Investment Lessons + Framework + Princip …

One of the most profound interviews of a fund manager I have listed to till date, hence thought of compiling the same in a format which perhaps, is more comprehensible. The fund manager is none other than Anthony Deden of Edelweiss Holdings. Tried condensing a 2.5-hour long interview https://www.youtube.com/watch?v=a4_U6bS-cU4 (most of it in his words), however with such dense thoughts from Anthony, couldn’t make it more concise:

(most of it in his words), however with such dense thoughts from Anthony, couldn’t make it more concise:

Myths + Realties: Investment Framework:

1. What can go wrong? This is one of the most important questions when making an investment. In fact, this is more important than what can go right. Not necessarily of the quantitative nature, but the kind of decisions which one makes and the impact of those decisions, both in short-term and long-term. Must avoid errors that would wipe out the entire capital, mostly on account of imprudence, error.

You don’t know what anything is worth until you know what can go wrong

2. Bespoke Investment Objective is NONSENSE: Creating a bespoke investment portfolio, basis the specific needs of the client is an illusion. There is no need to shape an investment portfolio around a particular person’s idea of risk, because people’s idea of risk is not necessarily real. Mere price oscillations are considered risky, whereas its permanent loss of capital which should be considered as risky.

3. Allocation of Portfolio with weightages is MADNESS: The idea of having X% in industrials and Y% here and overweighting this and underweighting that is complete madness. Portfolio should be viewed as collection of assets in the form of securities, having a purpose, each of the components having a sub-purpose of its own. Portfolio is an assemblage of a collection of assets which cannot only endure, but also withstand the pressures exerted upon them by time and turbulence.

The idea of going out to try to find more, why would I want to do that? First of all.

4. Fiduciary Responsibility: It was an enormous burden on me because if I were wrong, that means my actions or inactions would influence other people’s savings. So, I had to do something about it.  

The problem comes in not trying to impress your customer but trying to protect what he has spent years accumulating.

5. First Principles Thinking: Retracing one’s steps back and relooking at the investments, both absolutely and in terms of the circumstances and the environment is the key.  In a sinking ship, wherein you have 5 minutes to get out, looking at the possessions, the only thought that will pop up – “What’s worth taking with me?” You would pick the most important thing.

First principles thinking and questioning assumptions enabled Anthony to realize in 1999 that the entire financial system had ballooned, post which he sold off selling everything in the portfolios of his clients. It takes a lot of character, a lot of self-confidence, and a lot of real belief.

6. Flexibility: When you get lost on the road and you don’t know where you are, you may have a map. But the map doesn’t help you unless you know where you are. When the rules change, the basic framework with which you make decision needs to change.

7. Communication of the investment framework is the key.

Expectations of the people or investors at times is not commensurate to the reality that exists.

8. Incentives commensurate with SIZE of AUM – Bad Behaviour: When do you start thinking about enriching yourself from the assets of those who are participants in your scheme, then you are no longer an owner, that becomes a business. Where the size of their capital pool is directly proportional to their income and very little of it has to do with long term results because people do come and go. No one sees annualized rates of return over 20, 25 years because no one hangs around for 25 years.

9. Time Preference: Considering the crunched timelines, and thinking around quarters, the asset managers obviously cannot think long-term by owning the asset just for a month. That is known as Renting, which takes away the ability to own things, especially for long-term. Man’s time reference has changed over the years. So, it’s hardly anyone works to provide for another generation. People want to consume what they have. They see their investments as an extension of the current account.

When you buy for the purpose of selling you don’t really need to understand what can go wrong? Everything is seen in terms of price.

10. Continuous glaring at the screen is like looking at the scoreboard, you need to bat (i.e. study about companies/industries) in order to win: The more frequently we look at something. The more frequently you second guess why you own it?

11. No leverage / No shorting of stocks: Don’t play with your money, It’s not a competition. What you don’t understand, don’t do it.

12. Management Quality: If you don’t like the management, despite the company’s prospects looking great, you need to exit.

There shouldn’t and can’t be any rationalizations around the statements made by the management

This intense focus on the people responsible for the stewardship of a company in which Anthony has an investment is central to the way in which he identifies potential places in which to deploy his irreplaceable capital.

You generally know when you look at the decisions that are being made over a period of years. Looking at decisions, you understand the motivations of those who own this firm, and you understand whether they’re sowing seeds for the next year or for the next ten years.

13. Like-mindedness: I want to own a business participation in a business that is run by owners, whose motivation is the same as mine, who are responsible to their family and to their community, and to the capital that they employ as much as I would have been if I owned the same enterprise. So, instead of owning 100% I own 2%, 3%, 4%, 5%, 10%.

