About Me

Hi, I am Kinshuk Chaplot, engineer by education, reader by passion. Here, I write about investment philosophy, sectoral and stock analysis, book summaries and everything directly or indirectly related to the financial world.

I try to sum up the main ideas of the books in less than 2000 words. Stock analysis and sectoral analysis is long form content above 3500 words. At present, I have covered almost 25 books and 8 sectors. Do check them out.

Why Sinewave Securities ?

Sinewave is a specific trigonometric function which is represented graphically in form of continuous waves. This wave pattern occurs often in nature as in wind waves, sound waves and light waves. Taking the same concept to finance, a similar sinusoidal pattern occurs - where the price often REVERTS TO MEAN. I use this concept to create a  framework to buy, hold and sell businesses.   

Mean Reversion vs. Cyclicity – I feel Mean Reversion dominates over very long term. The idea of mean reversion is that the poorly performing businesses would improve their performance over time.  The under driving force called entropy governs the market which states that eventually everything will get self destructed, be it sooner or later. A lot of companies relevant today will certainly become irrelevant later. Periods of fundamental momentum may play out for quite  a long time but far more common thing will be mean reversion.

       

Investment Philosophy :

THESIS + ANTITHESIS = SYNTHESIS

“No investment philosophy, unless it is just a carbon copy of someone else’s approach, develops in its complete form in one day or year.” -Philip Fisher.

The base for investment philosophy  comes from Hegelian concept of dialectics which is based upon thesis and antithesis leading to synthesis. Investment philosophy is something which takes a lot of time to gestate and give birth to wealth creating ideas. It changes as facts change and works in dynamic manner. Knowing what you own, able management, clean books and fair pricing clubbed with a ton of patience serves as the foundation for my investment philosophy. 

"When investing, pessimism is your friend, euphoria the enemy." - Warren Buffett

On knowing the Business

The most important thing is to know what you own and it requires deep reading and understanding and experience of the industry. To have a deep understanding is what gives you the conviction to hold a business or sell it when your thesis gets on its head. There are multiple sources which gives you deep insights about the business, some of which include-annual reports, concalls, audit reports etc. but an overall combination of psychology, accounting, science and humanities is a prerequisite which helps in removing noise from signals. As Charlie Munger calls it "multidisciplinary approach". To quote Munger "People who believe infinite growth in finite world are either madmen or economists." Deeper knowledge comes from reading a from a number of sources and read as wide as possible.

Buffett: Well, if he were doing – if he were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.

Smith: But there’s 27,000 public companies.

Buffett: Well, start with the A’s.

On management

The most able management not only have a certain "skin in the game"  but also focus on the growth of underlying business. "A good business cannot be run without good management but a great business is the one even which a fool can run because sooner or later there will be one." There are a number of case studies in Indian as well as American securities market which showcases promoters of various types ranging from Jeff Bezos, James Sinegal, Warren Buffet to Kiran Mazumdar Shaw, Harsh Mariwala, Deepak Parekh, Uday Kotak, Ajay Piramal. Walking the talk and rewarding the shareholders are top notch traits which distinguishes good from great promoters. Some of the quantifiable parameters include shareholding pattern, remuneration growth, equity dilution etc. but qualitative metrics can only be inculcated overtime. Reading investment books and case studies can help a lot in understanding the traits of good and great management. I have covered a few books by Nasim Taleb, Jim Collins, Philip Fisher etc. which using case studies and concepts explains about the qualitative analysis of management.   

On Valuation

The real risk lies in not knowing what you own. Valuation is the trickiest part of investing as it is a relative parameter and cannot be predicted in an absolute manner. To quote Warren "If a management lays earnings prediction for more than 3 years they are lying." Valuation model such as DCF lays more focus on terminal value taking some certain predictions in this uncertain world is one drawback which cannot be ignored. Mohnish says "Valuations should be such that heads I win, tails I don't lose much."

DCF has its own limitations, some include - it limits its usage to only those businesses which have predictable business models. You have to exercise conservatism while predicting future growth rates and profitability. One can side-step the issue about making predictions far into the future and think in terms of expected returns over a decade or so (no more playing around with terminal growth rates). While doing that, when determining value a decade from now, one must not assume a high P/E multiple. And when facts change, you must change your mind. No matter how sure you feel about your predictions, when you encounter evidence.

Investors tend to tell stories quite well using DCF. “The most popular software for writing fiction isn’t Word. It’s Excel.” DCF has problems, most of which are behavioral. But it can still be used to check the growth factored in the current price or to get the fair idea of the perception of financial community of the company at current price known as reverse DCF.

Valuations are highly subjective and designating absolute figures makes it more rigid. It varies from sector to sector, what kind of business it is and the quality of management making it topic of debate. Although some realism can be drawn from earnings and cash flow multiples on what not to buy, opportunity cost etc. but it is quite difficult to accurately extrapolate the fair value in uncertain world full of disruptions.

 “Who can predict what the market growth is going to be. If you tell me anybody who had predicted that the markets will grow like they have in India today. I don’t think so. If anybody could predict to me what is going to happen to the exchange rate which is another big variable? I don’t think so. Nobody can predict what happened to interest rates. So everything is variable and yet on that basis we make a fixed 10 year projection and do the DCF? I don’t believe in this and in my entire life I have never done it.”--- “false precision” is yet another form of “physics envy,” practiced by men (mostly) who forget that its better to be roughly right, than to be precisely wrong. - Charlie Munger. 

The idea is to buy assets which are mispriced by the market and has high growth runway left ahead. More on this can be read in my sectoral and stock analysis blogs. You can navigate through them from Labels section. 

The broad framework for investing philosophy stands on understanding of business, management quality and valuations. As we move on with specific stocks and case studies we'll use this framework for analysis and synthesize our ideas.

PRACTICAL APPLICATION

As provided by Ben Graham in "The Intelligent Investor", investors should first know the type of investing they want to do - aggressive or conservative. An aggressive investor is the one who has higher risk taking capability and can give his time to the market. Whereas, conservative investor is the one who does not like to give time to learn much about the market. Conservative investors can choose passive investment approach via Index funds, mutual funds etc. while aggressive investors can go for direct equity investments

I place myself in aggressive category and factoring in with my age and circle of competence, I prefer a concentrated balanced type of portfolio, with less churn and quarterly balancing based on my investment philosophy (as mentioned above).

My core portfolio holdings include - HDFC Life, Radico Khaitan, M&M, Kotak Bank, and HUL. These companies together comprise about 75% while some other stocks like Genus Power, KIMS, and Brigade enterprises make up less than 5%. Rest 20% is parked in cash equivalents and liquid funds. I like to deploy capital if I find the above mentioned stocks below their intrinsic value/ fair value and sell them if any if my thesis pointers goes away. I don't use hardcore excel sheet calculations but a mix of simple arithmetic, qualitative and behavioral way of valuing companies. More on it is explained in sectoral analysis blogs.

I have created this page just to show what I learned in last 5 years from the markets. I made mistakes (and the biggest of it is investing based on tips) and learned things the hard way. 

Disclaimer - I am not a SEBI registered analyst or financial advisor. This approach suits my way of investing and is just for educational purpose. Please do your own research and consult your financial advisor before investing. You can borrow ideas but not conviction.