evaluated the company closely in 2012 as a contrarian idea, we did some channel checks with its customers and peers and found that the company continued to have a substantial business even after the crisis, with a diversified client base and a core competency in enterprise IT solution. The balance sheet was reasonable, old management was out and valuations were bombed out. Only if it survived and got the right leadership, it could be a great turnaround story.
We evaluated the company taking in the worst-case scenario and found a good margin of safety. We invested early in the stock across our funds and very soon the company started to get noticed not only by other investors but other peers and was acquired by another tech giant later, giving handsome returns. Taking such large contra calls requires teamwork to thrash out the various things which can go wrong and to build conviction.