January – March 2012

April 24, 2012

Whilst your individual returns are with you, I would like to share how we think about our performance at Jeetay.

  1. We look at a "representative" portfolio. Most of the older portfolios usually have in the past had performance numbers clinging around the numbers of the "representative" portfolio. Newer portfolios take time to build up and usually mask true performance and may even distort it. This "representative" portfolio is that of our oldest client.

  2. We benchmark our returns against the Sensex. We are size agnostic but usually find values in the mid-cap space. However we carry fairly large amounts of cash and so a mid-cap index may not be the right benchmark. We have chosen the Sensex to give you a sense of the "opportunity cost" of not being in the market and not as some sort of a competitor with whom we are in a quarterly rat race.

  3. Short-term underperformance does not bother us and short-term outperformance does not excite us. What should count are long-term figures. Our idea of the long-term is very long. We will be honest – we do not have performance figures for our definition of the long-term. So we have sliced the performance figures into various shorter-term horizons, to suit your perspective of what should be a sensible investment horizon.

  4. We usually measure the cheapness of our portfolio in relation to each security's historical valuations and not against the current market valuation i.e. we would like to have some sort of absolute cheapness and not relative cheapness.

  5. The figures cited are before taxes and fees. This is because the taxes are paid by you and vary depending on whether you have short-term capital losses and the quantum of short term gains. The fee structure varies due to 1) different plans 2) different entry points (high watermarks). These should shrink the magnitude of outperformance, although not eliminate it.

  6. We do not only look at returns, but at risk-adjusted returns. We do not measure risk by simple volatility, but by downside volatility, drawdowns and portfolio cheapness. On a risk-adjusted basis, our returns, even after taxes and fees, should compare well with the Sensex. Since we believe that markets are unforecastable, we usually hedge our positions by carrying fairly large amounts of cash.

  7. We continue to use the "representative" account methodology so as to be consistent (Tables 1, 2 and 3).

  8. We have found that the "representative" account, which has been that of our oldest account, now has a different portfolio composition from newer accounts and even some of the older accounts. It may thus in the future not properly track overall performance. We have included Table 4 in which four sets of figures are shown:

    1. The "representative" portfolio returns.

    2. The weighted average returns of all the discretionary portfolios in the Jeetay PMS.

    3. The weighted average returns of those portfolios with over 60% equity at any point since inception. These may be generically thought to be the "older" portfolios since "newer" portfolios take some time to build up and may not be representative of portfolio performance. They are of course included in the weighted average returns of all the portfolios.

    4. The Sensex returns.

  9. We will therefore be reporting "weighted average" returns along with those of the "representative" portfolio.

  10. Should you find all these numbers too intimidating but want to focus only on a few, just look at the second and fourth columns of Table 4. That summarizes the overall performance of Jeetay and the Sensex.

Table 1

Since Inception        
PeriodPortfolio Returns (%)Sensex Returns (%)% in cash  
June 07, 2003 to June 07, 200480.80%48.00%Almost fully investedAudited
July 05, 2004 to  June 30, 200531.45%42.10%Around 65%Audited
July 01, 2005 to  March 31, 200630.32%56.80%Around 40%Audited
April 01, 2006 to March 31, 200733.73%15.62%Around 20%Audited
April 01, 2007 to March 31, 20087.41%18.60%Around 30%Audited
April 01, 2008 to March 31, 2009-22.26%-37.94%Around 35%Audited
*April 01, 2009 to March 31, 201085.16%80.50%Around 30%Audited
April 01, 2010 to March 31, 201129.09%10.93%Around 27%Audited
April 01, 2011 to June 30, 20116.26%-3.08%Around 20%Audited
July 01, 2011 to September 30, 2011-3.75%-12.69%Around 7%Audited
October 01, 2011 to December 31, 2011-11.14%-6.07%Around 7.5%Audited
January 01, 2012 to March 31, 201219.97%12.61%Around 7.5%Audited
Cumulative Return801.31%402.94%    

Table 2

Since 2006
PeriodPortfolio Returns (%)Sensex Returns (%)% in cash 
April 01, 2006 to March 31, 200733.73%15.62%Around 20%Audited
April 01, 2007 to March 31, 20087.41%18.60%Around 30%Audited
April 01, 2008 to March 31, 2009-22.26%-37.94%Around 35%Audited
*April 01, 2009 to March 31, 201085.16%80.50%Around 30%Audited
April 01, 2010 to March 31, 201129.09%10.93%Around 27%Audited
April 01, 2011 to June 30, 20116.26%-3.08%Around 20%Audited
July 01, 2011 to September 30, 2011-3.75%-12.69%Around 7%Audited
October 01, 2011 to December 31, 2011-11.14%-6.07%Around 7.5%Audited
January 01, 2012 to March 31, 201219.97%12.61%Around 7.5%Audited
Cumulative Return191.00%52.52%  

Table 3

Since 2010
PeriodPortfolio Returns (%)Sensex Returns (%)% in cash 
April 01, 2010 to March 31, 201129.09%10.93%Around 27%Audited
April 01, 2011 to June 30, 20116.26%-3.08%Around 20%Audited
July 01, 2011 to September 30, 2011-3.75%-12.69%Around 7%Audited
October 01, 2011 to December 31, 2011-11.14%-6.07%Around 7.5%Audited
January 01, 2012 to March 31, 201219.97%12.61%Around 7.5%Audited
Cumulative Return40.75%-0.71%  

*A mistake we hope never to make again – at low levels of the market, do not wait for even lower prices. Ignore all the negatives, because they usually are already in the prices. Mark-to-market losses should not hurt, only permanent losses of capital.

