The vast majority of the general population associates investing in the stock market with gambling. The reason for that association is simple, they approach it as a gamble, feeling euphoric when their share price rises and slipping into a depressive state when their share price declines.
The key to a superior long- term return (note, I said long term because keeping a short term focus will only increase your inner emotional roller-coaster, put premature gray hair on your head, and clog your arteries) in the market is to understand the intrinsic value behind the company you purchase.
Intrinsic value is based upon the tenets of the underlying business and understanding those tenets affords an immediate advantage in forecasting where its earnings stream is headed and what resulting free cash flow the company can generate for many years into the future.
It is from intrinsic value analysis that Kothar Capital is able to place a value on the Company.
Our proprietary valuation models beat the market’s indicators and prevailing psychology,because like a gambler, the market can value a company based on how good a winning or losing streak it is on.
Kothar Capital uses three different techniques to triangulate the valuation of a company:
1. Discounted cash flow
2. Historical price-to-earnings ratios
3. Private-market valuation
In addition, Kothar Capital often looks for the potential realization of underlying value through a catalyst such as a new corporate strategy, improved operational efficiencies, or new management. Our belief is that eventually the market will realize the value that has been created, transferred, or unlocked by such an event and deem it a worthy catalyst. In short, when Kothar Capital bases a final decision it is derived from a well-rounded approach.
We strive to wait until the market feels manic-depressive about a company or industry for no rational reason, especially when we know the value is there and we begin to load up. However, there is the short-term risk that the market will become even more erratic and will depress the share price further. In that case, and cash permitting, we buy more. We do not chase a hot tip or an exciting story. We do not buy tickets on the momentum train because we feel that we will probably end up being the proverbial greater fool (there is always a greater fool out there to buy your stock from you at a price greater than you paid for it). We have no ability to predict the short-term market fluctuations of securities prices in a 1 or 2 year period. Short-term prices are driven by a number of difficult to predict factors including investor psychology and supply and demand. However, we know that in the long-term, the prices of our investments will converge towards and be driven by the intrinsic value of the underlying business. We force ourselves, no matter how tempting, not to time the market. However, we will maintain a cautious stance and raise cash if we feel overwhelmingly that conditions warrant such an action. But, we do not, and I repeat do not, ever time the purchase or sale of a good company. Relying on our ability as fortune tellers has caused too much frustration in the past so we prefer to rely instead on our much stronger analytical abilities. We detest losing money and strive through analysis, vision, and patience to avoid monetary loss. When we buy a stock, we continue to closely monitor the company’s prospects, so in the event our assumptions change we are not at the mercy of human emotion in making a rational investment decision.
As Warren Buffett so succinctly put it:
Rule number one: Don't lose money!
Rule number two: Never forget rule number one!
This approach to investing for the long-term requires patience and discipline. We suggest investors assume at least a 3 to 5-year holding period to (1) benefit from tax-deferred compounding and lower long-term capital gains tax rate, (2) increase the probability of generating a positive absolute return, and (3) reduce the likelihood of loss in the aggregate portfolio. It also means that our portfolio performance over the long-term will tend to benefit from low turnover of securities, low trading costs, and reasonable tax-efficiency. In order to succeed, our approach requires that we work with clients and investor-partners who take a similar long-term view towards investment success and who have the patience and discipline necessary to stay the course though the inevitable periods when our approach is temporarily out of favor, prices decline after we invest, or other approaches seem momentarily more exciting or rewarding. In our experience, this patience is the price that investors must be willing to pay to reap the benefits of investing. However, your reward is likely to be the ability to compound your capital at a good rate over the long-term through partial ownership of good businesses bought at good prices.
In short, we look for outstanding companies with exciting prospects, competitive strengths, strong capital structures, good managements, high return on equity, and consistently strong free cash flows but offered to us at a discounted price to its true intrinsic value with a built in margin of safety.
Above all we stick to a strict disciplined style of investing developed and honed by experience and relentless reflection. Finally, we only invest for you in companies that we too own, so we shall all endure the same pain and joy in the same triumphs.
The ability to bet big when one has maximum conviction about an investment is invaluable, especially given that even the most brilliant investors only have a few good ideas a year. Yet most professional money managers have strict limits -- either formally or informally -- on position sizes. Take a look at most mutual funds: the largest holding is often less than 5% -- (that usually is a starting position for us) -- and managers aren't allowed to hold much cash, so they have to dilute their best ideas with dozens of inferior ones, with the result that the average mutual fund holds more than 100 stocks. If you asked us to manage money this way, we would give it back to you because we don't think we could beat the market over the longer term. Keep in mind that outstanding businesses share a number of similar characteristics and outstanding businesses are rare, much less one that is at the right price. We place a great deal of time and effort through a disciplined approach on finding these businesses and when the price is right we jump headfirst. However, on one point we are very stubborn, we would rather do nothing than make an investment that does not meet our criteria.
In closing, it would be remiss of us not to bring up the ultimate mission of the firm: to make a meaningful contribution to our investor-partners by managing their money more intelligently. As a result of success in this mission it will naturally lead to our clients increasing their capital and so achieving greater financial freedom. Our hope is this would lead to their giving back to society and those in need through this freedom to live lives of peace, purpose, and meaning.