Survival

As a first year at IIM Ahmedabad, I was given a single piece of advice that carried me through the first year - “Survive, the rest will follow”.

(Interestingly enough, once you finish first year you’re given a PGP1 Survivor T-shirt)

Ajit Jain of Berkshire - a terrific capital allocator - answered this as his response to what he thinks about - “I hope I haven’t done anything stupid today”

The first thing that Pulak Prasad’s brilliant book covers in their philosophy is exactly this - the ability to avoid self-goals is the most important thing.

As a clueless human, while it’s good to be curious, I would rather avoid the fate that my feline friend suffered. The trick is to constantly tell myself that I’m clueless.

In every class with teacher during investing, he would teach us something and give an example of a real life stonk with some context. He would then ask us to take a position in the stonk at a point in history showing us a rosy picture that he painted. When most of the class was done taking a long position, he would fast forward to the future and show us how we would lose money.

Now I’m not sure if this is what teacher intended but I took away a single lesson from this, start with the position that you’re going to get screwed. Find out what it is that will screw you. And if there is anything that is going to screw you completely (-90%+ loss), avoid it.

This stance of avoiding ruin works, and boy it works really well simply because of the fact that the prior distribution of the stock market is that there are really very few companies that are worth holding forever. So the strategy that tries to minimize false positives (i.e. I buy a crappy business) will win over the strategy that tries to minimize false negatives (i.e. I miss out on a great business). Again, Pulak’s book does a really good job of explaining it - go read!

When sitting to analyse a business, I have started using a checklist to see if there is even one tickmark on the negative side - because if there is, I am better off avoiding it

A non-exhaustive subset of the really important parts of the checklist for me at this point are:

1. Is the promoter shady?
   I remember talking to a pretty good public equities investor and asking him how he thinks of governance in mid-cap and small-cap stocks. He told me - “Bhai dhandhe mein koi doodh ka dhula nahi hai” (No one is clean in the world of business). To his merit, this is actually true. But I want a business forever!! I will take a position only with a guy who is “doodh ka dhula”.

2. Is the management terrible at capital allocation?
   The pathway to hell is paved with good intentions. Even if the promoter isn’t shady, I don’t want to be suckered into a business where the promoter/management can’t allocate capital well. Historical evidence of expanding into random business segments, showy M&As (yes I sound like a hypocrite given I’m an i-banker but it’s because I’m one I know it’s very hard to do it well), restructuring for family planning while shafting the minority shareholders, etc. are blaring alarms.

3. Is there a voice in my head telling “This time will be different”?
   The stupidest (and my first) stock I bought was by running into a sector which was known globally for terrible economics (think airlines, hotels, restaurants, etc.) but I was trying to pick a winner because it was thematic at the time. I hold that stock till date with a 70% loss. I look at it as fees paid to learn a lesson the hard way. Run away from themes, run away from the “new” approach to a hard economics business, and run away the moment I tell myself “This time will be different”

4. Turnaround stocks
   This is the one that took me the longest time to put on the checklist. I used to think that I was really smart at spotting turnarounds (thanks to my ability of clearing entrance exams despite being a dumb-dumb). Again a lesson learned the hard way where I thought a company bringing on a new CTO would make it “digitally transformed”.
   Never again.
   Don’t get me wrong - turn arounds are the places where you can make a huge return. I still believe the quantum of return in special situations is much higher than traditional investing. I’m just really bad at spotting them correctly - hence I stay well away from them even when I think I’m relatively sure. (It’s a slippery slope to being relatively sure of every turnaround)
   I would rather bet my money on what I know relatively well - understanding economics of an already well run business - than make a bet on a company turning around because of whatever reason (management, market, theme, I don’t care - pick your poison).

This brings me to the end of this topic on Survival. I’ll just leave you with good music.

Alexa play Stayin’ Alive on Youtube: