How does PPFAS hunt for stock ideas

Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. Learn how Capella can make a difference in your life at capella.edu. You're listening to a Mint podcast brought to you by HD Smartcast. Hello everyone, welcome back to another episode of the Why Not Money podcast. Today I have invited Ronak Onkar who is a Co fund manager and head of Research at PPFS Mutual Fund. PPFS Mutual Fund manages around 70,000 crores in assets. In this episode, he shares his story of how he entered the investment management field despite having an engineering background and how he developed a mental model to hunt for stock ideas. Welcome to Why Not Mint Money, a personal finance podcast where we help you understand basic money concepts and share strategies for you to build your wealth. So let's get started with your money journey. Hi Donna, thank you so much for coming. And I wanted to discuss with you how to hunt for stock ideas. Let's first begin by talking about how the idea of you becoming an equity analyst fund manager came in the 1st place. What was your journey like? Thank you Sachin for inviting me. It's always a pleasure to speak with you and thank you for Mint as well. So this was not a very straightforward journey for me. If you would have asked me when I was a teenager, what would you want to be when you grew up? I always had my sights on something in the computing field. I was always interested in technology. I was always reading and learning more about it. So that was my career path or say life path already decided. I still enjoy studying technology, which is why I'm also a technology analyst today. But it was not a clear path to finance or investing. And there's no background in my family also to justify whether I should be in the stock market at all. So I never thought about it. But somewhere in my graduation during my undergrad, I was doing Bacit from the University of Mumbai. And the second year of my graduation, somewhere I read about Buffett, Warren Buffett. The description was that he was some furniture store owner. And I was surprised. How can a furniture store owner be such a billionaire or such a wealthy person? I think he was number 2 after Bill Gates at that time. This is somewhere in 2003, four period. And I was surprised to read the description. And the article actually got the description correct. They just talked about his ownership of Buckshire's ownership in Nebraska Furniture Mart, and that's why they categorized him as a furniture retailer. That's just one of the businesses that Berkshire Hathaway owns. But later on, when I read more about him, it became clear that he amassed his entire fortune by investing in businesses, and it was very intriguing. How can somebody become wealthy? So normally you associate rich people or wealthy people with people who start a manufacturing business or a services company or something like Infosys or Microsoft software or whatever. I mean, you know that there's a trajectory of people who are industrialists who will build a company, but this was very odd that somebody who by just buying and selling businesses could become so big. And that was just the starting point of my curiosity about what stock market is. And I was anyway reading a little bit, had friends who were also interested in stock market that time. So we were reading together. And that curiosity led to, I think by the time I was graduating, it was very clear that despite having a placement opportunity in my hand, I said it's better to own an IT company than work in an IT company. So I decided very painfully to abandon my career path. And I would also chalk it up for confusion because at that age you normally don't know what is going to be ahead of you. But I drove right into the literature and I was lucky to start with Warren Buffett because he has this philosophy of long term investing, which I think gave me a good foundation to understand what the basic fundamentals of investing are. So I think that was my beginning of coming into the investing industry and how I'll ended up in PPFS is a complete coincidence. So because I had to do some post graduation, I said before that, so when you got a placement, when you did not take up the placement opportunity, what happened after that, that period, jumping into a new field must be very difficult. So can you please? Of course, yeah. So again, it was a period of extreme confusion because people at my home could not understand my life choice because all this time I was so geared towards one career trajectory and how can suddenly somebody switch overnight into a different trajectory? It was not overnight for me. It was a culmination of 2-3 years of thinking and deliberating that I don't want to do that kind of work, technical work, Oregon coding or whatever IT services companies had in store for me. Mostly I wanted to do company analysis, become better at the craft of investing. At that time, I did not have this concept of craft of investing. I was just reading whatever, absorbing whatever I could read about investing. And this is before Kindle OR is go to bookstores and find books, go to libraries and take advantage of whatever books were available in India at that time. And I think quite a lot of books were available to really start understanding how investing was done, at least in the developed markets like us, because that's where most of the writing has come from. Indiana, the beginning. So I took a gap year of one year just to focus purely on reading about investing and most importantly, to build some understanding of accounting because I don't have a commerce background, so I had no idea what a company's balance sheet is, what a cash flow statement is, how to analyze those things. I did not even know what ratio analysis was until I started reading about investing and going detail into how companies are analyzed or studied. So that period that year was really formative for me where I decided, OK, now if I really want to make a career out of this, at least let me have some