If you have been a reader of Safal Niveshak for long, you know how I have been greatly inspired by investors and value investing teachers like Graham, Buffett, Munger, Howard Marks, and Prof. Sanjay Bakshi.
But if there is one “value investor-cum-blogger” who inspired me to start putting my thoughts on investing out to the world, it was Rohit Chauhan.
Rohit is a self-taught value investor who has been investing for the last 13+ years and blogging for the last nine.
If you do a Google search on “value investing in India”, Rohit’s blog stands right up there, which suggests his preeminence among all Indian value investing bloggers.
Anyways, I was a bit nervous writing to him asking for his interview for Safal Niveshak. But Rohit eased all my nervousness and agreed to share his thoughts and also his amazing investment checklist, which I present to you today.
So, here’s Rohit and his simple yet amazing thoughts on the art and science of becoming a successful value investor.
Safal Niveshak: Before I pick your brains on investing, please share something about yourself – your education background and career.
Rohit Chauhan: I have a Bachelor’s in Engineering and an MBA in Marketing. My first job was with Asian Paints in sales and marketing. In time I realised that I was not really a sales/marketing kind of person (preferring to read and learn) and so switched into supply chain consulting, which has been my profession since then.
My first job also exposed me to the notion of competitive advantage of a business as I worked in a territory where the company had a 70% market share and had shut competition out completely, inspite of higher prices.
SN: What got you into investing, and how did you begin to learn about the market and investing in general?
RC: My start into investing was born more from necessity than interest. I had to take up the responsibility of managing the family finances at an early age, which meant that I had to learn about investing so as to secure the financial future of my family.
I started from the absolute basics – learning the difference between a fixed deposit and stock, basics of insurance etc.
The key event which triggered my switch to value investing was the book The Warren Buffett Way by Robert Hagstrom.
This book introduced me to an incredible individual who had done very well based on pure merit and intellect. Over the next few years, I read up all I could on Warren Buffett, his mentor Benjamin Graham and anything I could find on value investing.
SN: What would you say is one of the most important lessons you learned early on?
RC: The importance of managing your emotions – fear and greed.
I knew the basics of investing well by 1999, but was still swept (partially) by the dotcom and IT mania. I invested a sizeable percentage of my money in IT-focused mutual funds and a company called SSI, even though I knew that the valuations were stretched. That is the definition of foolish greed!
I promptly lost 70%+ of my capital in these positions, which in hindsight was a good lesson as it showed me that being rational is very important to being a good investor.
SN: What according to you is the biggest problem why most investors don’t succeed in the stock market? Is it due to their inability to value assets properly, or is it due to the difficulty in understanding market’s behavioural cycles? Or is there some other factor at work?
RC: I would put it down to emotions, or being rational.
I think a majority of investors can do well if they invest regularly in index funds or any decent mutual fund on a consistent basis. If the investor has some level of interest in stocks, they can identify a few good companies and understand them well over time.
The main reason why most are not able to do well over time is due to greed during bull markets (2007-2008) or due to excessive fear such as during 2009 and now.
SN: Michael Mauboussin, in his book “The Success Equation” writes that much of what we experience in life (and investing) results from a combination of skill and luck. How has been your experience with skill and luck? Can you please explain with a real-life example in investing?
RC: I have been always been wary of success due to luck as it will even out over time. In my earlier days of investing, this wariness meant that I allocated only a small portion of my assets to stocks as I wanted to be sure that my success was due to skill and not due to luck.
In investing, one can have a reasonable amount of confidence that the results are due to skill, if one is able to outperform the market for 5 years or more. Once I crossed that threshold, I increased my equity allocation as a percentage of my assets.
I have found that I have been luckier than others in investing for multiple reasons – One is that I started investing around the time the internet became available and hence had access to a lot of information which sped up my learning.
In addition, I have been lucky to have invested in stocks such as Blue Star in 2003 when they were dirt cheap and just before the capital goods sector boomed (I did not know that would happen).
In terms of skill, my focus has been to learn the process of investing, which is highlighted by Michael Mauboussin in his book, as being critical to success in a field where luck has large impact on the final result.
SN: How can an investor improve the quality of his/her decision making? Some successful investors have talked about the importance of keeping a decision-making journal. What is your take on this?
RC: I agree with the approach of keeping a journal and recording your decisions / thought process at the time of making your decision. If you don’t do this, it is easy to forget your thought process at the time of the decision and convince yourself that a failure was due to bad luck whereas success was the result of your own intelligence.
One needs to focus on the process of investing, rather than just the outcome (returns).
I have a bit more detailed approach in making an investment. Once I have identified an attractive idea, I update an excel template wherein I go through a checklist and try to ensure that I am not missing something obvious and to avoid some of the common behavioural biases.
In addition to the template, I also write a note which details the reasons for buying the stock – sort of a summary.
I tend to review the template and the note annually to evaluate what has changed. In addition to all this, I have maintained a blog for the purpose of recording my thoughts which I refer to from time to time, in order to look back at my thinking at various points of time.
SN: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?
RC: I follow multiple approaches to finding new ideas for my portfolio. I maintain a list of stocks which I like from a business perspective, but the price may not attractive. If the price drops or the business improves, I may decide to start a position in the stock.
In addition to the above, I follow quite a few bloggers and other investors whose thinking I respect…and if they have purchased a stock, it becomes a good starting point for me to dig further.
Finally I maintain a spread sheet to filter ideas based on various quantitative factors such as debt equity, return on equity etc.
