Aniruddha Naha's most precious investing lessons

I started with DSP Microcap Fund in January 2008, which was the peak of the bull market. The year 2008 was a great period to learn the nuances of investing and what matters in bottom-of-cycle investing. Managing the micro-cap/small-cap segment in 2008 challenged lots of bull-market concepts of market cap/sales, EV/sales, EV/EBITDA, sum-of-part valuations, real-estate companies valued on land bank, among others. The challenges of 2008 taught me that the focus needed to be on cash flows.

Mistakes that have moulded my investment philosophy
My investment philosophy is: top line is vanity; bottom line is sanity; and cash flow is reality. As I gained experience, the evaluation of companies moved from a focus on the profit-and-loss statement to focusing on cash flows and assessing the strength of the balance sheet. Profit and loss were the last areas of focus while evaluating the strength of a business. Presently, we focus on the importance of historical operating cash flows (OCF) since in case a business has already seen a down cycle, the likelihood of that business withstanding the next downcycle is higher. Our process starts with cash flows, followed by the strength of the balance sheet, and finally the profit and loss statement.

The year 2008 was also significant in trying to gauge and understand the importance of good, clean, focused promoters, especially in mid and small-cap investments, where a lot of decisions are driven by the promoter. Hence, to understand how promoters have managed companies, I had to look back into business cycles and capital allocation executed at the bottom of a business cycle when cash flows were challenged and capital was scarce. Analysing the history of a company becomes very important as analysts/ investors focus on trying to predict the earnings of companies, which is helpful to gauge the forward-looking valuations. In my view, evaluating companies through business cycles and seeing how well they have managed their history lend a lot of insights into how well they will probably be able to manage future business cycles.

Lessons which are important in mounding a framework for me
Cash flows are crucial throughout the history of a business. Initially, the focus was on top line and profit growth, without a focus on working-capital cycles, cash-flow generation, etc., and I would buy the best businesses at any valuation, hoping to make returns from them being good businesses. Over time, the importance of reasonable valuations dawned on me, as very expensive businesses rarely have the chance of a P/E rerating.

The learning process keeps evolving, as business cycles develop along with challenging macros and disruptive technologies. The focus on cash flows and strong balance sheets has helped us stay away from all the fancy digital and platform-based businesses which recently got listed and caught the attention of many investors. As time passes and I evolve as an investor, the aim is to keep reducing mistakes and keep an inquisitive mind going, hopefully by being able to steer clear of noise.

This interview was conducted in June 2022

Also in the series:
Ajay Tyagi's most precious investing lessons
Pankaj Tibrewal's most precious investing lessons
Samir Rachh's most precious investing lessons
Chirag Setalvad's most precious investing lessons
Sandeep Tandon's most precious investing lessons