sort of formal education. And I was also applying for the MBA exams to maybe do an MBA in the near future. So Ronak, I was very curious about this part where you took a one year gap and reading about Warren Buffett and everything is OK, everyone does it, but you know, really focusing on learning about accounts and, you know, ratio financial statement. So how was that process like since you said you are from a computer engineering background, with what kind of books, accounting books did you pick up and the journey? So I went to the basics. So I asked some of my friends who were doing Bcom, I said how did you learn accounting? And they were confused. I said we learned it in college. I said OK, what books did you use? So I started off with really reading the basics like 11 standard commerce textbooks, PPS, whichever. I mean we were in SSC. So whatever was junior college textbooks that were there which people were learning for accounts, again, those were for people who want to prepare accounts, but they also had some portions where once you understand the preparation of accounts is there, you can probably interpret as well. So interpretation part came much later, but at least to have a basic grounding of what is double entry bookkeeping, how does it work? Even CFA level 1 curriculum was also quite useful. Some books I borrowed from friends to understand what they were talking about and that actually opened up a lot of the technical side of analyzing the accounts of any company and the financial side of understanding of business. That became very clear or at least started to become clear. So that was, I think it's more about curiosity of going into these areas, like once you have a path. I didn't have a curriculum in my mind. So once I started reading about businesses that I realized, OK, then Buffett talks about accounting, Buffett talks about this. Different authors talked about different aspects, some qualitative, some quantitative, and picking up on one of those threads, like if you imagine if you're on Wikipedia, you see one article leading to 10 different articles that you read. So they're hopping on that, going to the rabbit hole of reading different things. And because you had time on your hand, you could spend more time doing it. So I was lucky that way that some time was available with me at that time in between my entrance exams for MBA to keep reading and learning. And I also knew that once I went to MBA, I would be exposed to some of these things formally as well because in MBA you get really a breadth of the curriculum thrust upon you. Generally in the first couple of semesters, you will be exposed to all the breadth of management learning, including financial management. So it's more consolidated. But I really wanted to do the grounds up understanding of these things today. Also, I'm not an expert in account. So if there's some very technical stuff from accounting standards which you are debating, I will not be able to follow. But I'll generally be aware of how to interpret accounts or the nuances of different companies accounting statements, how they are representing themselves, what the auditors are saying about a company. So I'm conversant with the language of how business accounts works, but I will not be able to prepare it or I will not be able to. Like a California would know a lot of these things far better than what I would know, but I interpret them. I've learnt to interpret them based on my requirement. Now let's jump to your MBA part and how you got a job in PPA. So if you can quickly run us through that, sure. So during my MBA, I also got lucky with the institute. Again, it was part of Mumbai University and the faculty at the school, I told them my goals that I wanted to be in the investment field. Most people in MBA don't really have a final goal. They will go with whatever placements are going to be. But I told him that there are two, three companies I would rather want to associate myself with and they were like, which companies are these? So one of them was PFS because Paragba used to write a lot about BL finance, value investing. I had read his book Stock Storages by then, and I said this is a good place to at least start, but I had no idea how to get in these places. Or will they even consider somebody who has zero experience, zero knowledge? Like, how do you knock on the door and just walk in? So yeah, I mean, that entire first year went into just going through the curriculum again, continued my reading. The library at the B school was also quite good. And they also allowed me to get some books added to the library, which will be useful for all the other finance students as well. And especially I benefited because I wanted to read those books. So it's a good way to get access to books which otherwise the institute can have access to immediately. But individually, we have to spend a lot of money, thousands of rupees, to build that library of books. So got access to some of the really good books which were very expensive to buy in India. And the library was getting stocked up even internally. Not too many people were interested in what I was doing, but it was useful to just have my own time to myself. Like the year before that. And then in the first year, once the first year is over, normally you do a two-month or three month internship, which is when I really wanted to narrow down these firms. So I started cold calling people and trying to find who knows who just to at least send a resume in PPFS. There is an e-mail ID that time on the website which I had sent my resume already with a covering letter saying that, oh, I want to be an intern over here. Is there opportunity available? Later after I joined, I realized that the e-mail ID was not functioning or something. I don't know. It was not read by many people. It was a generic e-mail ID which was not checked very often. But luckily at that time I used to write a completely random blog. And I think it was the period when everybody had blogs, Google blog, every, every other person