October – December 2012
January 29, 2013
Whilst your individual returns are with you, I would like to share how we think about on performance on the portfolios managed by me 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 quantumof 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:
a) The “representative” portfolio returns.
b) The weighted average returns of all the discretionary portfolios managed by Mr. Chetan Parikh in the Jeetay PMS.
c) 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.
d) 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 portfolios managed by me at Jeetay and the Sensex.
Table 1
| Since Inception | ||||
| Period | Portfolio Returns (%) | Sensex Returns (%) | % in cash | |
| June 07, 2003 to June 07, 2004 | 80.80% | 48.00% | Almost fully invested | Audited |
| July 05, 2004 to June 30, 2005 | 31.45% | 42.10% | Around 65% | Audited |
| July 01, 2005 to March 31, 2006 | 30.32% | 56.80% | Around 40% | Audited |
| April 01, 2006 to March 31, 2007 | 33.73% | 15.62% | Around 20% | Audited |
| April 01, 2007 to March 31, 2008 | 7.41% | 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, 2010 | 85.16% | 80.50% | Around 30% | Audited |
| April 01, 2010 to March 31, 2011 | 29.09% | 10.93% | Around 27% | Audited |
| April 01, 2011 to March 31, 2012 | 9.03% | -10.5% | Around 10% | Audited |
| April 01, 2012 to June 30, 2012 | -0.18% | 0.15% | Around 8% | Audited |
| July 01, 2012 toSept 30, 2012 | 4.59% | 7.65% | Around 9% | Audited |
| October 01, 2012 toDecember 31, 2012 | 2.47% | 3.54% | Around 9% | Audited |
| Cumulative Return | 864.23% | 461.38% |
Table 2
| Since 2006 | ||||
| Period | Portfolio Returns (%) | Sensex Returns (%) | % in cash | |
| April 01, 2006 to March 31, 2007 | 33.73% | 15.62% | Around 20% | Audited |
| April 01, 2007 to March 31, 2008 | 7.41% | 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, 2010 | 85.16% | 80.50% | Around 30% | Audited |
| April 01, 2010 to March 31, 2011 | 29.09% | 10.93% | Around 27% | Audited |
| April 01, 2011 to March 31, 2012 | 9.03% | -10.5% | Around 10% | Audited |
| April 01, 2012 to June 30, 2012 | -0.18% | 0.15% | Around 8% | Audited |
| July 01, 2012 to Sept 30, 2012 | 4.59% | 7.65% | Around 9% | Audited |
| October 01, 2012 toDecember 31, 2012 | 2.47% | 3.54% | Around 9% | Audited |
| Cumulative Return | 211.32% | 70.24% |
Table 3
| Since 2010 | ||||
| Period | Portfolio Returns (%) | Sensex Returns (%) | % in cash | |
| April 01, 2010 to March 31, 2011 | 29.09% | 10.93% | Around 27% | Audited |
| April 01, 2011 to March 31, 2012 | 9.03% | -10.5% | Around 10% | Audited |
| April 01, 2012 to June 30, 2012 | -0.18% | 0.15% | Around 8% | Audited |
| July 01, 2012 to Sept 30, 2012 | 4.59% | 7.65% | Around 9% | Audited |
| October 01, 2012 toDecember 31, 2012 | 2.47% | 3.54% | Around 9% | Audited |
| Cumulative Return | 50.57% | 10.83% |
*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** (Portfolios managed by Mr. Chetan Parikh)
| “Representative” portfolio | Weighted average returns of all discretionary portfolios | Weighted average returns of “older” portfolios | Sensex 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% |
| 2012-2013(April 01, 2012 – Dec 31, 2012 | 6.98% | 10.06% | 10.21% | 11.63% |
**Returns are before fees but after all other expenses
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Here is a thought experiment on investing (adapted from a wonderful book, “Good Strategy Bad Strategy” by Richard Rumelt). Imagine that you have found Aesop’s goose and it is not going to die, not going to mate, not going to eat or fall sick and will keep laying golden eggs every year worth Rs 1 crore. There are no taxes and interest rates are to remain constant at 10 percent. You decide to encash your good fortune and sell the goose for Rs 10 crores to a gold miner.
Whilst the goose does have a competitive advantage (zero cost of production and a unique asset) in the gold mining business, the new owner will not become richer with the purchase. Unless a way is found to get the goose to lay more than Rs 1cr worth of golden eggs every year. Competitive advantage (or an economic moat) by itself does not lead to wealth creation. Only a growing competitive advantage (deepening and widening the economic moat) does. Of course, if you were fearful and the buyer was greedy, you could have sold the goose for less than its economic worth and value would have been created on purchase, but lets not assume irrationality.
Good investing comes from good business analysis more than good financial analysis. Mental models that help to understand business strategies that lead to growing competitive advantage should be useful to investors.
