Fund-management legend Samir Arora is back in India and he has advice for us on how to choose stocks and spouses
05-Oct-2022 •Dhirendra Kumar
A few days ago, I had an interesting chat with Samir Arora, who is the co-founder of Helios Capital Management. The firm is in the process of setting up a new mutual fund company in India and expects to launch its first funds in six to eight months. However, mutual funds are not a topic for this magazine, so let's leave that for Value Research Online and 'Mutual Fund Insight'.
I'm here to talk about what we investors can learn from Samir Arora's equity investing. Arora has a long and illustrious history as an equity fund manager and I consider his approach to stock picking and the general philosophy of equity investing to be of tremendous interest to all equity investors.
During the 1990s, right at the dawn of the modern, post-liberalisation mutual fund industry in India, Arora was the Chief Investment Officer of Alliance Mutual Funds in India. The performance of his equity funds was phenomenal and went a long way in establishing the attractiveness of Indian equity in the minds of a new generation of investors. Alliance later sold its India business to what was then Birla Sun Life AMC. Arora shifted base to Singapore and started his own hedge-fund business named Helios, which invested in Indian equities. Now, Helios is starting an Indian arm.
A video of my chat with Arora will soon be up on Value Research Online but let me tell you something that really struck me as worth emulating for equity investors, and that's the way Arora classifies the universe of investable stocks and the broad approach he has.
The first thing to do is to classify the companies into good companies and bad companies. So far, so good. Everyone does that. No, wait a minute. Everyone does NOT do that. Most investors are fully focused on looking at companies and seeing if they are good companies whose stocks they should invest in. It sounds like the logical thing to do. As Arora says, the job of the fund manager is to beat the average of the investable universe (which is basically equivalent to a broad-market index). As he says, you can start by choosing which companies are good or you can start by choosing which companies are the bad ones. The key point he makes is this: it's very difficult to choose between the good and the good, but it's easy to choose between the good and the bad. You need to look at dozens of things to decide whether a company is worth investing in but even one or two strong negative points are enough to decide that you must not invest in a company, no matter how positive the rest of the factors are.
Arora, who has a great earthy wit, says that most selections in life should be done like this, including choosing whom to marry. I think he has a point there. I'm well-settled in that department for many decades now but those of you who are still looking could do well to pay attention to his advice.
Armed with this idea, one can just eliminate half or more of the starting investable universe. This is a great starting point: doing just this much puts you above the average investor or the general market. Now, the task remains of choosing between the good and the good. However, a mistake in these good-vs-good choices is not going to have a disastrous impact on your investment. You might do well or a bit better but you'll be fine. You'll meet your financial goals.
The interesting thing is that this is exactly what Value Research does for you. On the face of it, we choose some stocks and recommend them. However, what we actually do is reject most stocks and recommend the rest. Over the years, at Value Research, we have evolved our own framework for evaluating and selecting good stocks. It begins with the entire universe of listed companies and applies a series of conditions, filters and checks. Interestingly, because of the perspective we have, we have always understood that a framework for selecting good stocks is as much a framework for rejecting bad stocks. We have developed a set of conditions that are absolute no-go for stocks. No matter how good a stock looks otherwise, if it qualifies on one of these negative factors, then we absolutely will not consider it. After that, we have a set of qualitative and quantitative factors that we apply to further narrow this down to a list of investable companies that we recommend.
The funny thing is that this is also the way we tell mutual fund investors to use our universally trusted start-rating system. Investors always keep asking what to do if a fund falls from five to four stars or something like that. In response, I always say that the real value of the system is in avoiding the one- and the two-star funds. If you do that, don't worry the rest will work out fine.
Doing this elimination task on scale (and continuously) is a big task for an individual investor but at Value Research, we have a well-honed process and a team for it. To take advantage of this, you should take up a membership of the service. Let me just recap what you get when you become a member:
The entirety of the service is especially useful in a bits-and-pieces, up-and-down market we have had for some time now. What we do is to give you the selection, as well as all the inputs you need for you to maintain the strength of your convictions. A major part of our job is to keep in touch and support you during times like this.
So, come and become a member, invest in our picks and be secure in the knowledge that not investing in what we have rejected is an important part of your investing strategy.