I knew had a blog of their own and everybody was an armchair philosopher writing about whatever they are reading experiences in their life, just random stuff. So Twitter, like today, people write random stuff in short form. That was the long form randomness. So at that time I used to write A blog like most people. So like people on Twitter do it today. I was writing blogs at that time, nothing to do with investing, just whatever I was reading. I was summarizing in my own way. And for some reason a person called Arpit Ranka read that blog and wrote to me. There's an e-mail ID over there and he says, interesting to read, let's get in touch or whatever, whatever his reasons were. And at that time he was working in PPFS. I was not aware of that, so I reached out to him. We had nice conversation and I asked him that I'm looking to get an internship in this company called PPFS. He said I worked there, so OK, is it possible to get an interview with someone said, let me check. So he put in the word and an interview was scheduled. And it was actually an easy process. I was very surprised that it was so easy. And this is in the year 2007. The interview happened. This is right before the financial crisis actually hit. So my internship was in 2008. So that time it was like peak crisis time and luckily got in the door and became an intern. And the team was also very small that time. PPFS had an institutional broking business, so I was part of that research team and Rajeev was the PMS fund manager even at that time and he was running independently and he used to consume the research that we put out and he used to do his own work as well. At that time, literally like everything was available cheap. And because I was from the IT background, they said why don't you track IT services companies. So that was like the real introduction to actually studying the IT services businesses apart from just doing a paper portfolio, which I had that time. This is like an actual study of a companies balance sheet, its history and build a financial model, understand how the company works, talk to the management. Was IT industry at that time was the only industry who almost every company would have a analyst meet conference call, which was very unique. Not all of the companies in all industries. Now, today it's very common. Even a SME company will have a conference call. But at that time, one of the highlights of the industry was the management was accessible. So you could actually learn a lot by interacting with them and even other analysts who are tracking the companies. So if you go to an analyst meet today, you will see hundreds of people who are tracking their company, stay in touch with some of them and learn a lot. So I was very, very open to meeting different people, learning from them. And basically it's like you don't lose anything by talking to different people. All they can say is no, I don't want to talk to you. So I was very open and just made myself available to speak and nothing to lose. And that also helped me pick up how the industry works very quickly. So those 2-3 months that I spent at PPFS were very very interesting because I really saw how the company was from the inside. I didn't know anything about the business from the inside. So talking to Parag by understanding his process, philosophy and reading his articles and books is separate. But to talk to him in person actually gave me a perspective of how he thought and how the long term process actually is. So one thing is to read about long term investing, but to actually see it being applied is a different thing. So every day you come into the office, the market might be up or down or whatever is happening. You will not see any impact on anybody's faces in the organization. It's just like it's a normal day. People are on their computers, working, doing their job. You will not see excitement in the dealing room. Also, it's just very calm normal day in the office, which is very rare. I have not worked in any other place. So I don't know how other dealing floors or other offices are when market upheaval is going on. But here it was quite calm and even talking to Rajiv Paragbhai gave a good perspective of what things to look at, how they were studying and just had a lot of questions. So I was like an annoying little kid asking a lot of questions to everyone learning, reading a lot. There was a very good library and which we still have, which it has grown a lot bigger now. I don't know if you've seen Nariman Point office. Yeah. So you've seen there are a lot more shelves in that office compared to what they are in this Andheri office today. But yeah, the library has expanded a lot since in the last 16 years since have been here. So it's interesting that it was available to read and very different books again, some books which I had not even heard of, I could access them, read them, learn from them. And PPFS organization also has a very good network of people who are fans. Not fans of PPFS, but they were friends of PPFS because PPFS is a much older organization. It was started in the late 70s by Paragbhai and a lot of friends of Paragbhai and other people who have grown along with Paragbhai are also accessible to meet and talk to, which is very rare. I mean to allow them to talk to some person who is just an intern was very useful and I made a lot of friends because of that. The story is very fascinating where you know, you were not even from a commerce background and you did an MBA, even in the MBA, the opportunity you got for an internship or through just a random block. Fascinating. So but Rana, let's now you know, shift focus to let's say someone just entering the field or even if there is someone who has been working for 5-6 years, the challenge is to look for ideas, right? So I mean, how to basically hunt for stock ideas. So do you have any thoughts on that, like the framework structure of thinking about ideas? I think there are a lot of ways to find ideas if you really zoom out a little bit. And I'm trying to be