A month ago, Anand Sridharan of Nalanda Capital wrote a lovely blog about how the term ‘value investor’ has been misused and why they would rather call themselves a ‘Business Owner’. Whilst many would think that is easier said than done, Anand has followed up with another brilliant piece about how the ‘Business Owner’ mindset helped the folks at Nalanda to ‘do nothing’, perhaps the hardest thing in investing and eventually deliver spectacular returns for their clients. First, the context in which Nalanda operates which may not be applicable to a lot of other fund managers:
“Nalanda’s structure is closer to private equity than to hedge fund or mutual fund. Our investors don’t give us cash on day-1 to build a portfolio all at once. When we find a business worth owning, we draw down just enough cash (from commitments) to buy as much of that business as we can. Our portfolio is an outcome of repeating such individual decisions and comes together over many years, without any grand design or top-down sectoral allocation.
….Our approach was basic: invest in decent-ROCE businesses run by decent people, with some basis to believe that these would sustain. And be disciplined on valuation. When all parameters lined up, we bought as much as possible.”
Why doing nothing is hard?
“Every step of the way, bad dominated good in terms of mindshare. Macro of past decade is well known: PIIGS, policy paralysis, scams, Trump, Brexit, Demonetisation, Covid, lockdown, inflation, war. Even at company level, my mindshare was consumed by problems: promoter squabbles, M&A disasters, capex-downturn, execution missteps, uneven progress. Envy made it worse. Every time a hot stock was mentioned, I noticed that we didn’t own it. No Bajaj Finance, Eicher Motors, Asian Paints, Marico, private banks, speciality chemicals etc. Big-picture message that our sound businesses were chugging along with compounding faded into the background amidst all this gloom.
As a result, there was strong temptation to sell every one of these businesses at every stage of the journey, especially as valuations moved to the expensive part of the spectrum (as early as 2013/14). In real time, there were a hundred reasons to sell and little reason to hold. It always seems smarter to do something than do nothing. And there’s no shortage of advice to sector-rotate, position portfolio for some macro regime, play something-plus-one theme, switch into hot stock, buy next big thing etc. Human nature and stock market context makes it nearly impossible to do nothing.”
How did Nalanda overcome this inherent human tendency to act?
“In 2015, Pulak reframed our description from long-term equity investor to permanent business owner. In the process, we formalized an approach of “if valuation is only problem, don’t sell”.
…While we always viewed investing through a long-term lens, viewing ourselves as owners made a huge difference to holding without fretting. Shift from investor to owner had a profound psychological impact that went way beyond semantics. Long journeys are way more palatable when we stop asking “Are we there yet”.
Subsequently, we only exited businesses when there was a material adverse change to the underlying business. Even then, we gave it a few years to gauge if change was irredeemable and distinct from normal ups and downs in any business trajectory. Examples of what made us uncomfortable include consistent loss in market-share, abrupt change of promoter, sizable capital misallocation and/or M&A, balance sheet deterioration.”
There’s plenty more to look forward to from the house of Nalanda – its founder Pulak Prasad’s book on investing is due mid-2023. Here’s Anand’s recommendation of the same.
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