Table 4

Jeetay Returns**

 “Representative” portfolioWeighted average returns of all discretionary portfoliosWeighted average returns of “older” portfoliosSensex Returns
2006-2007 33.73% 28.66% 30.11% 15.62%
2007-2008   7.41%   7.12%   8.68% 18.60%
2008-2009-22.26%-23.85%-23.85%-37.94%
2009-2010 85.16% 78.40% 79.00% 80.50%
2010-2011 29.09% 18.57% 18.40% 10.93%
2011-2012   9.03%   3.32%  3.07%-10.50%

**Returns are before fees but after all other expenses

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I would, after a quarter century of investing, like to share some of my thoughts on the appropriate level of diversification in portfolios. I do this as a way of cataloguing my experiences and not to add any additional insights into the vast amount that has already been written on the subject.

"Focus" investing i.e. running concentrated portfolios has worked well for my family and some of the portfolios that I advise (which however are not part of the performance figures cited in the report) when bets are taken on companies with strong "moats", which have huge free cash flow generation, little requirement for incremental fixed capital and working capital outlays to fund growth and managements which deploy capital intelligently and return surpluses generated over business needs to shareholders. The price paid to acquire part ownership in such businesses should carry an adequate "margin of safety", although over long periods of time even a price paid which is equal to intrinsic value should generate decent returns provided the addressable market is growing and the business maintains it dominance.

There have been periods of severe underperformance in these portfolios which have tested my conviction and the patience of those who followed my advice. In fact, to Mr. Market's "weighing scale", an investor should add a very liberal "patience scale".

The results have been pleasant. An elaborate study was done by one of the families I advise on the performance from 31st December 2005 to 30th November 2011: the portfolio returned 23.32% per annum v/s a 10.22% return for the Sensex over the same period. These numbers are without considering dividends. The one-year numbers are even more dramatic, underscoring the huge volatility that comes from a concentrated portfolio – for the year ended 31st March 2012, the portfolio returned 18.4% v/s -10.5% for the Sensex. The numbers for one year, I must hasten to add, may well at some point of time be the other way around. That is the characteristic of the "voting machine" behavior of Mr. Market and one of the biggest hazards that value investors face. Short-term underperformance does wreak havoc to the "patience scale". After all it is human nature to applaud the wrong things.

Mr. Buffett has stated that a "hyperactive stock market is the pickpocket of enterprise" and "returns decrease as motion increases". We have had hardly any significant turnover in these portfolios taking seriously Lord Keynes's dictum "to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause".

Let me share with you a wonderful anecdote I came across in a book that I would recommend to every investor – "The Quest" by Daniel Yergin (it is not on the stock market but on energy). Here is the anecdote from the book:

"But the point at which energy security became a decisive factor in international relations was a century ago, in the years just preceding the First World War. In 1911 Winston Churchill, then First Lord of the Admiralty, made the historic decision, in his words, to base Britain's "naval supremacy upon oil-that is, to convert the battleships of the Royal Navy from coal to oil." Oil would make the ships of the Royal Navy faster and more flexible than those of Germany's growing navy, giving Britain a critical advantage in the Anglo-German naval race. As Churchill summed it up, switching to oil meant "more gun-power and more speed for less size or cost."

But the move to oil created a new challenge: a daunting problem of supply. While the U.S. Navy was behind the Royal Navy in considering the move from coal to oil for its battleships, it at least could call on large domestic supplies. Britain had no such resources. Conversion meant that the Royal Navy would rely not on coal from Wales, safely within Britain's own borders, but rather on insecure oil supplies that were six thousand miles away by sea - in Persia, now Iran.

Critics argued at the time that it would be dangerous and foolhardy for the Royal Navy to be dependent upon the risky and insecure nation of Persia - what one official called "an old, long-mismanaged estate, ready to be knocked down." That was hardly a country on which to rely for a nation's most vital strategic resource.

Churchill responded with what would become a fundamental touchstone of energy security: diversification of supply. "On no one quality, on no one process, on no one country, on no one route, and on no one field must we be dependent," he told Parliament in July 1913. "Safety and certainty in oil lie in variety and variety alone."" (emphasis mine)

When the quality of the business is not of paramount concern, but the price paid and the valuation is, I would modify Mr. Churchill's statement: "Safety and certainty in investing lie in variety and variety alone."

Let me elaborate. A client put some money into the managed accounts about three months ago but stated that he only wanted to invest in "high-quality" companies for the "indefinite long-term". To date, I have not been able to invest a single rupee, because companies I consider "high quality" are quoting at premia to what would be conservatively calculated intrinsic value – significantly so in some cases. The quarterly performance numbers for the managed accounts show a significant outperformance to holding cash which would not have been so if I had a similar mandate from all clients starting 'de novo'.

For the managed accounts we have diluted quality standards to meet valuation standards, and though not by a lot, that tradeoff still had to be made. We are a lot more of the Grahamian "enterprising" investors than the Keynesian faithful ones in the managed accounts. I would sleep a lot better at night with the advisory portfolios than the managed portfolios if the stock markets were to shut down indefinitely.

Thus we are a lot more diversified in the managed accounts with one eye on the "voting machine" behavior of the market and our "patience scale" shortened to a time span of three to four years. Subconsciously, quarterly reporting does do strange things to investment behavior. So please don't clap at these quarter's numbers!

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Should there be any queries, I'm always available. Please do not hesitate to contact me or members of the Jeetay team at the office - Divya, Rashmi, or Shakir!.

Warm Regards,

Chetan Parikh