philosophical here just to give a context to people who are very new to this job. Like every single object you touch anywhere in life has a business behind it. Like you touch this cabinet, some business has made this cabinet and sold it to us. That business procured raw material from somebody and that was a business which sold that raw material to them. Somebody actually chopped the wood. It's a wooden table. They chopped the wood and sold it to that person who was making the furniture. That's again the business and all the way back to the basic resources, right? So if you generally have a curiosity of everything you see around you, this job becomes very, very easy to find the ideas. That's what I meant. So if you really want to understand, OK, who makes this pen? Who makes this ways? Who makes this books? Who are the publishers and printers of that book? Everything is a business and not all businesses will be listed on the stock market. So today if you see the listed businesses in India, there are about 5000 businesses which are on the main exchange which are listed and some thousand more in SME markets as well. But like 10 times that businesses are actually unlisted or private or SME's, which may not be of the size also to get listed, but they are around. So the entire world revolves around this capitalist system where everything you touch is a business. And it is open to analysis if you really want to study how everything works. Now the real question is how do you narrow down your focus? So I'm talking about an ocean of ideas. Now you have to go to that part of the ocean where the kind of fish you want to catch are there. So you have to make sure what fish you want to catch. That means you need to have some quantitative filters attached to that. So if you want to filter companies based on profitability, their long term growth trajectory, their profit margins, their profiles of how they manage their balance sheet and so on, you can put them in a quantitative filter. So when I was coming up in this job tools database was available where you could run these screeners, the quantitative screeners. Today anybody can go on a Screener dot in or some website and you know, do the screeners and you can filter a lot of companies in one shot. Like in like a matter of seconds. You will get a list of several 100 companies to Start learning if you put those filters in place. Now, what filters to put like some of these I mentioned. You can also use something like a magic formula which Joel Greenblatt had made famous when he wrote that book. And these are all the basic filters. They will give you some quantitative idea to narrow down the list of companies you want to track. It may not capture everything. So if something is up and coming which does not filter very well in terms of quantitative metrics, they will not come in that list. So you really have to then use a little layer of discretion to filter out other companies which were excluded from that list. Idea generation can come from all these quantitative ways. Again, I mentioned curiosity of learning things, so you should be reading a lot. When you start reading a lot, you read media articles. You spend some time on Twitter. Narrow down, use some keyword searches to track about something you're interested in. It can be a topic, it can be a sectoral keyword search, or it can be a specific company or product related search. And that will lead to reading more stuff, use YouTube strategically, start watching content and learn about how different businesses are thinking. We are drowning in content today. So there is, I think, no shortage of information flow which will really help us catch on some of the insights or about some idea of something about how the world works. And once you have that source of information going, your now job is to filter it. So one way to filter it is to do a quantitative filter. The other filter is to have some qualitative filter, like what qualities of that company, the people running that business you really want to track. Now that is not everybody's goal. Some people may not require that. Some people who may have a very short trading or investing or holding period, they may not care about all these very, very qualitative aspects of that business. People like us who really care about owning a piece of that business over a long period of time. We really care about how the promoters behave, how the managers behave. Is the quality of the business going to last over a long period of time? Will it do better over a period of time? Will that sector have growth in the future? So all these things matter to us. So we will try and find information sources to learn about all these qualitative filters as well. So quantitative data easy to find quickly. You can filter find 10 companies in that list. And when that companies, which companies based on understanding, reading the financial statements of those companies, reading annual reports, reading about the history of those companies, then you can further filter them into some other companies which are really something you want to buy in the future. And the last part will be your valuation where whether it fits today in the valuation understanding that you have about that sector or a business that will lead you to putting it in the portfolio. So this is generally the process, but it starts with curiosity. If you generally have a curiosity as an analyst, you will do really well. Whether it's an equity analyst, credit analyst, or a business analyst for a consulting firm, the role remains the same. So Ronak, can you run me through an example? It might be a recent example, something you did 10 years ago, not necessarily you bought the stock, but how this curiosity, you know, went up to the financial analysis model, quantitative, qualitative and evaluation part. If you could run me, you know, one example. Sure. So let's take a portfolio company which we have been owning for the longest period of time, which is Alphabet. It used to be called Google at one point in