Once I have identified a candidate, I read the last 8-10 years of annual reports to get a sense of how the company has changed or evolved. In addition to this, I also maintain a template which I update to record my analysis and then as a final step, I write down a summary note on the company before pulling the trigger.
This process looks long drawn and detailed, but it takes only a few weeks and is quite easy once you do it for some time.
SN: How important are investment checklists? Can you mention a few key metrics your own checklist consists of?
RC: As Michael Mauboussin says – “In a field where luck plays an important role, one needs to improve the process to get a good outcome.”
Checklists are very important to the process and I have found it invaluable in my own case.
I started maintaining one when I started investing, and for two main reasons – one to keep a record of my analysis of any particular stock (I do not want to rely on memory), and second as a store of learning.
This checklist has evolved with my learning and consists of various sections such as quantitative criteria – return on equity (is it more than 15%) or debt equity (less than 0.7).
I have some management criteria such as compensation, related-party transactions etc. in the checklist too.
SN: A lot of successful investors talk about the importance of having a “multidisciplinary approach to investing”. How do you approach this subject, and how can small investors create such an approach in their busy lives?
Beyond that, I think Prof. Sanjay Bakshi’s lectures and blog is an invaluable resource on the topic.
One needs to remember the point that all learning in investing is cumulative and it builds over time.
One needs to have the curiosity and a desire for learning and if you can devote even a few hours a week, it will build over time. After a few years, you will realise that you have learnt a lot on the topic.
SN: How do you define “risk” in investing? How do you take care of that risk?
RC: I would define risk as – not knowing what you are doing.
An instrument – equity or real estate – is not inherently risky as long as you know what you are getting into.
Let’s say you are in your 20s and have 20+ years of saving/investing horizon ahead of you. A market turbulence of the type we experienced in 2008 should not impact you as much as it would someone in the 60s who is closer to retirement.
So someone in his/her 20s can afford to invest in something which is risky in the short term, but can work out very well in the long term. The same option would be very dangerous for someone in his/her 60s.
I think the way to manage that risk is understand what you are investing in. If you do not understand individual companies and do not have desire to do so, the best option is look for low cost index or mutual funds and invest systematically in them on a regular basis.
SN: Corporate mis-governance has emerged as one of the biggest risks in investing. How can an investor insure himself against this risk? What are the factors you look out for to get hints of mis-governance in a company?
RC: I don’t think one can fully insure oneself against this risk.
This is one risk you have to deal with at all times, especially more so in India as the downside for unethical managements is not much. It is a sorry state of affairs where managements can rob hundreds of crores from minority shareholders and not get penalized at all.
I do not have any crisp formulae to look for mis-governance, but have developed a checklist to look for any red flag. Some key points in the checklist are – any suspicious related-party transactions, excessive compensation, instances of past mis-behaviour, and aggressive or bad accounting practises.
SN: As investors, one of the most difficult decisions we must make is with respect to selling stocks. What factors help you make “sell” decisions?
RC: I personally think selling is one of the most difficult decisions in investing. If a stock has done well, one has a tendency to fall in love with it and not part with it. On the other hand, if there has been a mistake in buying the stock, it is difficult to accept it and sell the stock.
I think the diary/original note we discussed in a previous question is of great help here. It is important to review you original investment thesis and check if it is playing out as you originally thought.
If the business has deteriorated or the management turns out to be a disappointment, then one has to bite the bullet.
SN: What are the 2-3 big mistakes that have characterized your investment life? Is there a way for investors to get over such mistakes?
RC: I would say my top mistake has been to allocate too little of my portfolio to a good idea and then sell out early, even though I understood the company very well and expected it do well.
I think one should evaluate each stock in the portfolio annually, and if the company is doing well, then one should not exit the stock just because one has made an X% gain on it.
It pays to stick with a good company for the long term if one is serious about wealth creation
The second mistake in my case has been that I refused to accept that the original thesis was not playing out and held onto the stock based on hope.
It is important to recognize the impact of opportunity cost in such cases. The only way to avoid such mistakes is to be honest with yourself and accept the reality that one will make mistakes 20-30% of times (even the best investors don’t get it right always).
SN: Who is one investment thinker that may be off the radar of investors that you think we should be following, reading and learning from?
SN: What is the best and worst investment advice you have ever received?
RC: The worst advice I received (and unfortunately followed) was to buy a hot sector (IT) as it was doing well (in 2000) and everyone else was buying.
This incident made me realise the importance of thinking independently.
I have learnt a lot from other investors and though it is difficult to point a single piece of advice, I would say one of best ones has been from Buffett – ‘Risk comes from not knowing what you’re doing’.
SN: What are your top five suggestions for investing and related books/resources?
RC: My top suggestion for investing resource is not a book, but Warren Buffett’s letters to shareholders. I would highly recommend reading the following books to start with…
- The Intelligent Investor ~ Benjamin Graham
- The Most Important Thing ~ Howard Marks
- Common Stocks Uncommon Profits ~ Philip Fisher
- Poor Charlie’s Almanack ~ Peter Kaufman
SN: If you were to give “just one” piece of advice to a small investor on how he/she can become a smarter investor, what would it be?
RC: As Charlie Munger says – Be a learning machine.
Read continuously and learn. One needs to love the process of investing – learning about companies, how they work, how to value them etc. There are no short cuts to becoming a good investor.
SN: Thank you so much Rohit for the amazing insights you shared on your experience as a value investor, and also for your wonderful gift in the form of the excel template.
RC: Thanks Vishal! It’s been a pleasure sharing my learning as an investor. I hope Safal Niveshak’s tribesmen are able to benefit in some ways out of it.
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