12 Sep 2016 14:46 IST

Sit tight you must

A money manager tells you why

‘Buy right and sit tight,’ is an oft-repeated advise from successful investors. Yet, like ‘buy low, sell high’, it is easier said than done. In Unusual billionaires (Penguin), Saurabh Mukherjea tell you why this rule is important, driving home the benefits of sitting tight on a portfolio for at least a decade.

Mukherjea knows what he says; he is the CEO of Institutional equities at Ambit Capital. He sets the bar very high to select the best businesses — revenue growth of 10 per cent, RoCE of 15 per cent, among companies with market capitalisation of over ₹100 crore. For financial services companies, loan book growth and RoE of 15 per cent are used for selection.

The toppers

The number of companies that pass the stringent criteria is abysmally low. The list of out-performers has expected names such as HDFC Bank and Asian Paints. There are also some unexpected ones such as Astral Poly. The stock returns of these companies, over a long period have beat out the index by a wide margin. For instance, a rupee invested in Berger Paints in April 1994, would be worth ₹212 in April 2016, compared to being worth ₹7 when invested in the Sensex. This is an annual return of 28 per cent for Berger vs 9 per cent for the index.

The book does not just list the winning pack, but also traces the history of these companies and very methodically looks at various metrics to prove why they are the winners. For example, how did they build and maintain their brand? What product and sales strategy enabled leadership position? Is there anything in their hiring, management and other processes that help sustain growth and gain market share?

Mukherjea relies on suppliers, customers, consultants and management professionals to piece together his insights. This adds the narrative a human touch. Here, Marico’s restructuring of its business and transformation from a family-run company to a professional one and Page Industry’s success in the World War II era in the Philippines with American forces boosting sales, make for fascinating reading.

Sloppy editing

That said, the book does not give you any epiphanies. Take the case of what makes Marico’s Parachute, a top brand among coconut hair oils. While the author gives some reasons for its success, one does not feel any wiser.

There are also many avoidable errors, especially in tables. For instance, when analysing market penetration of products, the same heading is repeated for two tables. Likewise, the higher number of ATMs to branch ratio and current account per branch are stated as a positive for Axis Bank. Why slightly different parameters are used for gauging HDFC Bank is not immediately clear.

The second part of the book gives a rigorous analysis of top-performing stocks and description of the framework used to analyse successful companies. These may seem off-putting to some, but could be a great source of information for others.

The real billion may actually be in the nuggets of wisdom Mukherjea sprinkles in the checklist for long-term investors. Particularly, the checklist used by Ambit to check accounting quality is a goldmine.

(The article was first published in BusinessLine.)


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