"When the environment changes it tends to impact entire sector rather than any individual stock" - Peeyoosh Chadda

An alumnus of IIT Kharagpur and IIM Ahmedabad Peeyoosh Chadda, with over 16 years of experience in the investment advisor business heads the investment advisory group at Edelweiss Asset Management. In a direct interaction he shared with us his fund management philosophy and what it takes to succeed in the market as an investor.

Can you describe your investing philosophy for us?

As a fund house we are highly process driven. We tend to rely on investment processes that are very well tested, highly rigorous and analytical in nature. Our investment philosophy within this process is that we look at good quality companies. Quality, in terms of management, quality in terms of the business model, cash flow, growth and appropriate valuation. Being very analytically driven we pay attention to portfolio construction. So, stock selection is one element of managing the fund while the other element is portfolio construction. Portfolio exposure to risk factors such as mid cap, interest rate sensitive’s etc. should be known and be acceptable at any point of time. For us managing money means selecting the right stocks and creating a wining portfolio.

How do you select stocks? Can you tell us the procedure that you adopt while selecting stocks?

Most of our stock selection is done on the basis of results that keep emerging. We track around 300 companies for these companies we keep ranking them in order of their growth and quality parameters. We look at valuations and also as to how the stock is performing in the market and based on this our processes select the stocks. Typically in our portfolio you will not find stocks with high volatility. We tend to look for a mixture of growth and value.

Where do your stock ideas come from?

It comes from the processes that we follow. If you track 300 companies, stock ideas keep coming to you through the results declared, other changes like profitability, improvement in return ratios and cash flows. We look at the entire universe and select the stocks that we believe have a good potential.

What are the most crucial signals according to you which would determine the entry and exit points in stocks?

You enter stocks for either of two reasons. One is a change in fundamentals. If there is a change in the profitability, cash flows or growth rates, there is some degree of change in the fundamentals, and that is not fully reflected in the stock price. The second reason is, there is some strong trend which is continuing and is likely to continue in future as well. These are broadly two signals for entering a stock. Exit is largely driven by the best opportunity available elsewhere or by extreme overvaluation.

Do you meet company managements and are you constantly in touch with them till the idea is a part of your portfolio?

We are analytical and process oriented, we rely on data as it is put out rather than meeting managements on a regular basis. However what we do is that, whenever we have data that we cannot reconcile we call the management to help us to reconcile that data.

Technical analysis is considered to be a very important and integral part of market success. What is your take on it?

We do not use technical analysis. But at the same time I know that a lot of people use it and are fairly successful in that. I cannot put my hand on my heart and be confident that it works. I know there are people who are value investors, growth investors and there are people who are technical traders. They have used it successfully but there are people who have used it and failed.

Have you gone wrong on your investment ideas some time after having generated them and followed them?

One has to accept that every month in this business is not a good month. We do not monitor individual ratios but on the whole 60-70 per cent of our stocks beat the market and we are doing a fairly good job.

How important is the selection of a correct sector in a stock’s performance?

In India it is extremely important. If have a right sector call you make a lot of money. Large proportions of Indian companies tend to make money on the basis of what is happening on the environment. Honestly, do we have a company like Apple, which has a product that is environment proof, we do not think so. I mean we have a very well run companies but the environment plays its own important role in their performance. When the environment changes it tends to impact entire sector rather than any individual stock. Therefore, even though if you select a mediocre company in a right sector you will do reasonably well. If you pick a wrong sector you will not do well.

Buy-and-hold as a concept is widely followed and preached by mutual funds. Is this concept completely foolproof according to you?

Buy and hold has two big advantages. The first one is very simple it does not rely on complex thinking or does not rely on many right decisions to make money. The second big advantage is that over a period of time the stock market tends to go up often in growing economies like India. Buy and hold has value for those investors who do not have time to get involved with the market on a day to day basis. There are two caveats to this. There are certain points of time when buy and hold is quite dangerous specially when there is extreme valuation in the market like in 1993, 2000 late 2007 and early 2008. You have to be careful during these times as the market can take seven to eight years to come back to that level. So if you are adopting a buy and hold strategy, I will suggest enter over a time and do not rush into the market because it has one or two years of good run and try not to enter into the market when valuations are not on your side.

How do you tackle a bad phase (losing period)?

There are good years and bad years in the market. You should not over react in the good year and not even in the bad year. We do not sit on big cash at any point of time and it is very rare to be invested less than 90 per cent.

Is it possible to recognise a bear market before it is too late?

I will rather ask your readers to train yourself to recognise the extreme of bull market before it is too late. You lost maximum money when you have invested in December 2007 and not in October 2008. Therefore danger is when you are riding something which is not sustainable. So I would say it is possible to recognise the market tops, I do not know whether it can be done but when the broader market is trading at a PE ratio of 27-28, your expectation about future returns should be reasonable.

What would be the most important advice you would give to a layman?

Rather than just using the stock market to create wealth overnight, I would say have reasonable expectations. The stock market is not a gambling den. Do have a plan and a discipline to follow that plan. If you do not have the ability to craft an investment plan do seek advice of a financial planner or a wealth manager who will guide you to create an investment plan and stick to that. In the market do not get induced by the volatility. One should remember that it is a tool for making money but not something to create overnight wealth.