Note to Smallcase Investors

Sustainable Compounders

A smallcase by the research team of Compound Everyday PMS

 

INVESTING PHILOSOPHY

Mandate: Sustainable Compounders is a multi-cap and value oriented smallcase with a mandate to build a portfolio of 10- 20 stocks across market capitalisation and sectors. While our focus is on absolute returns, we shall benchmark our returns with NSE Nifty 500.

Sustainability: We are looking to own businesses that can thrive over decades and reward shareholders fairly. Key characteristics of such businesses include large addressable market, competitive advantage, and respect for minority shareholders. Such businesses witness unit volume growth and high returns on capital for long periods of time.

Value includes growth: For us value investing does not mean buying stocks in the lowest quartile of quantitative valuations. It, rather, means buying at or below conservatively assessed value and seeing that value grow over time. We were and are happy to own growth and quality stocks if available at reasonable prices.

Humility and Risk Control: We proceed with the assumption that counter party is intelligent, resourceful and motivated. Most of the time markets are efficient in pricing stocks. What looks quantitatively cheap or expensive mostly deserves so. Very rarely owing to ignorance, dislike, temporary hardships, human biases or institutional reasons, prices diverge from value. Picking this divergence, however, requires a good understanding of underlying business. We try hard to limit ourselves to business that we honestly understand and operate with margin of safety. With experience we have realised this is the best way to control risk.

Management quality: Management quality is difficult to assess. We tend to focus on what management has done vs. what they say. This includes study of company’s history with an eye on past capital allocation decisions, quality of reported earnings and treatment of minority shareholders. Mistakes and learnings over last 8 years have trained our eyes to notice nuances. We have also learned that no price is too low for poor management quality at least in India where it is often difficult to replace management easily.

BENEFITS OF SMALLCASE
Investing through an expert-created smallcase is like hiring a personal trainer. While a personal trainer seems expensive, those who hire one do agree that it is an efficient, injury free and programmatic way to a better health. Similarly, expert created smallcases like Sustainable Compounders are an efficient, less costly, programmatic and easy way to sustainable investment returns and financial goals fulfillment. Importantly, an expert will help you avoid investing mistakes that many new investors commit and that in itself can add a few % points to your annual returns and justify the investment fees.

What makes a smallcase better than an average mutual fund is that a smallcase allows you to own stocks directly in your demat account giving greater transparency and control. Secondly, most smallcases including Sustainable Compounders are usually not so highly diversified (50-100 positions) as a mutual fund giving adequate weights to high conviction ideas. Lastly, unlike a pooled vehicle like mutual funds, your investment results are not affected by actions of other investors who can influence inflows and outflows due to greed and fear. That brings us to the last part..behavior.

RIGHT BEHAVIOUR
While good for hunting, gathering and surviving, evolution has ill prepared us to do well in investing. Fear and greed were mental shortcuts that helped our hunter forefathers survive. They ran when there were rustlings in the bushes (fear). And, they overate/ stored whenever food was in excess (greed). These genes are passed on to us as their legacy. Price fall triggers the same fear. Risk aversion rises and future projections get grim. No price is too low. Conversely price rise engenders same greed. Risk taking rises and future projections get rosy. No price is too high. Behavioural Finance has demonstrated that we are not perfectly rational. We are susceptible to heuristics and cognitive biases and this is the reason why average investor buys high and sells low – the recipe for investment losses.

Right behaviour, therefore, requires us to anchor our assessment to something other than short term price movements. We believe that anchor is honest understanding of fundamentals of underlying businesses. During price falls when a calm analysis of fundamentals convinces that long term prospects remain bright, the price fall is an opportunity to buy low. Similarly when prices rise to euphoric levels unsupported by best case possibilities, the price rise is an opportunity to sell high. The key to assess the same is an understanding of the underlying business.

We therefore restrict ourselves to businesses that we honestly understand and operate with margin of safety. This is the only way to bypass the emotional triggers and do the right thing – being greedy when others are fearful and being fearful when others are greedy.

Thus, to ensure a great investment experience, we would request you to have a 3-5 year of investment horizon and not to act solely on short term price fluctuations.

 

Kind regards,

Team Compound Everyday Capital

Sumit Sarda, Surbhi Kabra Sarda, Saloni Jindal, Sachin Shrivastava, Sanjana Sukhtankar and Sumit Gokhiya

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Disclaimer: Compound Everyday Capital Management LLP is SEBI registered Portfolio Manager with registration number INP 000006633. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. This transmission is confidential and may not be redistributed without the express written consent of Compound Everyday Capital Management LLP and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Reference to an index does not imply that the firm will achieve returns, volatility, or other results similar to the index.

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