time, now everybody by the time. So the fund started in 2013. The scheme actually launched in May 2013. So we completed 11 years now for the Flexi Cap fund. So even before that we were tracking Google because Rajiv had read this very interesting book called Googleplex. I think in one of the Agms, Charlie Munger had mentioned that this is one business which has a very deep Moat. And once you read the book Googleplex, you'll understand why that Moat exists. So that was his starting point. Again, he's also a very curious person. He picked up that book and he read it and because I was tracking technology, I also, after he mentioned it, I also read the book and that really started opened up the concept of a company like Google existing in the 1st place. It's like a college where geeks come together and they create products. One of the products which really worked for them was the search advertising business model that generates for almost $300 billion of revenue for them today. So something that they started and the business has grown to such a large scale. How do you understand a business like that? So one is as a consumer of that product, you use the product to search every day. So you are daily exposed to that product. Then you are exposed to the advertising that is visible on that product. Can be display advertising, can be search advertising. They also had YouTube by that time. So YouTube was another source of advertisement inventory for them. This is as a consumer, you observe all these things. Now you want to understand this business, right? So how do you do it? So the financial statements obviously give you an idea of what is the profit margin of this business, how much they spend, how much do people cost, how much they spend on R&D, what is their cash flows. So by the time Google was an established business, so it was a given that it will do OK, but will it grow and how will it expand itself was not known. A lot of doubts were there. So remember that time iPhone had just come up. So if the iPhone is coming up and the apps ecosystem is coming up, people will directly spend time inside the apps. So how will people do Google search? How will search advertising? Now Apple had the browser Safari, Chrome is Google's browser which came a little later. But the whole point was that if people were depending on search advertising as a revenue, if there were people would directly spend time in apps, How will Google search benefit if more and more time is spent on apps? All those worries were also there are no obvious that Google search will become this big or other aspects of Google also will grow to a big extent. So again, to track a company like that, one is to go through the financial statements. That is #1 discovery again was known like it came through a source where we read a book and we thought this is an interesting business to study. So there was no intention of buying the company immediately, but to really understand how it works. Secondly, I said exposing as a consumer, you know, how the product inventor is available #3 really helped a lot in understanding how digital advertising industry was coming up. So by that time, digital advertising industry was almost 1012 years old, if not a little older, 14 years old maybe because when Google started, they were web advertisements, but they were very rudimentary. They did not have cookies or tracking things which could narrow down the user profile and show you exactly the ad which is relevant to you. So those things you could study by understanding the digital advertising market. And that market also has evolved now over a period of time. So once you're tracking that, you actually also tried the evolution over a period of time. So you start understanding the business better than talking to people who were in the advertising space, who were in the agencies. They were also now recommending clients to go online for advertisements because that market was picking up and growing almost double digits, like high double digits every year. Whereas TV and traditional media, you're aware, do not grow as fast, even declined in many markets. So online advertising was increasing and agencies were also telling people how to use this. So clients are not aware how to actually build creatives for it, how to create. So that aspect of the industry you could understand by talking to a few people in the agency side on the technology front, a lot of people. So again it is very fortunate that we live in the era of Internet where people are putting up their views very openly online and we saw how blogs were put up. So technical blogs are also available of how this technology actually works. In the background I had who is behind? How are other competitors competing with Google? Why does Google search have a better mode? Why does Google have a larger funnel of users coming in? So today you will see almost there are 6-7 products which have more than a billion plus daily active users. That was not the case that time. It was a much smaller number and markets like India, Asia were all expanding at a rapid pace. So tracking those things as how the company was scaling their products in different markets, how they would manage the user funnel, like Chrome was a good funnel, Android is a good funnel, YouTube is a good funnel where the users will keep coming back again and again for content or whatever they were looking for. Search is a good funnel. So they were building these very strong funnels for users to come inside. And once they were inside the product was so useful that almost one of these products was used every day by users. So even today as a Google user, I use Gmail everyday, I use Android everyday, I use YouTube everyday. It's inevitable to not go to these is impossible not to go to one of these things at least once in a day. So that's the kind of the product decisions that they made really help that business. So this is qualitative information on top of the financial information. And once you know that financial numbers are going to be little