Sunday, September 23, 2012

The Trapdoor Delight

I did not quite comprehend with Warren’s beliefs of a ‘lifetime holding’ during my early investing career. It was later when I understood that lifetime holding of a stock did not mean ‘buy it, shut it and forget it’. It is because Business landscape changes so frequently that it can devour a very successful company in no time. 75% of the fortune 500 companies that existed 20 years ago have disappeared. The very thing we are sure is that future is going to be very different. A Kodak moment can happen to any business.  Lifetime holding means no less work in analyzing a stock. It requires a persistently examining eye to know that HDFC bank with 9 branches would grow to have more than 3000 branches in 16 years, that they have being incessantly growing quater o quater by 25% for past several years. And With that knowledge, holding on to it during such period, is a lifetime investment.
On the other hand there are investors who specialize in situational opportunities; they use the very rapidly changing and uncertain business economics to their advantage. They work on special situations. They enter the trapdoors that others frown upon. I met one such investor,   Rahul Paliwal who invests only in exceptional condition, trap doors. He waits patiently for policy to be passed, ban lifted, patents infringed, war waged or fraud revealed.  This person has been holding on to Hawkins for a long period of time although it has not performed brilliantly in this period. He is working on the knowledge that there is unmet demand for their cookers that was not served due to deteriorated labour relations and an order of Pollution Control Board to cease operations as they were allegedly producing polluting effluents. Rahul knows that it is a matter of time before they work the approvals through. He admits that this is a hard job, requiring him to be on top of things, but the returns have an honest upsides and situational investing is all he does. The FDI in retail is a case in point and I had highlighted this in a previous blog although one never knows when it will really materialize. Kingfisher or the UB Spirits were also trapdoors of special situation and so were Satyam computer, when the scam was revealed.
To put an element of investing perspective in it, I may say that there are opportunities that exist based on arbitrage of either time or information. Investing Opportunities that exist for a brief period of time or based on specialized knowledge, dilute in their essence with time or upon event happening.
This method of investing must not be confused with speculation based on tips. Hence it requires knowledge of fundamental analysis and that of business- economics. Rahul is currently investing in another special situation stock that he expects to give him a mutibagger returns.
I would not recommend this to the uninitiated and it would be ideal for serious investors willing to commit time and take those risks. As David madden says through one of his characters ‘a person who risks nothing, does nothing and has nothing’.
Meanwhile my exotic PMS managed by a well known fund manager has severely underperformed my own Nfty ETF investments by a huge margin.
Our cumulative learning over time proves high sounding, exotic investments from elite fund managers does not better the returns from effortless investments with low charges.