For many retail and first time investors the share market might seem complicated, daunting and impossible to understand. One day market falls thinking that Greece will default or China’s stock market is crashing down or USA companies reporting weak quarterly numbers. The next day it is up because Greece never defaulted, China’s market recovers from the fall or to surprise one of the USA Company reports good numbers!

With our experience, we think that these confusions are created by our human brain. Many experts have talked and have given their views on the above matters and they simply end up to be wrong and media tends to pile onto story each and every day making you think it is a bigger deal than it actually is.

In simple words making simple things difficult, adding on top daily news to distract and influence by obfuscation rather than any clarity. This is the environment retail and first investor operates in and faces huge capital losses.

At Valueoperations, we have over the years built and refined our investment framework built around the principal of Occam’s principle of parsimony – more commonly known as Keep it simple stupid (KISS).

There are really two ingredients that we look for while investing, bright prospects for growth and we think about share price volatility a little differently to most. As mentioned earlier we keep it simple.

To evaluate bright prospects of any business it is important to know first your circle of competence. It doesn’t matter how big or small is your circle of competence but most important is to know your boundaries of circle of competence. Once you understand and appreciate your limitations, add only those businesses into your portfolio of which you understand the model and clearly distinguish any changes in its prospects so that you can take right decision.

The second ingredient is your approach towards price and volatility, which is perhaps most difficult of two once the investment is made.

The very first thing you can do is accepting that your returns will rise and fall with the market daily. The alternative is to simply turn it off to avoid being distracted by its daily noise.

Your goal therefore should be simple one, to purchase business at fair price that you understand and that you are confident about growth in its profitability or earnings overtime.

For example, let us take Mindtree that we own in our portfolio from last three years and have more than tripled our returns within them. We do understand this business model and as per our research for us it is important that it keeps growing its revenue by at least 15% every year.

We do understand that while achieving that growth in revenues its PBIT margin is achievable in range of 20% – 22% but same time we also accept that there might be few quarters within our investment frame that can impact in short term to it. They are like employee wages, visa fee and currency fluctuations that can impact those margins.

Selling today thinking that margins are shrinking and will impact its profitability in long term is foolishness if the fundamentals are pointing them for the short term.

In saying that, purely on valuations basis we would not buy Mindtree today as we think it is trading at premium price and there is no margin of safety available to investors.

This does not mean you should consider this post as an advice to sell or buy Mindtree. We do own Mindtree in our Valueoperations funds and Aziz Dodhiya is the co-founder and Chief Investment officer for Valueoperations fund. To reach him please email him at aziz@valueoperations.com.

 

Mindtree Q1 2016 Q4 2015 Q3 2015 Q2 2015 Q1 2015
Revenues 982 918 912 889 844
PBIT 178 167 182 176 167
Net Profit 138 129 141 137 129
PBIT % 18% 18% 20% 20% 20%
Net Profit % 14% 14% 15% 15% 15%
Price range 1456 – 1150 1489 -1185 1230 – 990 1245 – 850 900 – 650