Dear Beneficiaries,
Since coming across Value investing in 2017, its principles and rational approach to investing and life have had a material impact on my personal and professional life. Finally in 2023, after a decade-long corporate career, we set ourselves up as a professionally run organization to compound long-term capital at high rates of return.
OUR PRINCIPLES
Honesty and truthfulness in our effort and results
Essentialism and discipline of doing less, but better
Test, iterate and learn new uncomfortable areas
Have fun along the journey
We aim to measure our annual output not just by financial results, but also by quality and depth of research and insights. We always endeavor to set our work environment akin to a research-oriented place, that happen to take action in public markets occasionally.
OUR INVESTMENT PHILOSOPHY
We own pieces of real businesses and are owners of the same. We aim to find owners who think like us and whom we would ourselves choose to run that business. If we don’t like the owner, we won’t invest.
Share prices is not an outcome an owner is focused on- Share prices are an output of work well done by the businesses- including taking care of customers, employees and other stakeholders.
Share prices don't provide any information for our relevance, other than a comparison to the real value of the business to allow us the possibility to buy more (at lower prices) and sell (at extreme overvaluations). Most of the time it is irrelevant to us. We aim to assess business performance by direct communication from the owners a few times a year and an objective assessment of results.
Every business (like a sportsman) has ups and downs and is to be expected. We give benefit of doubt (in bad times) to great owners on their abilities to recover and increase shareholder value over the long-term.
We think of ourselves as collectors of various businesses in our portfolio.
OUR SECURITY SELECTION CRITERIA
We believe that to invest successfully for the long-run, one needs to minimize mistakes, learn constantly and stay in the game for the long-run.
Finding such businesses which have the ability to compound your capital at very high rates of return are very rare and if we happen to find them very often, we are likely to be wrong.
As we mentioned in our blog, we believe the equities are meant for outsized returns only.
To find successful investments, one needs either very superior insights (which are typically developed over a long period of time in one’s circle of competence) or a significantly high discount or optionality.
Hence in our framework (as above), we aim to play on the upper side of the pyramid , where good businesses are deeply undervalued, that even with mediocre insights one can achieve very high returns while minimizing the possibility of downside. As Charlie Munger says, in the long run, through decades of learning , one may get 5-6 such unique insights that will be home runs. We are not in a hurry to reach that and believe they will come on their own based on our hard work and a bit of luck. We aim to find deep discounts to our estimation of intrinsic value, constantly increase our opportunity costs and measure our position sizing vis-a-vis discount and business quality.
Since we are in the early years of investing journey, we believe that there is not much edge in buying slightly undervalued businesses trading at small 30-40% discounts to intrinsic value. Generally market is efficient in valuing them and there is not much upside worth playing for. They directly go in ‘too-hard’ or ‘not worth it’ pile. The good hunting grounds are markets or securities which are deeply priced inefficiently due to one or multiple reasons-
Certain section or industry or country considered uninvestable and deeply hated
Long fatigue with the owner operator of the business…. A great founder (with long term track record) is going through a tough time
Very complex business… value unlocking demands patience
Deep optionality embedded in the business that market is unsure of pricing
OUR PORTFOLIO CONSTRUCTION APPROACH
Position sizing provides an ability to benefit from the public market volatility and maximize returns at a given risk level. Our experience of public markets have shown that following events in public markets are to be anticipated and one must be prepared to be resilient and ideally antifragile to them-
A slow, secular declining core business starts accelerating its decline rate (Streaming businesses)
Great undervalued companies can become insanely undervalued (Meta)
Unknown risks come out from somewhere (e.g. regulations in China businesses)
Undervalued businesses can stay undervalued for a long long period despite strong business results (Our Cable Businesses in Europe)
A business one bought quickly doubles disallowing possibility to add more (Bajaj Holdings)
To tackle such situations, the best tool in the hand of a portfolio manager is the right position sizing. Based on our personal learning and insights from this wonderful writeup (Bronte Capital: When do you average down?), we have kept simple guidelines to help keep us disciplined and not get carried away . We aim to keep 5-6% start position to allow us to add on further drawdowns and insights and keep an upper threshold of 12%. For businesses with likelihood of technological obsolescence and/or levered business models (including Banks or Insurance businesses), we keep them small in size (start position 3% and maximum size of 5%).
In 2023, we read and did research on multiple companies, but ended up with just three decisions based on our criteria.
HOW WE SPEND OUR DAYS
We believe that successful investing needs a combination of width & depth: width to keep ourselves open to serendipity from broad sources , and depth for better understanding of our core businesses.
