Invert, always Invert! | Ashutosh Kumar Jha

One of my favourite pieces of advice that I’ve read is from Ajit Jain on how he constantly thinks: “I hope I have not done anything stupid today”

The more I see investing from a student’s lens, the more I realize how important this is. Choosing what not to do is far more important that choosing what to do.

As I think more about it, this line of advice has given me a lot more clarity in the chaotic world of markets around me. There are some obvious ones that I can get out of the way:

Don’t touch businesses I don’t fully understand

Corollary: Be honest to myself about if I really understand it through Feynman’s ELI5 approach

Result : I’ve stayed away from sectors like Banks, Pharmaceuticals, Real Estate. Focused mostly on pure tech or tech enabled sectors, consumer and retail, industrial goods.
Macro predictions make no sense in a long term world

Corollary: Stay away from technical analysis, and other forms of quantitative driven investing. Although I like to think my centum in math from 8th standard means something, there are folks much better than I am (Citadel and RenTech have teams of Math/Physics PhDs) at short term forecasting. Plus in the long term macro always mean reverts.

Result: I don’t want my investments to be driven by timing of entry and exit. I would rather invest in pockets where I know a good company can continue compounding and be a monopolistic business in an attractive industry. So much so that valuation is at best cherry on the cake, not the cake itself.
Stick to historically proven instances of management execution not stories of the future.

Corollary: Switch your brain off when management cooks khayali pulao. Stay away from buzzwords. Read a lot more transcripts and annual reports than talking to management as of now.

Result: A lot of my time goes in highlighting notes from ConCalls on what management has said and then going to next year’s annual reports to see if that’s what they actually do. Keeps me sane, sticks me to a process, and reduces the fuzziness in assessing buggy humans.
Don’t buy at any price

Corollary: As of now, I don’t even look at businesses above a certain P/E. Unlike most value folks, I’m open to that number changing for a very high growth company. But but, I’m a skeptic since I’ve only seen less than 5 businesses who have maintained high growth historically to warrant such multiples.

Result: Use valuation as a test for whether to buy or not always. Buy at any price is a flawed philosophy in my brain.

A lot of what I’ve laid out may (and most probably will!) change as I learn more about investing.

I might get into other sectors because I spend enough time studying them to finally understand them (enough time >= 3 months of deep work!).

The one on predictions might change if and only if I return to being a quant and spend north of 5 years learning how to do short term predictions well enough. But as I was telling a friend, I just like the fundamental long term approach a lot more because I’m way too lazy to take on the stress of regularly monitoring a systematic trading algo at all times of the day. We’ll see if this changes.

I doubt the buy at any price bit will change but I am a little sold on the idea that great companies rarely are available for cheap anymore in India. Furthermore, there are instances where I have seen a super high growth company actually warrant very high multiples but it’s too hard to predict as far as I can tell and I’m better off just not doing it right now. Regardless, my way of screening using valuation might change.

Most probably the thing that will change is me getting better at evaluating management to the point where I will rely more on reference checks as I build up my network but I don’t think I’ll give up on the leg work of finding historical instances of execution ability. I’m too paranoid to trust someone that blindly and will sleep peacefully at night knowing my trust is triangulated by historical proof.

I’m starting to love investing as a study a lot more. Everyday I get to learn something new and I get to make money by sitting and reading and doing scuttlebutt leg work.

Life’s been fun so far in this line of work!