FIN - GURU - CONTRIBUTION IDK

By Anuj Sehgal Founder & Portfolio manager of Manas Asian Equities Value Fund

My daughter turned 13 a few months ago and got her 1st smartphone recently (delay it as much as you can!). The new thing I learnt while chatting with her on Whatsapp recently was "IDK". To a lot of my questions to her, her reply would be IDK (“I dont know”). That got me thinking. As an investor most of the time my answer is also IDK when people ask me whether the markets will go up or down or when will the war in Ukraine end or how will it impact our portfolio companies or will our portfolio companies benefit from Covid or suffer from it or will there be another wave of Covid or not?

The point is we humans always have questions and expect answers to those questions (even though in our heart we know that if were asked the same questions we would struggle to give an answer) and as such people make up answers while in reality, most of the time they have no clue. There's an army of analysts, commentators on CNBC and so-called experts on TV who claim to know answers to all the questions and more so forecast things while in reality they have no clue. These commentators rationalize all the market/stock moves post facto and put a narrative to every thing. As famous investor Li Lu recently said, humans are good at rationalization but not very good at being rational. The quest amongst market participants to know what's in store in the future is just amazing for obvious reasons. Companies also oblige by giving guidance whereas in reality barring a small number of businesses who indeed have some visibility it is almost impossible to predict sales forget profits.

Given the IDK answer to most questions about the future, my approach to investing is very simple but difficult to implement. Just buy good businesses that I can understand run by good managements at a good price and hold them for the long term. I call this goodness of an investment. Only sell them if the original investment thesis changes and you are wrong or the valuations become exceptionally expensive. Quality of a business can be ascertained by its longterm track record, its return on capital, earnings power and free cash flow generation ability. A good business might not remain good hence it is important to keep assessing if the business is continuing to expand its competitive advantage.

That brings me to good management. This is the most difficult to figure out but once you have done it successfully you just stick with them because there are very few of them. One of the hallmarks of good management apart from allocating capital prudently and a long term approach is that they are honest, nimble, resilient, open to learn and change and have respect for all stake holders including minority shareholders. Such management will usually take timely steps to mitigate any potential risk of disruption. It is extremely difficult to figure out people in general and a good management in particular but there again I believe one should not just depend solely on your own judgement about a management but cross check with people you respect. People behave differently driven by incentives so it is always a good idea to ascertain good management over cycles.

The final piece of the goodness of an investment is the price at which you buy. That is a function of valuation, margin of safety, temperament and the longevity of the investment horizon but always remember the price you buy something at determines what returns you will make assuming you are right in your investment thesis. It pays to be patient and disciplined.