bit stable because the qualitative aspect looks OK, then you can put a valuation multiple on that and say, OK, now how much would you pay for a company that grows so much? How much would you pay for a company in the US market compared to a similar business if it was in India? What what valuation you would pay? So the relative valuation you could do. We didn't do a DCF because this is such a fast growing industry. It's very hard to get the numbers right. And DCF requires a little bit precision. Can you please explain DCF for people who might not really understand? So it's very simple. So for example, any business, right, forget about Google or listed companies, like you're running a shop and the shop has inventory, you're selling products like a Redkirana store or retail store who is selling daily groceries or goods. Now this shop you're running successfully for almost 10 years and you have a steady business of people and maybe you want to expand it and you want to raise capital. Now you don't have the money yourself. You have some money saved, but you need some additional money to build this business or grow this business. So you approach investors, hey, you know how much money can you give me for running this business? So some investors will show me your numbers, they will study your numbers, OK, This is annual sales, profitability, everything. OK, I will give you say ₹1,00,00,000 for expansions and I will own 20% of the business like Shark Tank today. Shark Tank exactly the same thing. So imagine a Shark Tank but different investors are evaluating you. How do investors get a confidence that this is a business worth investing in in the future, Right, So they will look at cash flows now, cash flows like how our incomes grow and how we calculate the present value of the future cash flows to understand how much money we will have in the future. In the same way, investors calculate how much money that business will earn over a period and they discount it with some discount rate. In our case, we might discount it. In the individual's case, we might discount it with the rate of inflation because that is the bare minimum. We need to compound money to at least keep at the pace of inflation if we want to earn a little bit more than we say. OK, my return expectations are inflation plus say 2%. Then you know that this is your discount rate. A business also might have a discount rate in the form of how much money it will have to spend to borrow money. Maybe the bank is only giving a loan at 12%, That is your discount rate. Maybe. And on discount rate, they will say OK, I want something more on top of that to at least make some money out of running this business. If I borrow money, people say, OK, 12% is too low. It is like very close to the borrowing rate. I want 15% return expectations. That becomes your discount rate. Now you discount this using the net present value calculation, which is very easily in Excel. So you put all these numbers in the Excel and do an NPV and you can get the answer. Now do that for any business and you get a very, very precise understanding of what this business is valued in the Year 5 or it is valued in the year 10. The only problem is you have to make assumptions that reality is not known. You're assuming that this much growth will come. You're assuming nothing will go wrong or you will probably reduce the growth expectations by assuming some COVID like event will happen. Nobody knows. So the amount of assumptions you have to make to really value that business, that makes a DCF a very dynamic and a very creative process. So I would not disregard the DCF process. It's actually the only way to value a business. But unfortunately, because our prediction skills are not that good, we are unable to give good valuation numbers. And the problem is it's a mathematical formula, so it will give you an answer. So the answer should not make you feel confident that the answer is right. Answer is an assumption. It's an opinion of this entire exercise of finding what aspects will make the cash flow grow in the particular business. Even for you and me, we don't know what the future holds, right? So we might have a salary coming in from our work, it might give us certain income, we will plan our investments accordingly, but we will not plan all the eventualities. What if there is an accident? What if there is a health issue? What if we get a bonus and we make far more money than we anticipated we will make. So all these are different positive, negative aspects which will affect our cash flows. So if you tomorrow we say what is sessions DCF value in 10 years from now, you can get an answer by calculating or putting some assumptions. But that doesn't mean the assumptions are always going to workout exactly the way they are. So that's the challenge for DCF. This is what DCF works. I think it's the only way to value, really value a business. But because it's so complicated, we use approximations. What does this mean? Yeah. So what approximations do you use? We say, OK, today the business is earning so and so much. What is a same kind of business, same size of business in the listed market trading at. So you are looking at relative valuations, relative values on the basis of cash flows, on the basis of earnings, basis of sales. So we have price to sales multiple, price to cash flow multiple or invert that it becomes a free cash flow yield or you can do earnings yield which is the inverted of price to earnings ratio. So these are basically relative approximate ways of pricing the business, not valuing it. You're just comparing the valuation that the market is quoting for these businesses and based on the risk free rate that you will get. So for example, if you put your money in the fixed deposit in the bank, how much money you will earn That assume is the risk free rate in businesses. Case we look at government securities rate that is in the market. So 10 year government security, whatever the interest rate will earn, that becomes the risk free rate. And above