We try to do so by focussing in three domains-
Macro- Reading business newspapers or magazines
Mid-funnel - Company deep-dives via Investor days /Business breakdowns of companies we would want to learn about
Core Portfolio- Regular monitoring and tracking of industry and business updates
OUR CURRENT PORTFOLIO
Below is a snapshot of composition of our portfolio as of December 20, 2023 that has developed over the past four years of investing our own capital.
Category 1 : Forever Gems
This is a very special category as it is the holy-grail of long-term investing in wonderful businesses at a very very cheap price . Opportunities to own such gems (at deeply undervalued prices) will come very rarely and we aim to pounce them with big amounts when they show up and then not squander them by selling them .
These are the businesses which depict very high returns of capital (>25%) , have a moat (that is insurmountable and will take years for someone to replace) and are dominant in their categories by huge margins by far. This is the reason why we aim to keep them in our portfolios forever and are not looking to be opportunistic with this section of the portfolio.
We believe that keeping a select portion of portfolio as hold-forever is a wonderful approach and frees a portion of our net-worth away from decision-making, avoids mistakes of buying mediocre businesses (that may look cheaper than the gems) and also providing last-mile- liquidity for any unforeseen circumstances. We believe these businesses are the highest quality franchises and we are collectors of them in our museum.
META platforms
We acquired Meta platforms at an extremely undervalued average price (~ $ 120 /share) . This is a business which dominates the attention span of 3 billion people on the globe. This dominance provides it a significant ability to roll out new avenues of growth via new products/ features at a very fast pace and global scale leading to very high returns on invested capital. Once you have such a large pool of people on your platform, the optionality is infinite and sky is the limit. We believe the culture at Meta will enable it to iterate and launch new optionality multibagger bets. We are very excited for what Meta brings in AI and Virtual reality , its two biggest bets for the next decade.
We believe it is very very hard for any new player to imagine building a platform of 3 b users globally in the near future and this allows Meta with strong barriers to entry. We aim to be very very long term holders of this business and wonder at its ability to do amazing things . We couldn't imagine a better person to run this business than a young, inspired , extremely long term focused and visionary Mark Zuckerberg.
Prosus
Prosus is one of the rare investment companies which have proven to have a very long term vision and holding periods in its highest conviction investment (ie Tencent). Tencent is one of the world’s best businesses which dominates China through its platform. Tencent itself is a rare gem blessed with a capital allocator who has a long-term track record of providing capital and its platform to build next generation big businesses in China.
We believe Tencent is highly undervalued and on top of it, Prosus holds Tencent and few other investments at a very large discount (40%) allowing us to ride the journey of long-term value creation.
We also like Prosus other pool of investments in e-commerce, food delivery, and payments. We are lucky to own such a high-quality business at extremely low prices and hope to keep it in our museum for a very long time.
Prosus allows us an extraordinary capability to invest in next generation innovation in China (Via tencent) and other geographies via its own focused investment portfolio.
Bajaj Holdings
Bajaj Holdings holds primarily Bajaj Finance at a deep discount to NAV (50-70%). Bajaj Finance is a rare proven gem in India finance sector which is an excellent operator and has managed to dominate India’s financial sector with tons of long-term valuable data on customer’s credit profile and profiting from it. Such a vast pool of customers provides it a perfect platform to launch adjacent products and increase Lifetime value of a customer for a long period of time. We have owned this business for 3 years till now and are happy considering ourselves as partners and long term owners like the Bajaj family.
We believe it was a very unusual time in the past three years with Covid , China uncertainties and various other factors that provided unbelievable opportunities to buy these gems at unbelievable prices. In normal times, we believe these opportunities will be very scarce and we may get only a couple such opportunities to buy such gems in a 5-to-10-year period. We don't aim to squander such a lucky opportunity we got in the 2020-23 period by selling them even if they have increased materially from our buy prices.
In a short period of time, we have been lucky to be able to buy 3 such outstanding gems in our portfolio and today compose ~ 25% of our portfolio.
Category 2 : Deeply Undervalued , Good Businesses
This category of portfolio holds a portfolio of good business (>10% ROE) which are deeply misunderstood or ignored or rejected by the vast investment community.
We don't see this pool of businesses as forever gems, however we buy them at such deep undervaluations and aim to profit from market recognizing their worth (in near to mid-term). We have no idea when the market will do so, nor aim to make such guess - but aim to find businesses which are growing intrinsic value per share over time (via growth or buybacks or other catalysts)- so that time is on our side while we are patient.
We aim to rotate these businesses as and when they get closer to intrinsic value or we find materially better opportunities .
Almost all of the above businesses are above average businesses run by capital allocators with a long term track record and currently trading at significant discounts to our estimate of Intrinsic value (ranging from 50% to 66%).
