The Exchanges

Q Gautam, uh, before we dive deep into your lessons on compounding, I want to explore your journey, right? How you started in investing, uh, and what are the sources that you learn, uh, the real power of compounding yourself?

A Sure. So I come from a family of four and I was born and brought up in Kolkata, India. And as we, as you very well know that the Marwadi community in India is known for having business in its genes. So ever since my teenage years, I was very fascinated by the, by the concept of entrepreneurship, especially by the fact that once a solid foundation is established for a business, the owners do not work for money, rather money works for them. I did my graduation, uh, Uh, with a specialization in accountancy, so pursuing higher studies in the field of finance seemed like a natural extension. I did my MS in finance from IFA University, Hyderabad, India, and I also did my MBA in finance from Nirmala University, Ahmedabad, India, and later on, I went on to obtain my charter from the CFA Institute, USA. After completing my MBA program, I got placed as an analyst in the investment banking team of Citigroup, and I worked at their Mumbai office for three years, and after that, I Moved to Deutsche Bank, where I worked as a senior analyst in their investment banking team for almost four years. As regards, how did I get my start in the Indian stock market? As is typically the case of most investors, I was simply pulled into the stock market out of sheer greed during the final euphoric phases of a bull market. In my case, it was the 2003 to 2007 bull market in India. I still remember I'd purch…

AI assessment note: “As regards, how did I get my start in the Indian stock market?”

Q And how do you incorporate checklists in your investing process? And how do they help you make higher quality decisions in investing? Because you are saying throughout these cycles, which you mentioned,

A So a prudent, a prudent investor never purchases ownership in a business without conducting the necessary due diligence. You should study about the company and its competitors, both listed and unlisted from company website, company filings, information on the internet, and you should read the last 10 years annual reports, proxies, notes and schedules to the financial statements, and the management discussion and analysis section, or what we call MDA. Within the MDA, check for changes in management tone and industry outlook, and also observe the recent trends in insider shareholding. After you've concluded the initial groundwork, proceed to study the following parameters in checklist fashion. Income statement analysis, cash flow analysis, balance sheet analysis, returns ratios analysis, operating efficiency analysis, management quality analysis, and a psychological checklist of the standard causes of human misjudgment. All these seven categories are detailed in my book chapter on checklists. At the same time, it's very important to understand and realize that the ideal checklist is subjective and it varies from individual to individual. For instance, the primary checklist items you look at when evaluating deep value cyclicals or commodities is very different from the primary checklist items you look at when you're evaluating high quality secular growth stocks, where the quality …

AI assessment note: “proceed to study the following parameters in checklist fashion. Income statement analysis, cash flow analysis”

Q And there are certain final nuances to individual position sizing, which is initial allocation plus subsequent pyramiding, which one gets to learn over time with experience in investing. How was your experience Been with this and how have you evolved your approach on this?

A So I size individual allocations in my portfolio according to my evaluation of potential risk with the largest allocations having the lowest likelihood of permanent loss of capital coupled with above average return potential. I initiate new positions with a minimum weighting of three to five percent and subsequently average upwards if the management executes above my expectations. It's very important to realize that Individual position sizing is important, not only for its impact on overall portfolio performance, but also for one's mental peace of mind. I sell down to my sleeping point. If any single position becomes a discomfortingly large percentage of my portfolio value. And one should have higher allocations in businesses with disciplined capital allocators, solid growth prospects and longevity of growth. As Mae West very aptly put it too much of a good thing can be wonderful.

AI assessment note: “I initiate new positions with a minimum weighting of three to five percent and subsequently average upwards”

Q And how is your investing journey evolved over the years? What core set of ideas did you start off with and what ideas did you slowly inculcate in your investing mindset as you started learning new things?

A So my personal investment philosophy has significantly expanded over the years with the time and experience in the market. Initially I started off by investing in low price to earnings and low price to book stocks or cheaply valued stocks, statistically cheap securities because I started off Like most investors by reading Benjamin Graham's The Intelligent Investor. Later on, I read Warren Buffett, Charlie Munger, Phil Fisher, and I started buying quality businesses at reasonable to fair valuations. But today, it covers multiple areas of the investment universe, including deep value, cyclicals, commodities, turnarounds, and special situations like de-mergers and reverse mergers. Instead of being restricted by my personal biased views, as was the case in my initial years, I am now able to invest in a variety of industries and situations wherever I find mispricing of value and a highly favorable risk return trade-off. You see, no single strategy works all of the time and in every kind of market. And that is why it is essential to build up one's investing arsenal to be able to hunt for value from within different areas. And over the years, I've come to realize and appreciate just why this is so critically important. It is because a bull market is always going on at all points of time In some specific sectors of the Indian stock market, for instance, during the 2009 to 2013 bear mar…

AI assessment note: “Initially I started off by investing in low price to earnings... Later on, I read”

Q Your firm, Sterile Wealth Partners specializes in identifying emerging and fundamentally strong businesses. Based on variant perception and long-term structural trends. Could you please elaborate on these two investment themes?

A Sure. So let me talk about variant perception first. Variant perception refers to having a differentiated view on the short to medium-term trajectory of a business. And variant perception refers to situations where you get ROC or return on capital employed expansion coupled with earnings growth. This gives you valuation re-rating and you end up getting multi-baggers. And there are various triggers for variant perception. Namely, product mix change into a higher margin category, a big capacity expansion, which is then followed by operating leverage, and deleveraging. Deleveraging refers to cutting down your debt. As debt goes down, interest costs go down, net profit goes up, market cap goes up. Variant perception can also come from an industry cycle shift. So we have seen how the residential real estate in India has turned around after almost a decade from middle of 2020. And it has already led to many multi-baggers from the real estate and building materials space. Variant perception can also come from a favorable government regulation. So since early, we have seen a heavy emphasis by the government of India on ethanol blending. That in turn has led to many good opportunities and multi-baggers from the distillery space. Variant perception can also come from improvement in asset turns. This is an information which you can easily get from the conference calls. You can ask the man…

AI assessment note: “Variant perception refers to having a differentiated view on the short to medium-term trajectory”

Q And were you always a writer, like writing short blogs or maybe giving an attempt at longer?

A So I didn't, I used to write blogs, but I had a very, uh, I had a personal habit of, uh, just curating, uh, and collecting articles of interest and articles, which really made a big impression on me. And at the same time, I had a habit of making notes in a word document. So that in turn greatly helped me while writing the book. I basically, it's more, the book was more of a organization of all my various thoughts on different subjects. I remember I self published the first edition of the book, uh, in 2000 1819. And when I self published the book, it was, the idea was just to help others unconditionally. And I had not charged any royalty to cover the costs of production, marketing, and distribution. I'd never expected the book to become so popular, but How the world works is, Siddhar, is that when you help others unconditionally without expecting anything in return, the universe works in such a way so as to come back and reward you back multiple times over. After the book, the self-published edition became very popular. During May, 2002 1019, uh, during the Berkshire Hathaway annual meeting weekend in Omaha, Nebraska, I was in Cretan University signing copies of my book for the readers, and Miles Thompson from Columbia Business School Publishing, New York, flew all the way down to Omaha to meet me, and they offered me a publishing contract with them, and the rest, as they say, i…

AI assessment note: “I used to write blogs, but I had a personal habit of, uh, just curating”