Investment Wizards: Learning from the Strategies of Legendary Investors
Tuesday, Apr 23, 2024
The majority of people see “investing” as the most complicated thing there is to deal with. Why do we say that?
Not because it is, but because when the real money gets associated, everybody will break a sweat without running in a marathon.
With the most valuable thing called money, our need to make more, but at the same time having to risk going out of our comfort zone, while also seeing others do great at it, leaves us with a mixed feeling of expression.
To be like, “Let me try and see," but “What if I lose my money?”, “Look at this legend, nailing it.”. Well, how do I?
There is something these legendary investors do and you need to observe what they actually do. Let's take our time to see what they are up to in this article.
Legendary investors for greater inspiration
What are these legends doing? They are into fundamental investing with greater disciplines to make that chunkier money than you normally do. Let’s see their action so that you can get some inspiration, though GreenPortfolio is always there to make you invest wisely with our fundamental strategies in place for smallcase investing.
Ben Graham
Not many of you have heard, but this man is an investment manager and a popular investor who follows the discipline of investing.
His philosophy is to buy stocks when their value is lower than their actual worth. While looking at the most important things about that company, such as debts, profits, and cash,.
To make it simpler, if a bike costs $1000, which it's worth, you take it when they are selling it to you for $500. While you buy it, you must care for high profits, low cash, and plenty of cash.
If this is so, it means you are paying less for something that's worth more.
Besides this, Graham knows that the market is never predictable, and even a well analyzed stock can play badly sometimes. He considered keeping a margin of safety to be calculated before purchasing it on the basis of intrinsic value.
The market prices don't represent the real worth of the company, rather, they are noises that aren't true. You must find its intrinsic value, in our example, it was $1000, assuming that its true intrinsic value is $600, which gives the margin of safety as 40%. If you see, it's still profitable from the time of purchase.
Even if you sell it for $600, you are making money.
Quickly, let's define his stock selection criteria:
- Current assets must be double the current liabilities. If so, it can surpass recession.
- It must have had positive earnings for the past 10 years and there must be a track record of it.
- The earnings per share must be more than ⅓ over the next 10 years. Compounding annually with a YoY of 3%.
- The earnings of the company must be greater than the share price. Therefore, the PE ratio must be below 15 and a cumulative PE must be below 20. To ensure short-term volatility is not a concern.
- The last check is for safety and value! The p/b ratio must be below 1.5. The ratio gives you the real value you get to receive. If the book value is greater than the share price, you just need to rest assured.
He says, “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
How has Ben Graham tackled the economic downturn, which we call “a market crash”?
It’s hard for even intelligent investors to go through but they do and learn from it. From 1922 to 1929, Dow Jones was in a great bull market. People around that time had to make great returns, no doubt. Ben’s second fund almost overtook the market by 25.7% annually from 1925 to 1928 against Dow, which made around 20.2%.
While everything was going just great, none anticipated a crash that eventually took Dow Jones down by 90% overall in four years, while Ben’s fund was down by 70% overall during that time.
It was very common to use leverage to make more potential returns in the bull market but very few know how devastating it is to have to use it during losses.
- Graham, swears off on using leverage.
- Having bought at a cheaper price, leveraging that fact, but when the market gives opportunity year after year, if you don’t take a selling decision at some point, it no longer will seem valuable.
- When you experience something worse, you mentally change, although he recovered financially by 1935.
What we get to infer is that:
- Justify any stock purchase with objective reasoning and a margin of safety. (That is how he normally purchases with the value investing principle mentioned above.)
- The market is never the same and hence, when you understand how you buy, you should also understand when you will sell. This emphasis is based on his experience in the four years of loss.
- To avoid being mentally damaged, it's essential to be backed up. He suggests having a percentage of investment in bond equivalents.
That’s both sides of the value investing principle that Ben Graham used with his investment experiences to stay in the market. The man, who is also Warren Buffet’s mentor, says stock value doesn’t represent the business’s value. People fear misunderstanding this to be irrational in the market and that’s why it is important to understand the intrinsic value that justifies your purchase.
Warren Buffett
The man who doesn't leave your mind for the mastery he exhibited in the domain of investing. No wonder how disciplined he was to make such a success.
We have been hearing this, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
That's right, you need to hunt for those who have good positions and economies, and he refers to them as “wonderful companies.”. They are the baggers who rarely come to cheap prices, as opposed to fair companies that frequently get sold.
Even if you purchase them at a high price, they seem to rally beyond it, while the fair companies never reach that price.
So it means you need to wait for such an investment to invest in a great company at a fair price and when opportunities come, you need to invest heavily.
When most people around the world during COVID suffered losses, that's when Buffett entered. It's more about the behavior of investors than the fundamentals of stocks.
Even if you make only 20 investments in your lifetime, you are conscious of the way you buy or sell. It's important to never lose money and to never forget to not lose money. It's only a matter of whether you were right and how many moves and strikes you take.
Most people only think they are safe until the real wave comes. He has been able to wave it with value investing. Here's how he picks businesses:
- You must understand the businesses you are investing in, just like you would as an angel investor.
- The quality of the company must be high, with earnings that are predictable.
- The management is consistent and strong.
- They must have a competitive advantage.
- Past history of stability and profitability.
- Who has a manageable debt ratio?
- It must be undervalued to buy it at a price when you know it can make money in the longer-term.
Although Warren's philosophy is influenced by Ben Graham’s strategy, the unique thing about his strategy is that he invests in companies that he understands. Take the example of his investment in “Coca Cola.”.
