“Don’t invest in pieces of papers (stocks), invest in great businesses underlying them” – Warren Buffet

“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” – Warren Buffet

These quotes by the master investor sums it up that investing is all about putting your money in the right businesses and watching them grow over many many years. You need to have a farming mindset rather than having a short term hunter mindset to be successful in creating wealth in long run.

Unfortunately markets and their short term oriented players always come with new fads and themes like Dot com companies, E- commerce, Infra/ real estate businesses, Bio tech, Subprime mortgages, Gold ETFs, BRIC, smart Beta indexes etc. which takes the markets and specific sectors through an irrational exuberance which creates short term wealth but they ultimately burst to destroy all what was created and play havoc with the investor’s minds

But there is always one theme which has stood the tests of time – Long term value investing in quality businesses. This has been an evergreen theme which has never run out of fashion.. It’s amazing that all the successful investors in the world (including Warren Buffet, Charlie Munger, John Templeton, Peter Lynch, John Neff, Carl Icahn, David Dreman, Benjamin Graham, even our own Rakesh Jhunjhunwala) who made billions of dollars from stock investing (except for one notable exception of George Soros who was more of a trader and speculator than an investor) have only one thing in common. They all followed the basic tenets of value & long term investing with some adaptations. Despite their remarkable success in beating all the indexes and benchmarks consistently for last many decades, most of the market participants including institutional investors(FIIs, domestic mutual funds, leading brokerages and investment banks, retail investors etc.)still don’t follow the basic tenets of value investing(safe and long term investing) and only pay lip service to it.

I find it unbelievable and shocking and can only ascribe the following reasons for this behavior
- Temptation/ greed to make a fast buck and fortune overnight (instant gratification)
- Focus on short term goals of beating the other mutual funds or hedge funds
- Herd behavior of most of the market participants including the big institutional buyers
- Lack of patience and discipline which is required by a long term investor
- Lack of conviction on one’s beliefs or stock picks leading to bouts of fear

Let me give me my own example of how patience , conviction and discipline around sticking to the principals of long term investing in quality businesses has helped me to beat the markets consistently through my model portfolios year after year.. I have been diligently publishing my model portfolios since last 4 years (since 2013) which have been handsomely beating the market (Sensex) by good margins. As per the day close on 15th September , am publishing the relative comparison of my model portfolio gains% against Sensex performance/gains % with respect to the date of initiating the model portfolio(1st January of the specific year)

Portfolio performance sep 2016.docx

You can check the live portfolio trackers on the blog. I am posting the latest status below for your reference (check it out). It’s very apparent that rigor and discipline of long term investing in quality businesses has helped me too in beating the markets consistently over many years.

2013 Portfolio performance sep 2016.docx

2014 Portfolio performance sep 2016.docx

2015 Portfolio performance sep 2016.docx

2016 Portfolio performance sep 2016.docx

In past I have published my methodology in picking up quality businesses – strong/ unique business models, good revenue visibility, competent management, and robust financials (excellent balance sheets & Return on capital) and attractive/fair valuations. Pl refer my blog-”How to pick winnng stocks and stay with them” dated Sep 14 2014

Investment Framework4

My views on the current market situation and the implications for retail investors like us :-

The market is interestingly poised at a fair valuation now with Sensex PE at about 19, same as the long term average for Sensex. Market cap to GDP ratio (described by Buffet once as the best single measure of where market valuations stand at a given moment) stands at about 70 % while the long term average is at 78% . Even from a 1 year forward earnings perspective (PE 1 year forward), its fairly valued at about 16 . The factors which are going to drive the market going forward are global as well as domestic – Global liquidity surge , Fed rates potential increase, Chinese economy/market stability , Monsoon play, 7th pay commission rewards , reforms roll out(GST etc.) . Apart from these factors which have a speculative play; corporate earnings growth will be the key factor driving the markets in a sustained manner. Last quarter (Q1 of FY2017), the corporate results showed some semblance of growth coming back(with revenue and profits growing up by high single digit numbers). Hopefully the growth will increase its pace in next few quarters and take Indian markets on a huge and sustained bull run , led by increasing urban and rural consumption trends and capital/ infrastructure investments by the government in the second half of FY17.

My fav ever green sectors and stocks where I am investing now for long term(at least 3 to 5 years) are some of the names in my 2016 model portfolio like Housing Finance sector (India Bulls Housing Fin, Dewan housing , LIC Housing Fin), Private banks(Axis bank , Yes Bank), Pharma(Aurobindo & Torrent), IT companies(HCL Tech etc.), Auto(Tata Motors, Maruti) and Consumption driven sector(Bajaj Finance, PC Jewelers). All these businesses are quality businesses with durable competitive advantage with excellent returns on capital(ROE), strong balance sheet, competent managements and stable growth records (in last 3 to 5 years) and yet available at under-valued or fair prices, providing a great “margin of safety” for value and long term investors.

Cheers
Wish you a happy investing
Amar