The Magadh Difference
We take an active approach based on a mix of core stock calls, tactical stock calls and counter consensus stock calls. We have an intense focus on risk mitigation
In our view, Magadh Capital’s approach to investing is different from most other public equity-oriented investment vehicles in India due to its following traits–
Amalgamation of fundamental research and behavioural finance– We work with the purpose to understand the stocks owned in the portfolio and the underlying dynamics, as if the portfolio owns and runs those companies.
Behavioural finance plays an extremely important role in our process. A large part of our work goes towards analysis of mistakes – ours and others’, and study of markets, psychology and history. This helps us avoid some common mistakes in our investment process.
Active Approach- Some part of our portfolio consists of tactical stocks calls. Here we put stocks that again are from our fundamental research based stock universe but that have some near term catalysts. For such stocks generally we exit once our price objectives are met once the catalysts have played out, or if we identify some other stock with better risk-reward characteristics.
Intense focus on risk mitigation – Understanding, assessing and mitigation of risks is of utmost importance for us. Our probabilistic approach mixed with the philosophy of trying to avoid deep, prolonged bear markets form the core of our investment process.
We do not attempt to time the market but act fast if there is a high conviction opportunity. We believe that it is not possible to consistently buy right at the bottom and sell right at the top. Accordingly, we do not try to gain from perceived direction of short-term macroeconomic or commodity cycles. For example, we do not sell some stock in our portfolio with a hope to buy it 15-20% lower sometime in future. Underlying belief here is that any attempt to forecast macroeconomic or commodity cycles over short-term is difficult as well as futile. Hence investments based on expected trends in these cycles often have high degree of risks. However, if we have very high conviction (say, with a 80-85% confidence) that a stock will witness a 20-25% decline we are not shy of selling the stock. Further, we do try to avoid getting caught in the relatively less frequent but deep and prolonged bear markets like those in 2000, 2008 and in 1Q2020.
Dovetailing of deep quantitative work with plausible narratives- Our fundamental research process works to identify the key business drivers and the building blocks of a company with an aim to draw conclusions that are quantifiable. Identification of key business drivers calls for working on narratives, scenarios and stories. These provide the assumptions for our proprietary earnings and valuation models which in turn form the backbone of our number crunching exercise to draw conclusions regarding the prospects of a company.
Mix of Top down and Bottom-up investment- Magadh Capital employs a rigorous approach to identify good stocks available at fair prices. Here the focus is largely on the stocks’ prospects by analysing the company’s strategy, ecosystem, financials, industry prospects, and valuations.
At the same time, we also try to benefit from sectoral or economic tail winds. We are always on the lookout for new themes and trends that can aid a company’s sustainable margins, earnings growth, and return ratios.
Keep long term horizon but address mistakes fast– Magadh Capital believes in long term approach to investing and accordingly designs its portfolio that can deliver attractive returns over three to five years. While the investment theses for stocks in our portfolio are tested on a daily basis, indeed we act on selling a stock promptly if the price objective is achieved or all triggers have played out or its simply a wrong call or likewise we see some compelling reason to sell the stock.