Dear Bowling Coach, Here’s My Journey As An Investor

(Image: BloombergQuint)

Dear Bowling Coach, Here’s My Journey As An Investor

BloombergQuintOpinion

I became an investor by accident. Through college, I did not have much interest in stock markets. The sports page and RK Laxman’s cartoon were all that I cared for. After graduation, I started interning with A.F. Ferguson & Co. (AFF, now part of Deloitte Haskins & Sells) and that is when I started to learn about businesses. Even then, markets weren’t on my radar. I was keen to know how cement was made and what compressive strength meant but had no interest in ACC’s share price.

Dear Bowling Coach, Here’s My Journey As An Investor

All that changed when I made my first investment at the height of the original technology frenzy in 2001. A colleague burst into the AFF office one morning with a ‘100% tip’. I didn’t even bother asking whether the 100% was a way of saying it was a sure thing or was that the expected return. Neither did I ask him why was a hotshot technology company named after a scenic apple-growing state in North India.

After some rushed paperwork my first stock was bought with two months of internship pay. Over the next few weeks, I realised what the 100% meant. I lost (almost) all my money.
The BSE building and the Mumbai skyline in the early 2000s. (Photographer:Scott Eells/Bloomberg News)
The BSE building and the Mumbai skyline in the early 2000s. (Photographer:Scott Eells/Bloomberg News)

I took that loss personally and resolved to recover my ten thousand rupees from this fraudster called ‘Mr. Market’. That’s when the markets bug bit and I was sucked in. I continued studying businesses and why stock prices changed but I did not invest at all for a few years after my 2001 debacle. The next share I bought was Shree Cement in 2004. During my internship, I had spent a lot of time auditing cement companies and had gained some industry understanding. The rationale was simple. Shree was a low-cost manufacturer with factories in areas where infrastructure-led demand growth was likely to be high. It was also undertaking Balance Sheet repair, that if things went well, would improve shareholder returns. Also, this time the investment was based on own analysis; no tip involved. I don’t remember the exact buy price but it was in the vicinity of Rs 200 per share and I bought 20 shares.

I remember the exit price though. The stock had done really well and the price was Rs 1,000 in mid-2006. I was getting married and had to sell Shree shares to buy white goods.

The majority of Rs 20,000 that I got from the sale went into buying a washing machine which we still have. The missus sometimes catches me staring at it, for at almost six lakh rupees in today’s Shree Cement price, I am sure it is the most expensive washing machine in the country.

<div class="paragraphs"><p>(Image: Swanand Kelkar)</p></div>

(Image: Swanand Kelkar)

My journey as an individual investor really started in 2011. I had started to accumulate some investible surplus and that’s when I made certain ground rules for personal investing.

The main ones were:

  • I won’t buy anything without writing a rationale;
  • At no point will my personal portfolio have more than 10 stocks;
  • My holding period would be forever. Specifically, no event trades.

The first serious trade I put on as an individual investor was to buy Cholamandalam Investment and Finance (CIFC) in August 2011 and I still hold the stock. Before we go any further, two things need to be clarified.

First, unlike mark-to-market screen-shots on Twitter, this is not a gloat post. As of May 31, 2021, over 40 companies in BSE 500 have a decadal CAGR better than CIFC. From that standpoint, I have no bragging rights and yet with a CAGR of 33% nobody can argue that CIFC was a bad investment.

Second, all my personal investment was done within the Compliance rules of my former employer. In fact, the rules of a 10 stock portfolio and holding period of forever came from the reality that I wouldn’t have much bandwidth to trade personally. In the past ten years, on average, I have put on less than three trades per annum.

My first meeting with CIFC happened in July 2011. I was in Chennai for a couple of days meeting the big corporates and had a free hour in the afternoon. I was going to be at Dare House to meet another Murugappa group company and I decided to meet CIFC as a filler as its office in the same building. I flipped through the annual report the night before and what I saw didn’t enthuse the portfolio manager in me. The market cap was Rs 1,800 crore with a free float of just over 20%. Even if I liked it, building a position in an institutional portfolio would have been a challenge. Yes, the company had shown some signs of turning around in FY 2011 but its book value had remained unchanged between FY2004 and FY2011. Return on Equity was in single digits and the stock was already trading well above book value. I closed the annual report and mentally marked it as ‘industry insight’ interaction.

I remember three things from my first CIFC meeting. One, that the CEO S Vellayan was sitting in an open office on a Swiss Ball instead of a chair. Everyone within earshot was privy to the entire meeting. Two, Vellayan was candid about the mistakes of the past few years especially the ill-timed foray into personal loans and three, we spent a bulk of the meeting on one slide that had a triangle drawn on it.

Dear Bowling Coach, Here’s My Journey As An Investor

I was impressed with Vellayan’s forthrightness, clarity of thought, and willingness to talk about numerical metrics as barometers of progress.

I waited for another quarterly result, just to see if CIFC walked the talk and they did. I wrote a rationale essentially documenting the ‘triangle’ discussion with Vellayan and bought 1,650 shares worth Rs 2.5 lakh in mid-August 2011. The shares have since undergone a 5:1 split and the original two and a half lakhs is worth more than Rs 46 lakh today; a CAGR of over 33% excluding dividends.

<div class="paragraphs"><p>(Image: Swanand Kelkar)</p></div>

(Image: Swanand Kelkar)

A lot of changes happened in these ten years; in the economy, in the financial services space, and within CIFC itself. My investing approach was what Warren Buffett calls ‘lethargy bordering on sloth’. I used to eyeball quarterly numbers and occasionally interact with CIFC representatives through calls and meetings. As long as the promoter intent and ability and the opportunity for growth remained intact, I did not bother too much with regulatory changes, CEO changes, quarterly misses, monthly stock price gyrations, or even valuations. No Price-to Book versus Return on Equity charts, no top-down view, no relative return comparison.

But the lethargy didn’t mean I learned nothing from owning CIFC for a decade.

The most underappreciated facet of long-term investing is that the investor grows with the investment. You come seeking blessings of Goddess Laxmi but stay for those of Goddess Saraswati.

Right from the first meeting, Vellayan spoke of drivers of Return on Total Assets (RoTA). Over time, super-imposing growth and capital requirements on RoTA change became my preferred framework for analysing lending businesses.

He also spoke of the use of technology almost a decade ago and demonstrated a use-case in his office. Collection staff armed with handheld devices were uploading collection details without having to come back to the office with sheaves of paper, and this was in 2012. We discussed how counter-cyclicality can be built into a mono-line business; by choosing product lines with little or negative correlation. The most fascinating meeting was when Vellayan described his journey from Delhi to Mumbai in the cabin of a truck. My meetings with business heads and the CFO, Arul Selvan were insightful too, and importantly, the overarching message always remained the same; across time and across personnel.

So what’s the point of all this, you ask. This column was triggered by a conversation with my 28-year-old bowling coach who told me coaching was his hobby and ‘day-trading in F&O’ was his job.

I told him to be careful to which he proudly added that he takes no risk as he never takes delivery. In the cacophony of BTST (Buy today, Sell tomorrow), Telegram chats, live ‘expiry trading’ sessions and daily P&Ls, I wanted the tiny voice of long-term investing to be out there. Even if no one else does, I hope at least my bowling coach reads this.

Swanand Kelkar is an investor and former Managing Director at Morgan Stanley. Views are personal.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.

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