that risk free rate, how much can the business earn for you? So you really don't want to pay a very high multiple of price to earnings, high multiple of price to cash, cash flow or high multiple of price to sales for buying any of these businesses. The lower the better if you're convinced about the quality and the longevity of that business. So that's how you approximate the price of this business and you wait for the right price to come, which is again the beauty of long term investing that you need to have tremendous patience to really wait for the right price to come. Sometimes it can come in the form of a very adverse global event like COVID, when the right price falls in your lap and you just have to be ready with cash at that time. But sometimes the market ignores some sectors. That time you might get a chance to participate. So really studying different sectors, understanding various industries can build a database of companies for you, which are something you want to buy at a certain price. And you build that database for yourself. And based on that, you pick a company when the price is in that range of comfortable valuation to buy S, we have pricing businesses generally not doing DCF because DCF is fraught with so many errors that it becomes very, very hard. For example, both of us might study the same business and do a DCF analysis and the answer might be close, but the assumptions going into that answer might be very, very different. So again, it's just like the market, anybody's guess what the price is going to be. So better not be precisely wrong and justice be approximately right. That's the reason we use pricing as a guidance for how to value a business, then actually valuing the business by putting its cash flows and predicting them in the future. Got it. So you don't want to predict how much it will earn because it depends on, I mean, no one is gone, so we can't really predict the future. So the method you use is a relative pricing to what the company is trading at now. Can you give me an example of how you found, you know, some of these opportunities which you found where undervalued compared to, you know, it's PS or something? Or maybe you can use an example from COVID when he said so in COVID, we really added a company in the portfolio called ITC, which is very famous. It was a meme stock at that time. Don't tell me you smoked and you thought here, this is a very good comment. Yeah. So again, this is not a product where I'm personally familiar with, but I know it works in the I don't know. I'll have to follow them around in the office breaks to see who is smoking, who is not. But again, I'm not personally familiar with the product but the numbers were obvious. It is a very old business and it is one of the well known companies in India in terms of size of cash flows that they earn by selling cigarettes or tobacco products. Now this business was known to us. Again, the growth rates were very different from what some of the other traditional FMCG companies were. And this company over the last 20 years before COVID, a crash happened, was already had invested a lot of capital in scaling their consumer brand, in scaling their hotel businesses and all those other non tobacco linked areas that they were investing in. And they were also scaling profitability over a period of time in those areas. This is a classic example where I'm just giving, which is very, very illustrative. That's why I'm giving it to you now. A company of ITC's quality of cash flows and growth and growth was almost guaranteed because the product was consumed almost on a daily basis. And all the other FMCG products that they launched, the Atta or biscuits or soaps or shampoos, everything was may not be number one or two, but they were in the top five category in many of the markets that they were selling. And they had distribution advantage and reach and they were also fully vertically integrated in terms of all the products that they were selling except for the consumer products. So when you have such a large empire and a very, very well done business with good return on capital, profitability and growth coming in, it was very hard to see business of that quality compared to some of the other consumer companies, the valuation gap in them was quite wide. So could you give me, I will give an example, I will give an example. So if you are reasonably assured that the company will grow their earnings over a long period of time, then price to earnings is a good relative multiple to use to at least gauge where your company stands versus the peers. ITC is much larger than some of these companies, but yet it was getting a much lower price to earnings multiple. It was less than 20 times earnings for a long time. In fact, before we bought almost five years, the company had zero percent or even less than that. I think stock price performance despite giving dividends continuously and much larger dividends as well. But if you saw at the same time companies like HUL, which is not in the portfolio or even Asian pain, so some of the other consumer companies which are Britannia, all these companies were trading at almost three times to four times the price to earnings multiple of this company. And even despite the crash during COVID, other companies multiples did not fall as much, but ITC actually fell. The multiple actually fell and we have seen that the price was falling. The business is doing alright. I mean it has a lot of cash balances in the balance sheet. So it will not suddenly shut shop if something happens. They are not able to sell for a long period of time, for at least a year or so. The company has ability to survive and it can come back and again redistribute the products and scale up their manufacturing. So really the question was what price do you pay for a consumer company which has such quality of cash flows and growth and assuming the company will survive over a long period of time? So it was a number brainer at that time when we do relative pricing and even relatively to