Annual letter 2019

I manage my own and a few friends’ portfolios. The return since inception (June 2018) till 31 December 2019 is 32% CAGR. The biggest contributors to the return were Manappuram, Muthoot, and MCX. The biggest detractors were Ambika, Max Ventures and BSE.

I have written about Manappuram/ Muthoot before here. Both Manappuram and Muthoot are very profitable franchises and have a long runway ahead of them. They should continue to gain market share in the gold loan market both as the overall market grows as well as by taking market share away from unorganized moneylenders. There are risks in the business emanating from diversification, and they are of course exposed to the price of gold. But at this stage, I feel the risk reward continues to be favorable.

I have written about MCX, which I had labelled as anti-fragile. So far, it has performed quite well. It is a monopoly business with market share of more than 99% in metals, bullion (gold) and energy. I continue to like the business as they too have a long runway. Since this is a monopoly, their growth will come mostly from overall growth of the market and increase in prices. I remain optimistic on both these counts. The market should continue to grow as the growth of underlying commodities is tied to the growth of the economy. Secondly, the price growth has two components – 1) growth in prices of the underlying commodities, 2) price increase (trading commission) by MCX. Currently, the business is facing tailwinds due to increase in price of energy as well as bullion and I expect these to continue to drive their growth.

I have smaller positions in Oberoi Realty and Narayana Hrudayalaya (NH) about which I have written here and here. I will look to scale these up as I continue to like these businesses. Oberoi Realty is arguably the best real estate developer in the country. They are known not only for the quality of their construction but also the quality of their balance sheet, which is a rarity among the real estate developers. NH is the best hospital chain in the country for providing affordable healthcare to the masses. I think both these businesses have strong competitive advantages and long runways of growth and will be stronger and more dominant 10 years down the line.

Out of the detractors, I have sold out of BSE and Max Ventures, which I consider to be a mistake; but continue to hold Ambika. I have written about Ambika, but one risk which I did cover but did not fully appreciate at the time is the cyclicality of the business. The margins of the business are inversely proportional to the price of cotton. Currently cotton is going through a difficult time but it may have started rebounding. I cannot predict when cotton prices will bottom out. But, what I can say is Ambika will be able to survive and will come out stronger from this downturn. Risk reward at the current prices seems favorable and I continue to hold Ambika.

Partly due to unavailability of compelling opportunities in Indian markets and partly due to geographic diversification, I have started looking at opportunities outside of India. During this year, I initiated positions in two such opportunities – Franco Nevada and Novagold, both listed in the US. I will detail the investment rationale for these businesses in a separate post.

My investment philosophy is to control the risk first. There are two broad ways to control risk – one, at the asset level and the second, at the portfolio level.

From an asset perspective, the idea is to buy something only when I find a compelling opportunity. And when I do find such an opportunity, to invest between 5-20% of the portfolio in that opportunity, depending on the level of conviction. And if I don’t find any such opportunity, then do nothing. Usually from my limited experience and from the experience of others, I have found that compelling opportunities are usually found in high quality businesses. I am a firm believer in the Warren Buffett adage – “Prefer good businesses at fair valuations rather than fair business at good valuations.” Usually compelling opportunities will have all of the following characteristics:

  • Businesses which I understand
  • Have strong competitive advantage
  • Will be around and thriving in 10 years
  • Honest management
  • Available at reasonable valuations

I will invest only when I’m able to tick ALL the boxes. And when I do find such an opportunity, I will invest a considerable portion of the portfolio starting with a minimum of 5% and building it up to more than 10% or even 20%. In this respect, I stumbled in the past year and acquired two companies which were fair businesses at good valuations – Max Ventures and BSE. Hopefully I have learned from my mistakes and will not repeat the same mistake in the future.

The second part which is equally difficult is to do NOTHING when there are no compelling opportunities to be found. Because of this there will be times, when I will have considerable cash earning very little return. And I’m totally fine with that. Because I don’t HAVE to invest in sub-par opportunities just for the sake of remaining fully invested. Also, because cash provides optionality during turbulent markets, when compelling opportunities are all around us.

Finally, these equity investments are really share in quality businesses. And the idea is to build a portfolio of these assets in businesses which will be stronger 10 years down the line. It is a marathon, and we are still in early phase of the race. Currently, we have 6 opportunities (I consider Manappuram and Muthoot as single exposure and Franco Nevada and Novagold as single exposure) which I consider compelling. If I’m able to find one or two such opportunities in each year, that should stand us in good stead.

Do let me know in the comments what is the most compelling opportunity according to you.

Disclaimer: I’m not a registered investment advisor. None of the content published on this website constitutes a recommendation to buy a security, portfolio of securities, transaction or investment strategy. I write for educational purpose. Hence, please do your own due diligence and consult an investment advisor before making any investments.

3 Replies to “Annual letter 2019”

  1. Beautifully written. And funny it mirrors my positions too , what with me having my largest position as Manappuram ( which tremendously boosted portfolio return ) and a huge chunk in Ambika Cotton , which brought out returns considerably. But continuing to hold patiently as I believe all my businesses will be much more valuable in 10 years time.

  2. Hello Kashif! Congratulations on your performance. I have read a couple of your posts and love the way you present your thoughts, from both qualitative and quantitative perspective. Since in this post you mention about managing money, I am wondering if you could share the fee structure that you have and how do you deal with taxes on fee income. Also, as far as I have researched there are regulatory restrictions on managing people’s money, so how do you legitimize your endeavor. These are some questions I have been trying to find answers for myself and your thoughts will be very helpful. Thanks a lot for your time and kudos on your efforts.

  3. thank you for sharing. congratulations on your performance. Would be great if you can share an update on how your portfolio fared in 2020 and your current bets.

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