A man with zero tolerance of bad corporate governance

Sunil Shah, co-founder of Turtle Star Portfolio Managers, shares insights about his investment philosophy

A man with zero tolerance of bad corporate governance
Sunil Shah learnt a lot from books such as “The Intelligent Investor” and “The Security Analysis”

Sunil Shah graduated from college at a momentous time in the history of this country in the early 90s. It was the time when prompted by a balance of payments crisis, the Narasimha Rao government liberalised the economy to infuse growth and investments. With the entire country waking up to a new world of entrepreneurship and investments, Shah embarked on a career as a research analyst, a profession that was just unfolding. But that’s how Shah, the co-founder of Turtle Star Portfolio Managers, took a plunge into the stock markets.

He started reading to gain a perspective of the stock markets. Books such as “The Intelligent Investor” and “The Security Analysis” have helped him in his mission.

Money9 spoke to Shah to understand his investment philosophy.

Edited excerpts:

Q: Can you shed some light on your investment philosophy when it comes to picking up a stock?

Shah: At the end of the day stock prices are a slave of earnings. The key focus is to think about how big can the business cake grow and how will the company ensure it maintains or grows the share of the cake for itself. The statement looks simple but covers all the relevant points one needs to ponder before investing. As we know the Japanese people spend 70% of their time planning and only 30% in execution. I believe 98% of time should be spent in planning and the rest in execution and holding the stock.

Let me give an example. In a class of 50 students, the top 5 students are known to all. I would try to focus on students who’s rank is between 10 to 20 and what different things those students are doing so that any one of them can rise closer to the top 5 rank students.

Let’s replace students with companies. The investment philosophy is to pick quality mid-cap companies that can be the large-cap of tomorrow.

Q: When it comes to analysing an investment opportunity, what do you give more weightage to – conviction or analysis?

Shah: The stock market is more art than science. In science 1 + 1 = 2 and nothing else but that is never the case of stock markets. Take a simple analogy. A man who is doing a round of jogging track will complete the round in an approximate predictable time, but a dog will take its own time, the dog will go east, west, north, south, stop, run, bark, jump etc, so fundamentals or analysis is like the man, but markets or stock prices is like the dog. Hence after analysis – conviction to hold something is more important it is only conviction that the dog will reach its destination but predicting the time is difficult likewise one can analyse the way forward but needs to have the conviction to hold for a long period of time.

Q: What gives you the confidence to hold on to stocks that have turned into multibaggers?

Shah: I have owned few stocks for over a decade and they have become 100 baggers. The confidence to hold them is because the focus has always been the business and never on price of returns. Since my analysis tells me that the business is going to grow and the company is doing all the right things to retain or grow its market share, I would continue to hold these companies, and not focus on the stock price. It is the conviction to hold that generates returns and conviction is built on the pillars of business and not on stock price.

Q: Where did you fail and why? Can you name some stocks that eroded your wealth? Are you still holding the same? What were the lessons from these mistakes?

Shah: The stock market is an amazing place. The day you start believing that you have mastered all the rules of the game, the game changes. The day you start being arrogant about your success, the stock market hits you hard on your face.

I have made my share of mistakes in my investing career, but the most common element has been to take the management at face value and trust their statements with emotional biases. Inability to decipher corporate governance properly has been the biggest shortcoming in my investment journey.

One of the stock ideas that has taught me this lesson is RICOH India. There was an amazing learning here. I just saved my skin by exiting just in time. I just acted on fear and sold rather than being emotionally attached to the company. The talks of management, the size of opportunity, the backing of a strong global parent, the announcement of government orders, the participation from the promoter to lend debt to fund growth, product visibility in exhibition centers, the ground check by talks with various franchisees in many cities were all proven wrong.

At the end of the day, the learning was that despite all checks and balances in place, you could be wrong. Nothing works against bad luck. The biggest learning has been that even on the slightest doubt on corporate governance, take the matter seriously and, if possible, exit.

Q: Who is your investment guru and which books are you reading currently?

Shah: I have been head of research for Enam Securities Direct in the past. Enam was a temple of knowledge for stock market lovers. My gurus have been Manish Chokhani, Nilesh Shah, Vinod Ohri, Divyesh Shah. I have many friends from whom I keep on learning.

There is something to learn from everyone, our attitude helps us to grow or keeps us stagnant. Books I have just finished are “Psychology of Money”, “Joys of Compounding” and the next one will be “The sketchbook of Wisdom” from Vishal Khandelwal – one of the noblest souls in our markets today.

Q: How does your typical workday look like and what are your hobbies?

Shah: Taking cue from the book “Psychology of Money” – The ability to do what you want, when you want, with who you want, for as long as you want is priceless. It is the highest dividend money pays.

A typical workday is no different than from others. Making it simple is the difficult part. We are now in a world that has a deluge of data and much time has to be invested in reading, making notes on thoughts and discussing perspective with a few like-minded people. The key aim of the day is to keep away from noise and focus on the voice in the markets.

Q: In which sectors are you bargain hunting at current levels?

Shah: To my mind three themes have evolved in the Covid times – first, increased adoption of IT in our life, in fact IT adoption in our life has advanced by at least 4-5 years; second, fiancialisation of savings and third, PLI or domestic manufacturing of electronics products.

I think all these three themes have seeds of structural story and have growth possibility in the next few years.

Q: Going by your experience what would your top three advices to an individual investor?

Shah: Rome was not build in a day. Wealth creation happens over the long term. It is the period of holding that has maximum impact on wealth rather than the % growth in short period of time. The “N” in compounding formula is more important than the “R”.

The stock market is a place for wealth creation. Focus on the businesses you buy rather than focus on the stock prices.

Also do a “SIP in index fund for the next 10-20 years.

Q: As an individual what would you prefer direct stocks or mutual funds and what is your biggest investment in life?

Shah: Investment is a full-time job if you are in direct stocks. I am loving this work and, hence, I prefer the route. However, if a person is into any other business or profession or employment, a mutual fund SIP is the best thing to do in life.

My biggest investment in life is based on luck. I am lucky to be part of stock market journey since 1993. I also applied lessons from priceless book on and follow a process. Following a process has been the biggest investment and holding on to 100 baggers has been a derivative.

Ideas that have done well for me are Astral, Balkrishna Industries, Muthoot Finance, Minda Industries, CDSL, Atul, CAMS and others.

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