Q3 2021 Portfolio Update
In this update, I aim to reflect the thought process , activities and the process over the last 18 months that led to the development of current portfolio.
Back during Covid sell off in March 2020, it was significantly easy to pickup businesses which were statistically cheap with very low probability of any error at those prices. The challenge was to decide the level of concentration to be made in them as almost everything was available with sufficient margin of safety and positioned to generate great returns .
I ended up creating a diversified portfolio of 20–25 businesses . However, some (not all) of them were average businesses and in a very short period of time, reached to my assessment of fair value in a time period I had not expected at all. With the fast return to the fair valuations, the portfolio needed to be churned very quickly and concentrated in long term compounders. That meant diligently assessing if the current holdings deserve a hold, or sell even at those prices. Positively, the ample time available in the past 18 months during the pandemic lock-downs allowed me to make those decisions .
Today, as I look in the portfolio, the portfolio seems well positioned to the point which would need no-to-minimal turnover for a significant period of time. The way I look at the portfolio (snapshot below) is my ownership stakes in these dominant and good return on capital businesses primarily run by owners or managers with significant skin in the game.
The above 9 major group of businesses represent ~ 90% of portfolio at current prices (as of Sep 30, 2021).
At first look, The portfolio would seem heavily concentrated , but looking a step deeper one can fathom that it is sufficiently diversified with respect to different type of businesses, geographies (China, Europe, US , India, Canada) , and currencies (HKD, USD, EUR, CAD, INR). e.g Liberty Global runs Broadband and wireless network business in key geographies of Europe; Fairfax Financial runs decentralised insurance business around the globe, and Prosus makes Venture capitalist bets on emerging internet business in key high growth geographies.
Key updates-
a. Alibaba’s incessant decline in share prices provided opportunities to add more in the business, as I continue to believe in the dominance of the enterprise and the long-term capitalist reforms in China with Chinese intricacies. (more details in the volatility section).
b. The prices on all the Tata group of businesses that I hold have multiplied many-folds on the buy prices. However, I continue to sit and do nothing . My confidence in the value creation by the group is positive due to the exceptional focus and track record of the group chairman .The steps he is taking to develerage balance sheet, monetize assets and Free Cash Flow generation continues to be value accretive . Besides this , the Tata group took a majority stake in Tejas Networks (in which I have been a shareholder since July’20) and made an open offer to shareholders to exit at price which is 5X of my buy price. However, I decided to not participate in the offer and will continue to sit and participate in the value creation that Tatas aim to create in Tejas networks over the long run.
c. I wrote in my last letter, that I was about to buy Prosus and I did it in the past quarter. China’s regulatory environment concerns gave a very lucrative price to hold the business for long-run.
d. I have been constantly adding in each quarter to Prem Watsa’s Fairfax Financial group. The exceptional long term track record, very well run and positioned insurance businesses and some key investments which are undervalued on balance sheet continues to provide tailwinds for the group to do great. The business still trades at significant discount to book value and I will continue to add to it as long as I have cash and it stays around the price. On top of that, I aim to continue to hold IIFL Finance and Securities business (which are owner-operated first gen. entrepreneurs and in which Fairfax is the largest long-term shareholder) in India for long run in line with Fairfax’s plan.
e. Its a fascinating story about what the Bajaj group of businesses has achieved in the past two decades for the shareholders. The Covid crash was an optimal moment to build a big stake in this long term compounder business via holding companies (ie Bajaj Holdings and Maharashtra scooters) which were available at significant discounts to already depressed underlying business valuations. The Bajaj finance business always comes out stronger and dominant with market share gains after every economic stress in the industry.
f. Edelweiss is another business in the financial services domain run by first generation entrepreneurs with a track record of creating shareholder value in the past 2 decades in various segments. Their adaptability and resilience to withstand the ups and downs of the economy keeps me comfortable to ride the journey with the group. In addition to this, this is one of the rare companies which share a lot of ownership stakes with its employees and managements skin in the game. I have had a few email exchanges with the Chairman on the recent shareholder letter and I am incredibly impressed by his openness to receiving feedback from all shareholders and creating a world class organisation for the long-run.
g. After sucking my thumb for months due to my inability to imagine the long term value creation in this business, I finally added Micron to my portfolio. Thanks to the fall in share prices coupled with the recent additions to Seth Klarman and Sequoia’s portfolio transpired the motivation to look into it with fresh slate.
Experience of volatility
Last quarter was certainly a time for bumpy rides in the Chinese portion of the portfolio. Makes me remember the last instance on my Tata Motors holdings when the prices nosedived more than 50% from my buy prices, but eventually recovered on a good return till date. I hope Alibaba plays out similarly.
It is always a bit unnerving to see that happening to one’s holdings , but then one has to humbly re-assess facts and try to discern market emotions from fundamentals. Given how low Alibaba had fallen from the buy position, doing nothing didn’t seem to be a rational decision. If I am confident of my thesis, the fall should provide an opportunity to add to it, while if I am not, rationality dictates I exit the position even if it means booking a loss. After a lot of thought, I ended up adding to the position .
A few things help ride such wild volatile swings for me personally are-
i. Longer term time horizon- Time makes up for most of the falls and the noise eventually gets separated from the fundamentals and market recognises it. The ability to think that one’s holding period for the business is atleast 5–10 years provides enough calmness to ride through it
ii. Confidence in the thesis — The more one knows and reads about the business from one’s eyes and through writing of other knowledgeable investors, one is able to take rational decisions. The fewer one knows, the more the share prices will provide judgement on business valuation.
iii. Appropriate position size and understanding of the maximum downside to one’s net worth if the bet goes wrong.
One of the disadvantages in financial markets for a young investor is the inability to outline a broader range of outcomes to a business enterprise. The ability to think from multiple perspectives is something that gets better over time, which is why wisdom is so linked to the age of the investor. There are lot of unknown unknowns which could happen and can fall beyond the imaginative powers of young investors. I have been thinking a lot about it recently and how to overcome this as best as I could .
To tackle this, I aim to use two levers-
i) leveraging great investors, who have seen this for decades and outperformed markets .
ii) Reading financial markets history and possible outcomes going back to not just 20 years, but upto 100 years in various markets. I am currently enjoying books by Ray Dalio on “ The changing world order” and “Principles for navigating debt crisis” and would highly recommend the same to everyone.
Closing thoughts
I am sure a few of the above investments will turn out to be duds and which will provide lessons and learnings for future which I would aim to capture in my writings going ahead.
Till then, wish me wisdom to stay the course that I have outlined above.
Thanks for reading,
Akhil D.
Disclaimer : The information is not intended to be and does not constitute financial advice or any other advice, is general in nature, and represent personal opinion. Before using this article’s information to make an investment decision, you should seek the advice of a qualified and registered securities professional and undertake your own due diligence.
None of the information in this article is intended as investment advice, as an offer or solicitation of an offer to buy or sell, or as a recommendation, endorsement, or sponsorship of any security, company, or fund.