Life was much easier for us as investors in the 1980s, and perhaps even in the 1990s. The internet has created a lot of noise along with  information. So unless you know what is information and what is noise, you cannot use the internet well in any field. Even as a runner, cyclist, photographer you are thrown so much stuff, that in case you bite all that you may not be able to chew, or eat – forget digesting.

I would look at a company watch it for a few years and then buy and then hold. Say I bought shares of Asian Paints or Berger Paints. First of all not much information was available about these companies. Supreme Industries is so low profile even now I am sure many of you have not heard about it. One of India’s sharpest investors had asked me to prepare a research report on Supreme in 1988. Apart from a fee of Rs. 25000 I got to spend a lot of time with the company’s numbers and I decided to buy shares of Supreme (RoI of time spent on research is INFINITE, and I am not joking).

I did not know whether it was doing well quarter on quarter. I did not know whether the owners of the company had pledged their shares to borrow money for some other venture. I did not know anything other than what the balance sheet said. We used to use something called “VANS” – value added news service – which would pick articles about companies from various sources and give us a weekly/monthly update. We used data from CMIE – Centre For Monitoring Indian Economy – which gave us very high quality financials. We rarely got any gossip or Cobra posts about the promoters. We did not have very granular data but we could compare industry data to the specific company, margins, growth, ability to attract talent and retain it, spend on technology, etc. AND WE THOUGHT that was enough. Maybe our research was not that rigorous but was sufficient at least in those times.

We just decided on the basis of feedback, some market gossip, etc. which shares and management was good and we researched fewer companies. We held on to lesser shares for longer periods of time. Once in while we would hear bad news like Orkay, but based on RoCE or RoNW or RoA this company may not have even entered our first level of acceptance for research. We were choosy – time spent on a bad company is not worth the time wasted! Once we found a company was cooking its books (intelligent guessing, that is all) we would not touch it. Doing detailed research was (is) so difficult that we had to be particular about the first level of screening itself. It reminds me of police selection process. When the constable selection happens literally thousands of boys descend on that place. So the boys are asked to run 5km – and the cut off is 18 minutes. This means a lot of the boys are eliminated there itself. After that they are weighed in – and they have to meet the height /weight criteria. That eliminates many more. Post this, the selection process starts. For us it was Ronw, Roce, fcf, – and after that we liked a high promoter holding. We soon started liking good family run businesses over so called professional management where the top management had no skin in the game.

WE HARDLY WENT BEYOND THIS!

Now what has happened is one weak Nbfc has a big ALM problem. They are borrowing short and lending long and I guess even they know that if the interest rates spike in the short run they will also not get money. Possibly. So some weak companies are in a tangle. One big investor seeking liquidity sells off one instrument at a higher yield (if you have dealt with bonds you will know how notoriously illiquid our corporate bond market is). So suddenly some smart ANALyst runs a query about all nbfc and publishes some article on how the whole Nbfc industry is sitting on a time bomb. Now if you are a small (aka new) investor who is investing on his own without good advice, chances are that YOU will panic. Fair enough.

Luckily for us when we were in the formative years we were not bombarded with so much of noise. So by some luck we learnt that the same action done by a good management and done by a bad management have different implications. When one big textile company wanted to issue bonus shares, their statutory auditor did not give them an ‘adequate reserve’ certificate. They changed the auditor. I knew the management, the past auditor, and the new auditor. I knew what was happening, but stuck on because it was a strong brand. With a weaker brand I would have jumped ship.