Here are some from biology although there are many from other disciplines which I’m not listing.
a) Evolution as an algorithm: Innovation, formula that through trial and error creates new designs; Competition + variation + replication = natural selection + evolution; “Differentiate, select and amplify” resulting in novelty, knowledge and growth; Economic evolution dependent on physical and social (method of organization) technologies; In evolutionary systems, statsis will result in extinction; Economic equivalent of mutation and sexual recombination are business plans based on risk, relatedness and time horizon; Swarm intelligence.
b) Punctuated equilibrium: Removal of “keystone” species from ecosystems; Disruptive technologies, technology S-curves; Extrapolationism is not a good theory.
c) Co-evolution: Arms Race (Red Queen races) and thus the difficulty of maintaining sustainable competitive advantage; Organizational resources and business plans; Symbiosis and “switching costs”; Eras and stages of co-evolution; “All forms of life make one grand system” -Charles Darwin
d) Fitness: Designs are fit if they survive and replicate under the constraints of environment; Fisher’s fundamental theorem – average fitness of a population grows from generation to generation; The experience curve.
e) Adaptation: Evolution produces designs that reflect new selection pressures; Speciation; Usually resisted due to delusional optimism, psychological denial and loss aversion; Organizational structure – hierarchies, Skunk Works; Cultural norms and inertia.
f) Industry clockspeed: Fast clockspeed species have extremely short life-cycles; Sustainable advantage is a slow-clockspeed concept; Fast – clockspeed industries tend to generate hedging strategies.
g) Genes: Business genes or practices that perform the same role as genes in biology; Information stored in “organizational memory” and passed on between individuals and firms; Relationship between genes and organisms typically complex and indirect; Genetic engineering has begun the process of short cutting the process of species evolution, proactive chain (organizations, technologies, capabilities) will shortcut industry evolution; Business double helix and cycles between vertically integrated industries and horizontally disintegrated industries.
Let me elaborate. Differentiation is vital to evolution. As Robert Goizueta, the late CEO of Coca-Cola said: “In real estate it’s location, location, location. In business it’s differentiate, differentiate, differentiate.”
There is an absolutely amazing presentation by Mr. Rajiv Bajaj of Bajaj Auto which is one of the clearest expositions of good business strategy that I’ve come across. I’m grateful to Mr. Darshan Engineer and Mr. Dhaval Shah of Siddhesh Capital Market Services Pvt. Ltd. for drawing my attention to this presentation and link (http://enam.com/AxisConf/axiscap-videos.html).
There are some mental models from biology that one can apply to this presentation although there are many from other disciplines too.
Here are some of them from the presentation. I’ll like to thank my colleague, Mr. Anish Jobalia, for making the notes.
Scooter strategy (Speciation)
- When we make a scooter, it has to come out of the same center from which comes the motorcycle. If we create a completely different platform, it won’t work
- One of the key difference between scooter and motorcycle is: In a motorcycle, one has to change gears, in a scooter one doesn’t have to
- Bajaj has to be paranoid about leadership in motorcycles. What if tomorrow someone made a motorcycle where you didn’t have to change gears
- If scooter technology is put in motorcycles, it can be done but price to pay is fuel economy
- Technology of ability to deliver high mileage as well as no gear technology would be meaningful to motorcycles
- Once we have that technology, it’s a piece of cake to make a scooter. This way we can make a scooter with a high mileage
- If we make a scooter, it will come from womb of a motorcycle. Then it will be de-risked completely
Three wheeler and RE 60 strategy (Speciation)
- Bajaj is the largest 3 wheeler maker globally
- As a leader, one has to attack oneself, strengthen oneself and guard oneself – Defense strategy
- People who use 3 wheeler deserve much more like a 4 wheeler : water cooling, fuel injection, steering wheel, seat belts etc
- Better 3-wheeler is a 4-wheeler
- Provide it at the same cost structure of a 3-wheeler
- It takes nothing to make a 3-wheeler (no high capital, no technology)
- Idea is to create a entry barrier to the high EBITDA business so that nobody would be able to copy the technology, certainly not China
ASEAN market strategy (Co – evolution)
- Entered Philippines and Indonesia 6 years back
- Approach was different in both markets: In Philippines went as Bajaj but along with Kawasaki because it already had the network while in Indonesia went by themselves
- Result was that in Philippines they are market leader (45% market share) while in Indonesia merely 2% market share
- Tie up with Kawasaki was to overcome the first mover disadvantage
- In Indonesia, people do not come into the showroom. Only way to reach them is through mass media
- To overcome this disadvantage, had to find a clever entry strategy i.e. Kawasaki
KTM Strategy (Co – evolution)
- We never pursued KTM for technology
- Started working with KTM in 2008 and by 2011, Bajaj had finished designing, manufacturing and shipping them back to Europe
- Chose to invest in KTM (47%) for guerilla marketing
- Bajaj is trapped in a value for money proposition. People would not buy the best of the motorcycles from Bajaj priced at a premium
- So invested in KTM
Hero as a competitor (Punctuated Equilibrium?)
- Biggest mistake Hero is making is that they are not defending their leadership
- Splendor has remained static for too long
- Hero thinks their brand is ‘Hero’
- Have to do something about the design, performance and price
- This is what happened to Chetak 15 years before. One day world moved past Chetak
Royal Enfield – Siddharth Lal (Fitness)
- Was clear from start that he would never participate in mainstream
- Strategy was to be a niche player and employ a guerilla strategy
- Never acts like a leader
Mr. Charlie Munger, the father of the “mental models” approach to thinking, once said: “Those who will not face improvements because they are changes, will face changes that are not improvements.” This is what evolution is about.
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I believe that an investor should be cautious when markets rise and suppress any desire to join the bandwagon, no matter how tempting it may be. I hope that in the months ahead we get opportunities to increase our cash holdings.
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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 who look after the administration at the office – Divya, Rashmi or Prem!
Warm Regards,
Chetan Parikh