Key Learnings from Masterclass with Super-investors- Rajashekar Iyer

 Rajashekar Iyer, 61, a chartered accountant by qualification has 30 Years of experience in the field of equity research, advisory and investment management. He likes to Buy companies where profit growth can be very high, but at cheap valuations. He uses technicals to optimize the entry point and capture the excesses of the market on the upside.

Key Learnings from Masterclass with Super-investors- Rajashekar Iyer are as follows:

Step-up Investing strategy 

• Rajashekar Iyer bought Divis Laboratories at 175-185 Rs and started buying the stocks in part with appropriate stop-loss, which helped him make a meaningful allocation without increasing the risk of losing capital. This strategy can only be applied to a stock in which you have high conviction at a particular price level and anticipate a large upside. 
• Also, you have to put stop loss at a level to which the stock would fall only when there is a major change in fundamentals or in case of major market reversal.
• When stocks are bought cheap, they are less vulnerable to steep corrections. 

Position Sizing and stop-loss

• Decide how much you are willing to lose if you are wrong.
• Combination of fundamental and technical factors. For example, "the fundamental buy valuation could be 15 P/E, and technical could be the lowest stock price in the past six months. Suppose a stock is trading at Rs. 440. I look at fundamentals and the price chart and put the stop loss at Rs. 405. so I will buy 310 shares (10000/35)- an initial investment of Rs 136,400. If the stop loss is at Rs. 350, with the potential loss of Rs. 90 each share, I can only buy 110 shares (Investment of Rs. 39,600). So in one case, I can invest 14% of my capital, in another case I invest only 4% of my capital, both with the same loss potential of 1% of the portfolio."
  
• You can apply a step-up investing strategy mentioned above if you like the stock so much and want to build a large position.
• Through looking at the price chart of weekly, and also 2-3 years charts in which you can see the areas of high congestion. Also, it would depend on company to company. For example, "HDFC Bank, which has been a stable performer for many years, a 20% of correction would be very significant whereas in mid-cap, not so significant"

Technical analysis

• Technical analysis can be very useful when you are too focused on price.
• Technical analysis provides additional information to fundamental analysis but you cannot solely depend on technical analysis because if your company is fundamentally strong and say you would have double your investment, then it doesn't make sense to sell your position if the chart says so. And if your stock is doing badly and fundamentally deteriorating and the chart says to hold on, you would get out of it totally because it doesn't make sense.
• Ignoring price risk doesn't make sense even if the company still has strong growth potential as it can deviate massively from fundamental value and stay at such deep undervaluations or overvaluations for a long period of time.

FCF to Market Capitalization

• FCF to market Capitalization indicates if the company is overvalued or undervalued. Even if the ratio looks lucrative, you need to check its earnings also and the nature of the business. For example, Rajashekar Iyer was analyzing a mining company, and its FCF to market Cap was lucrative, when he looked at the financials and nature of the business, he found out that the company was earning almost nothing as its underlying commodity price was down and the government had put some restrictions. He then met the management and found out every aspect of the business. It was a good business to invest but it was cyclical and as the prices of the underlying commodity had gone up, its stock went up over 40x. Hence this metric come in handy to find out stocks.

Generating investment Ideas

• By using screens
• Recommendation by others
• Scanning relevant information like Annual reports, management interviews, presentations, etc.
• Through Reading

Criteria for Stock rejection

• Meaningful ROE over the past 10 years and if things are changing in the industry helps the company deliver good numbers then it doesn't count. 
• Growth should be organic.
• Lack of scalability. 
• Poor quality of management. The quality of the management must be checked through their execution skills, their approach to the treatment of minority shareholders, and looked at from the point of view of the management's ability to think strategically.
• Long-term Potential must be high.
• Valuation

When to sell?

• You sell when a downtrend is established meaning you look at the growth rate of the company and fall in the stock price if the growth rate is slowed down, underperforming and stock is falling then there is the possibility that a downtrend is coming.
• The extent of overvaluation has to be taken into account like if the stock is significantly overvalued then any weakness in the price of the stock should be taken into consideration.

Growth is strong but valuation are high and Vice versa

• When growth is strong but valuation is high then one should try to study and understand business. when the favourable condition comes, buy the stock. Patience is virtue.
• Vice versa is not possible according to the super investor.
• One should only to invest in such companies when you cannot find the company with cheap valuation or you wait as even if you invest in such expensive stock, you cannot earn exceptional return.
• Return expectations should be 8-10X in 10 years or double in three years under reasonable circumstances.

Investment Process

• Don't build too many "textbook" processes, as you would become stifled and you cannot be creative.
• Buy stocks of companies which have done well over the last 10 years, rather than companies which we can hope will do better in the future.
• One should check the business's ability to grow its value consistently and meaningfully and it will be dependent on attractiveness of the business, management's capability to allocate capitals  strategically and ability to operate the business efficiently.
• Value the company based on its current state and it is much easier to do if you understand the business well.
• What management has said three years back and what they are saying now tells us so many things and look how company is doing compared to industry.

Valuing the company

• Valuing the business on variables are- how much they grow their sales, how much profits/growth they can make, and what kind of capital they need to generate the sales, and how they treat the minority shareholder.

Managing Risk at portfolio level

• Analyzing portfolio one year down the line under both favourable and unfavourable condition.
• If the potential drawdown is 35% under unfavourable condition then analyze which stock is contributing the maximum to the drawdown and if you find it then manage it at stock level.
• Try to make sure that even in adverse condition, the overall drawdown should be limited to 10-15%.
• Reason of drawdown in the portfolio can happen for only two reasons- stock specific decline and overall decline in the market. If the reason is latter then get into cash is the reasonable choice and you get into cash when the stock is trading significantly above value. 
• Check whether the fundamentals are deteriorating. 

Cyclical stocks

• Two things that impact the cyclical- cycle of the commodity itself and ability to manage that cycle.
• So buy when the cycle is favourable and buy good quality company. 
• In cyclical companies and others, value doesn't come only from earning but also from the cost of capacity creation and what are the asset worth. like in those of power, cement, or steel sector.
• Earnings are very fluctuating but buy when the earnings are emerging.

Books that was found most useful

• Security analysis
• The intelligent Investor
• Robert Rhea's Dow theory
• Gerald Loeb's Battle for investment survival
• Edwin lefevre's Reminiscences of a stock operator
• Victor Sperandeo's Trader Vic- methods of a wall street master
• Winning on wall street by  Martin Zweig
• Phil Fisher's Common stock and uncommon profits.
• Darvas's book how to make 2 millions in stock markets
• Trading in the zone by Mark Douglas
• The battle for investment survival