Pankaj Tibrewal's most precious investing lessons

Investing is all about business, management, balance sheet, cash flows, valuations and managing oneself.

Management in India is more important than many other countries.
Identifying the DNA of promoters/management is the key for successful investing. Management needs to be trustworthy. Identifying the culture of the company is extremely important as that's the biggest moat in today's commoditised world.

Growth is good, but not at any cost: No business can create long-term value if there is no growth. However, not all growth is good growth. If a company's return on equity (ROE) remains below the cost of equity for long periods, high growth is toxic and destroys the value of the firm as the company needs to constantly raise capital to meet its growth needs.

Managing self is extremely important: One should strive for awareness and equanimity in markets as well as in life. One must be aware of one's core area of competence. Spiritual anchoring is essential for successful investing. Meditation helps align the mind, body and soul, so one can remain grounded and focused. Investors are either too obsessed about the future or worry about the past while forgetting the present. Meditation lends mental clarity, enhances the emotional quotient and reduces stress. The market intoxicates us with success but also drains us with failures. Meditating for 15-30 minutes a day can help maintain a balance in both times.

Cutting the noise and being patient: To generate long-term outperformance, filter the noise and remain focused all through. Some investors get carried away by stock-price movement in the short-term, and that provides a long-term advantage to serious investors. If any quality business is going through a temporary setback, that's the best time to invest, especially if the setback has no real bearing on the intrinsic value of the company. Major part of our success does not depend on choosing the best stocks, but our behaviour in the worst and best of the times.

Work on process and inputs: We should accept the hard reality that outcomes are not in our control. What is under our control is our process, inputs, stock-selection filters and our temperament, which go a long way to achieve the desired outcome. Build a solid investment framework and philosophy that suits your investment style and temperament and keep improvising on it as you move ahead.

Digesting success: Not an easy one. Remain grounded and humble all the time.

Valuations: Price one pays for the stock is very important. Always have a margin of safety built in. As Howard Mark says, everything is good at a price.

Don't try to time the markets.
One can never sell at the top and buy at the bottom. When not sure, it's just best to sit and do nothing.

Invest in quality businesses: Invest in businesses that can generate superior returns on capital employed over sustainable periods of time, and growth which enables it to reinvest the cash flows back in the business. This leads to compounding of value of the business and the stock price. Focus on the earnings capacity of the company rather than the earnings themselves. The quality of the portfolio would separate you from the rest of the crowd during any drawdown and crisis.

Read voraciously and meet new people: "I have known no wise people who did not read all the time," said Charlie Munger. There is no substitute for reading. Read books from varied disciplines as everything has something new to teach us.

Mistakes are great teachers.
"The only mistake is the one from which we learn nothing," said John Powell. I have made my own share of mistakes during the last two decades. One is on error of commission: I have sold many winning stocks too early and I was not able to ride the entire upside by looking at valuations at that point of time but growth kept on surprising. Lesson learnt is that growth is the horse and valuation is the cart and not the other way around. Growth drives valuations. It's important to keep refreshing the growth outlook of the company from time to time. Other mistake made is error of omission. I had the opportunity and understanding of some of the great businesses and multibaggers early on but I regret for not participating. Error of omission is a costly mistake. One should be open-minded and agile in investing.

This interview was conducted in June 2022

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