It was the late 1980s when Warren Buffett first started to buy shares of Coca Cola. After a stock market crash in 1987, he found the opportunity to buy a quality company at a lower price.
His conglomerate company, Berkshire Hathaway, continued to increase its stake in Coca Cola Company. His stakes in this company still persist and have been multiplying ever since.
The principle behind investing in Coca Cola is value investing, which is what we've been talking about. The recognised brand in the beverage sector had its challenges when people moved towards healthy options but the brand could adapt. You can see Coca cola has a diverse product portfolio, which could align with changing needs.
It's Buffett who stuck to his conviction about the value of a brand despite the changing industry. Looking at the management, he found trust in them, who surpassed expectations through various market conditions.
Dividends are another thing that Buffet liked about Coca Cola. They increased their dividend payout to the investors, making the investment look more attractive to all. It speaks of the company's stability and financial health. The company has consistent and reliable earnings. Moreover, holding on to such an investment for the long term could help him pave the way.
His understanding of the company and its competitive edge helped him stay consistent with his investment in Coca Cola. It is Berkshire's 4th largest position, which is worth more than $23 billion, whereas the dividend alone is $736 million. This was achievable because it's a decades ago investment of $1 billion back in 1988 and moreover, the dividend grew more every year for 61 consecutive years, which Coca Cola ensured would give this value to their investors.
Radhakrishnan Damani
A legendary investor from India is known for his business, DMart, and for being a multi billionaire investor. Like all the value investing fans, he is one of them too.
But he has a trading history as well. In the Harshad Mehta scam, where few selected stocks were purchased, Harshad Mehta kept on buying, making the price of the stock over the head. Damani realized that it was inflated artificially and he kept short selling those stocks. Though losses occurred , he didn't let it go until the point Damani had to reach bankruptcy, but that one news broke the silence, and Radhakrishnan made loads of money.
He says making money in trading is much harder than in investing . But his investing corpus was built using trading money
Being an investor, market sentiments are never his focus but rather the fundamentals of the stock. He looked for stocks below their intrinsic value with strong fundamentals including cash flow, earnings, competitive advantage, and growth.
He believes in the long term over the short term and diversifies his portfolio to keep the risk lower. All the while being patient and leading his thoughts independently. Whenever there is a need to readjust the portfolio, he has taken the time to do so.
Cutting short on his philosophy:
- Believes in value investing, similar to Warren Buffett
- He looks for long term opportunities, which are for 5 to 10 years.
- He evaluates good stocks, buys them, and sells them upon reaching their true potential.
- Patience is essential to staying in the game.
- Don't get allured by his independent actions and stick to them.
- A bear market is an opportunity to buy and not sell.
Let's look at Damani's investment in VST Industries, a business in cigarette manufacturing. From 2001 onwards, Damani invested 63 crores in VST industries. The share price was 65.85 in 2000, now it is 3915 per share as of today. Currently, with a 32.7% stake in the company, he has 50,43,139 shares held, which are worth 1,979.4 crores as of March 2024. His current stake changed to 35.84% in April. Which also gives a dividend.
This investment depicts his value investing philosophy, compounding, and timely readjusting by decreasing or increasing shares.
Rakesh Jhunjhunwala
This great person is more popular among the Indians and known to all. Surprisingly, his corpus for investing came from trading and he started his trading journey with Rs 5,000, and he says that made him a huge amount of money, of course.
He is both a trader and an investor who excelled in both, known by the name of the big bull of Dalal Street. Let's see what his investment principles looked like:
- When you are convinced about the sustainability and business model of a company, you just need to stick to it.
- In depth fundamental analysis is the one he relied on, which included growth aspects, fundamentals, and financial health.
- The longer you wait, the better it is. So he avoids short term fluctuations coming his way.
- He isn't interested in already performing stocks but rather in undervalued stocks that have potential for growth.
- His preference to focus on global and macro level factors has helped him look into the portfolio accordingly.
- He remained invested in a portfolio with different sectors in it.
We can closely relate his investment in Titan to value investing. With a 5.1% stake in Titan, it is worth 11,000 crore.
To give a little background, between 2001 and 2002, Titan had its challenges and the share prices went up to 29 rupees per share. He bought it at 30 to 35 rupees per share.
What did he see in this stock to purchase?
- Prices are available at the lowest.
- Sustained increased revenue in 15 years.
- A brand name with profitability
- Prior to 2001, there was a higher return on equity.
- Although poor profit exhibited for 2 years, the operating profits remained stable.
- The internal and external factors impacting prices can be temporary but there was correction in prices that took place.
- Using net current asset value to find out stocks whose market prices are below the intrinsic value of the company.
That purchase had many intentions before it was bought and it includes some of the above thoughts.
Well, now it's a multi bagger for him in his portfolio.
The Wrap
The legends that you look forward to were able to do so with misses and hits together. Everything that looks like a hit, is seen in the portfolio only after readjusting it over time and not otherwise.
Most importantly, the value unfolding took years for those who had long term vision to wait and see what an undervalued stock with greater intrinsic value could do.
That's about the story of the legends to motivate you to do value investing rather than only relying on pure speculation. Although the instances of one stock were taken to explain the process, there were many such value-invested stocks in their portfolio that made it to overall success.
Green Portfolio can help you reap the best of your portfolio with well thought stock selection for any type of goal through smallcase investing. We've been doing it, and we'll continue to do it. Learn about the smallcase share price by contacting us.
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