Barring a few corporate run businesses, every other business is founder /owner led with a significant part of his net worth invested in it. We are extremely excited about this part of our portfolio as we expect it to provide significant returns from the depressed prices from here in the next 3-5 years. A few of the businesses in this category may well turn out to be long-term holders in Category 1 and we will continue to monitor their progress on this path. In a blog , a few months ago, we wrote about various compelling themes on which our portfolio has naturally adjusted towards -
China
The China story needs no introduction to any investor given the dynamics of the political and regulatory environment over the past 3 years. This has resulted in severe price falls for Chinese equities. China is being termed as an “uninvestable country” and equities are priced for a bleak future. That creates a potential hunting ground with notable good businesses trading at deep discounts. As we run our own capital with no time horizon limitations, we are happy to sit in the China story even if it takes a long time for tide to turn in its favor.
Meanwhile, the in-country management, who is most aware of the situation on ground, is taking advantage of the lower share prices and increasing our ownership via buybacks.
India financials
The story on India financials (primarily NBFCs) has been even bleaker for 5+ years . Various names have been beaten down in valuations as ‘dead businesses’ and accorded zero to insanely low multiple to book value even after accounting for significant NPA provisions and clean ups made to the Balance sheet over the past five years.
While lending balance sheets can somewhat be a black box for an outsider to figure out, but one can find several names where one doesn’t need an opinion on this piece.
Market is providing opportunities to buy depressed diversified financial services businesses where one is paying nothing for the lending business and getting the big upside for free whenever the economic environment improves.
Cable industry
Cable businesses represent the third lot I find deeply undervalued. A stable predictable Free cash flow industry is undervalued on multiple concerns of competition, slowing economy, leverage and other concerns in the US and other developed geographies- people have divided opinions on whether that is justified or not.
However, if you look outside the US, one can find some names which don’t even need an opinion on such issues. Similar to better quality cable assets are trading at even deeper valuation discounts and providing opportunities to own cable businesses in various geographies of the world for free. The insider buying + stable Free Cash Flow + huge annual buybacks add juice on the top.
Media Assets
The legacy media industry has gone through a lot of pain via multiple headwinds of cord cutting, increasing content expenses, lower monetization and increased competition over the last decade.
As is natural, this has led to significant consolidation in the space with major players namely Netflix, Disney, Warner Brother discovery and Paramount.
We own a couple of so-called legacy media companies in this space.
Both of these businesses have very high cash flow generating (though transforming) linear cable business, alongwith investments in Streaming which is depressing the long-term earnings potential of the business. From our perspective, the market is overly concerned about the declining linear business. These businesses have tremendous eyeballs in the US and across various countries. We believe those eyeballs will slowly transform from one mode of consumption (linear cable) to streaming over time. We firmly believe that the linear business (even with a smaller base) has a long-tail and is currently under-estimated. On the top of it, the market is ascribing no value to 100s of years of IP in these assets which can be effectively leveraged to launch a high quality , yet lower cost streaming business. We believe the streaming services are very low priced in comparison to value they provide and expect long term pricing power of these businesses in these segments.
Given where the stocks trade at, we expect the intrinsic value of these assets to be at least 3X.
Our top 10 bets in Category 2 comprises ~ 55% of the total portfolio
As is possible in this game, some of the opportunities will not turn out to be as big as hoped, but as long as risk is limited and upsides on a few turn out to be multibaggers, the returns should be satisfactory.
Category 3 : Laboratory - Test, and Iterate
We have learnt that the best way to understand more of a business you like or admire is to take a small tracking position. When one has a stake in the business (even if minute), there are far better incentives to deeply assess and appreciate the intricacies of a business than sitting on the sidelines.
This is a category wherein we venture in new areas and territories with small positions (as per our third principle), we test our hypothesis by learning more about the business and over time either increase our position sizing (to a core position) with conviction or exit the business.
Concluding Remarks
We are pleased with how 2023 went up to set ourselves up in this long journey of learning. With the base established, we aim for 2024 to step up the pedal on the accelerator.
There is nothing in the world which is better than being independent, working for yourself and being excited everyday when getting up to learn new things. It is a blessing to be able to do so and be born in a world which provides such opportunities to carve out a niche in line with one's capabilities and passion. It does take a good mix of imagination, creativity and discipline to make the most of it. I always remember a line from Warren Buffett that sums it all “If you are going to spend the eight hours a day working, the most important is not how much money you make, but how you feel during those eight hours and how interesting what you are doing is “
Life is short and there is not much time in this world, and we aim to utilize it to do what we like the most. It is not meant to be lived the others’ way or in a timid way, but on a high note based on our own principles.
I hope everyone finds that work for himself sooner in life. Have a good year.
Akhil Dalal