Q: What is your buy and sell discipline?

A: Our buy approach, whether adding to a position in stages, or small increments or filling the full position outright, depends on the nature of the company. If we are buying a small company without much liquidity, we may take our time buying it. Sometimes, we will buy some of a stock and if our conviction level gets stronger, buy more at a better price. Overall, we take just a couple of days, not months, to buy our positions. We act quickly and nimbly if we feel strongly about a name.

We will sell a position if our original thesis is no longer valid since we bought the stock. This happens, if the stock is static or it is down 20%, or vice versa. In case of any wrong decision of ours, something that we missed, we accept our losses and sell the stock. Conversely, we will actually buy the stock even if it is steeply down, if we believe there are no fundamental changes and it is only a short-term phenomenon. More importantly, we treat every investment on its individual merits. There is no specific level for a sell decision. It is not necessary that if a stock is down 20%, we will sell. However, sometimes, a poor investment pick will trigger an immediate sell decision.

Q:  Can you give an example of a sell decision?

A: Tyco is a recent example of a bad pick of ours. We have long had a position in Tyco. We bought the company stock when it had problems and even got some decent returns. At first, we were quite excited when the company announced it was splitting up into different entities. However, our research into the company, over a period of one and half years, threw up concerns about the value of each specific entity, standing on its own. Therefore, we decided to sell the position before the breakup. Generally, we actually like to look for conglomerates that are splitting since the market undervalues them just because they are conglomerates and the approach of ours has been quite successful in the past. However, Tyco was an exception.

Q:  What are your views on risk and how do you control it?

A: We believe, our investment approach itself, looking for 80 cents on the dollar, is inherently less risky in the long term. Moreover, diversity is a key factor because we do not tie ourselves to an index and, do not allot more than 20% in any one industry, in case a major crisis hits it.

The other risk control measure is our upper limit of 5% in one stock at cost. We try to maximize returns by constructing a less risky, cheaper portfolio in the market with better earnings prospects as the lower P/E over time provides us with more leverage in a downside situation. We believe it is easier for a stock to fall steeply when it is trading at 45 times earnings and misses an earnings quarter, than when it is trading at 11 times earnings. We thus cover both the downside and upside of an investment, to cut risk.