Investing is an art, not a science

Value Research | August 29, 2005

Sandip Sabharwal became Head of Equity, SBI Mutual Fund, in February 2005.

In an interview to Value Research, he shares his views and tips on how to select stocks.
Here are some excerpts from the interview.
On being the first investor in a stock

We take a view on companies based on fundamentals which can be justified by the state
at which the company is in.

If we are investing in a new company, we take a smaller stake if we are not very
confident. When other investors start coming in, we may increase our holdings as the
stock gains a presence in the market and also results in higher liquidity.

There are a whole host of mid-cap stocks where I have been the first to invest in over the
last three years.

These include stocks like United Phosphorus, Thermax, Balrampur Chini, Apollo Tyres
and Shasun Chemicals.

I think that the key to making money in mid-cap stocks is to buy them when they are very
cheap, illiquid and when no one is looking at them.

Eventually as the companies start delivering results consistently quarter on quarter, more
and more people start looking at these stocks and the liquidity builds up.
• Why mid-caps are hot

On having conviction about a stock

Conviction comes with experience, being successful and with time. In equity
investments, along with fundamental analysis, gut feel also plays an important role.

We invested in Adlabs at around Rs 120 – Rs 130 after attending a group meeting with
many other fund managers and other investors. We took a view that the entertainment
industry in India is in a nascent state and it has great potential.

People who look at current year's earnings will always find the stock expensive. We
bought many construction companies thinking that after five or ten years, these
companies would see their turnover rise 20 times. When that happens, even the stock
price will increase manifold.
• 4 great stock buying tips
On his stock picking strategy
I like to carry out my own internal research before taking an investment decision mainly
because I have realised that the views of external analysts are likely to be biased at best.
Equity analysis is a nascent industry in this country and as such the experience levels and
the talent pool is very limited.
I am firm in my view that equity investing is an art rather than a science. The investor has
to not only have an ability to carry out analytical analysis but also be able to
independently evaluate softer issues like management competence, future business
environment, etc and have a good feel of the way the stock is likely to behave.
Before going in for an investment I would typically like to be confident of the long-term
growth prospects of the company so that one does not have to monitor the stock on a day-
to-day basis. The stock should ideally have the ability to perform even in adverse market
scenarios and provide a positive return. I know that it is a difficult task to expect this to
happen all the time, however I always try to go in for such an investment.
• 5 rules when buying stocks
On whether he is a bottom-up or top-down investor

My approach to investing has been largely bottom up.

I try to evaluate a company based on its competitive positioning, the growth potential of
the business or businesses in which it operates, the available market place for its goods or
services, the pricing power and sustainable profits levels of the company in the medium
term and its return ratios.

I typically like to take a call on companies after visiting them and evaluating the
management bandwidth of the company along with its business outlook.

What I have also observed over the years is that one has to just evaluate the management
of the company and its ability to deliver above normal returns to investors.

Such companies are often investment worthy as the management will find avenues for
growth which an investor is not able to visualise at a given point in time.

The bottom-up approach to investing typically brings one to the same results as the top-
down approach but in a more efficient manner, because here one is focusing first on
micro research and then trying to evaluate the same in a macro environment.

For example, we were one of the first investors in the automobile sector. After meeting a
whole lot of auto companies in early 2002, I realised that all these companies had
undergone substantial restructuring over the previous five years and were seeing
significant volume growth.

Volume growth combined with no capital expenditure and consistent cost cutting was a
potent combination in an industry with high operating leverage.
My key picks at that time were Mahindra & Mahindra at Rs 100 levels and Tata Motors
at Rs 75 levels.

My position in these two stocks based on bottom-up research finally led me to the same
results, as a top-down positive view on the auto sector would have resulted in.
• 3 stock market mistakes to avoid
On his success
I would attribute my success to having an investment philosophy which is not a me-too of
either any of the existing or past investment gurus. I think that as an investor one has to
go through the investment styles of all past masters of investments but finally have one's
own style.

I believe this is what I have been able to do over the last 10 years of my experience in this
field.

I strongly believe that to do well in this field one has to take strong calls on investments,
stick to ones' beliefs, learn from past mistakes without letting them overwhelm you and
have a focused approach to investing without bothering about what anyone else is doing.

Subsequent to a strong due diligence, I buy or sell stocks depending on my conviction

irrespective of the general market opinion which I believe has to be a feature of a fund
manager who has to perform over the long run.
• Why stock tips are dangerous
Some of the prominent and successful funds Sandip Sabharwal manages are:

Magnum Contra Fund

NAV: 21.51
1-year return: 106.89%
3-year returns: 73.68%
5-year returns: 46.12%

Magnum Taxgain Scheme

NAV: 45.38
1-year return: 147.67%
3-year returns: 84.82%
5-year returns: 22.73%

Magnum Global Fund

NAV: 23.49
1-year return: 116.19%
3-year returns: 70.78%
5-year returns: 25.72%

The Net Asset Values and returns are calculated as of August 26, 2005 and are for the
growth schemes. To understand growth and dividend schemes in detail, read The best
mutual fund scheme for you.
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