ITC's own valuation, that was the lowest valuation that they had seen in a while despite the stock not doing well, it was even lower than its long term average. So when you see these kind of things playing out which don't happen very often. So we built a sizable position in ITC at that time. And I'm just giving an example of how the thought process culminated because knowing everything about the business is just one aspect, but knowing when to buy it actually really helps you put it in the portfolio. How much to allocate again is a portfolio management decision that you have to take over a period of time. So this is one of the examples. And this is generally how other companies also get priced or valued over a period of time. And then we relatively compare them with our existing holdings, whether something new we want to buy S the opposite of this is also very interesting where you have something in the portfolio but you don't know when to sell. Normally we don't want to sell. If the company is doing OK, we will continue to own it. But there are certain conditions when we will actually want to sell. That is if the valuation is run up far ahead of our expectations of what the business will do. And our expectations can be wrong, but still it cannot be that expensive in terms of they existing cash flows or whatever growth rate you are factoring in. So sometimes the market suddenly revalues companies for whatever reason people like a particular sector or theme and the business becomes very, very expensive relative to its own past cash flows and earnings. Then it's a good time to say bye bye to that business, sell it from the portfolio and maybe wait on cash, maybe find another business which is slightly more attractive than the one you sold in terms of valuation available and your understanding has to be good. So over here, it really helps to have that holistic understanding of different sectors and realizing that OK, in this sector this is overvalued, so I will sell something here and buy something here. So that kind of understanding is very useful when you have a team doing the work. Oregon, even if you alone are doing it, it will be good to have a holistic understanding of different sectors to capitalize on the market opportunities. And lastly, we sell when we really goof up while researching, like we studied something and we made an assumption about the business and the business should do something in the direction that we thought and does something exactly opposite or something else altogether. That really is a mistake in investing and it's better to just cut your losses and justice go at that time. Don't worry about turning it around or the company will improve. No, it doesn't improve. If you made a mistake in assessing something, you just have to get out. Maybe you sit on the side and assess again afterwards, but in that moment, don't just keep it in the portfolio when you have known that you have made a mistake. So yeah, what the kind of diligence we do while bringing an idea into the portfolio, the same diligence happens for tracking it and also by deciding whether the idea has to be sold at some point in time. So Ronak, final question, since you are a very interesting personality in the in the sense you came from an engineering background, learned accounting ground up, became an intern, became a head of research, become became fund manager after after that. So if you would have, if someone, let's say who is from not from a commerce background but is interested in making a career in this field, then you know what, what are the things that you would recommend to them? I think people underestimate the importance of understanding the basics of financial accounting and knowing the competence required for this job. So just because I came from outside does not absolve me from learning all those things. I have to put the effort to learn all these things and be as compensated as somebody who has done academic qualifications like a California or a CFA or other courses that they were taken. So you need that academic understanding. If not, if you don't have the label on you, it's OK, but you need to understand those principles of accounting and how business accounting works. That really helps you filter out bad businesses, bad companies, and avoid mistakes while investing. So that is number one, anybody who is starting should aspire to have bare minimum academic understanding of all these principles of how businesses are run, how their accounting is done. Secondly, it's really about curiosity. I cannot emphasize it any more than this, but if you're not curious about how anything works around you, it will be very, very hard to become curious because somebody pays you to do research on a company. You will do OK for a while, but it will really not scale your understanding of how the world works because in the end, most businesses are connected to each other. This seems like a not just an interview, but like a master class for investors. So I hope you guys will enjoy watching this video. And thank you so much, Ron, for coming. Thank you, Sachin, for inviting me. It was a pleasure to just talk about what we do over here. And yeah, I'm glad I got a chance to contribute to your series. Thank you so much. Thank you. That brings us to the end of today's episode. If you would like to know more about this topic, then you can reach out to me on Twitter. I go by the user name at the rate Sashen NJ or LinkedIn using my full name that is Sashen Nintao Kongzam. We would be happy to take your suggestions. That's all from our site. Thanks for tuning in. See you in the next episode. To stay updated on this podcast, follow us at HD Smartcast on all the major social media platforms. To listen to more such podcasts, log on to www.hdsmartcast.com. Imagine earning a degree that prepares you with real skills for the real world. Capella University's programs teach skills relevant to your career so you can apply what you learn right away. 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