14. Peace of mind is more important – Cause that way I can sleep very well at night and I can assure you the capital that I commanded is deployed, it’s going to be around 50 years from now.

15. Balance Sheet: The idea of having a fragile balance sheet for the sake of a higher goal price doesn’t lend itself to the idea of ownership,

An owner is really very concerned with his balance sheet. In fact, the balance sheet is perhaps more important than his income statement.  His ability to endure and to survive is based on the strength of his balance sheet and the nature of the assets on the balance sheet. It’s not just assets, but the nature of the assets.

16. Financial or accounting jargons: Price to Earnings (‘PE’), Price to Book (‘PB’) are accounting terms, reflecting what happened in the past. EBITDA and Forward Guidance by the management is nonsense.

The only reason EBITDA is around, is on account of the ability to finance acquisitions to credit. Were it not for credit creation, there wouldn’t be an EBITDA

How many deals get done at a multiple of EBITDA, wherein heart-o-heart, the CEO knows that from a cash flow standpoint, it does not make sense at all. Compounding of earnings should be termed as wealth. Operating Earnings, i.e. EBIT should be considered as Earnings, since it incorporates Balance Sheet components

Purpose of Forward guidance is price of stock. And then, therefore the price of the stock become the product, so then it becomes a game, so the focus is not on making something, the focus is on “How do we make money?“

17. Management Compensation: If there were owners in those firms, there would not be any disputes about compensation because the owner of a business knows very much well how to compensate.

An owner in a business doesn’t take options, no. It’s common stock, he owns it.

18. Revisiting Decisions: I have a habit of revisiting decisions. Good or bad over the years and I go back, and I ask myself, “What is it that I should have seen that I didn’t? What was possible to see?” That one overlooks. I also ask myself, “What could I have seen that I didn’t? What did I see and how did I focus on those that others didn’t?”

The idea behind this is to be able to separate an element of luck and happenstance from skill

Now of course, since then I’m making fewer decisions than I ever did in the past. I think back in those days I would have made 20 or 30 decisions. Investment decisions a year.

Today I make one, maybe two on a very busy year.

19. Quantification of Risk is foolhardy: The unseen and the unmeasurable are more important than the other kind. And that has come from such observations over the years. Things that kill you are often things that you cannot measure, or we cannot see. In modern times, we distil risk down to a number. We call it volatility because it’s easier for most people to quantify. But in doing so we are ignoring the very nature of the risk itself.

20. Why Invested in GOLD? 35% of the total capital invested in physical gold. Gold provides all the 3 elements: Scarcity, Permanence and Independence from the financial system. My sentiment about gold is very simple. It’s something that I understand, something that I hold in a vault that I can. Something that can be sold to anybody, anywhere in the world at a moment’s notice. Something no one owes me. It’s not a claim on anything. It’s not a promise for anything. And there’s a sense of peace that I possess by having financial strength that even central banks don’t do.

21. Concentrate on your circle of competence, the businesses which you understand, you like, you understand the customers, its suppliers, competition, etc., rather than chasing some fad, which you have no clue about.

22. Structure of Production: If an idea looks good, we usually think who’s the beneficiary. We also try and look at the structure of production. once you get a sense of the structure of production, and some of the examples that you have of companies that you found that are three, four, five, six, seven steps down the production line. For example, a lot of people, perhaps like to enjoy having a whiskey. But a lot of people do make whiskey, a lot of people make the glass and the bottle, but how many people make the machine that makes the bottle? Only one.

And you end up having a view that there is scarcity in oligopoly and certain areas have come as a result of some event or some reasons that are economic positions that are impossible to compete with for several reasons.

23. Deployment of capital stems from like-mindedness: if I am interested in acquiring a 5%, 10% of your enterprise as a participation, I want to be certain, that the motivation that you have as an owner and a manager is like that of mine. I have an interest in you making the kind of decisions that will have an impact on the company 20, 30 years from now, rather than next quarter, or next year. So, if your objectives, and if your motivation is different than that of mine, and the capital that I deploy, then at some point I’m going to be disappointed. So, like-mindedness, whether it is in a marriage, in a business, or in any enterprise is a principal and important factor in doing the right thing in the right way.

Investment Principles: Scarcity + Endurance + Independence

# Scarcity: Scarcity is the most important law in economics. Scarcity is a natural law. It’s just part of life. There’s scarcity in material goods, in resources. Everywhere you look at is scarcity. In real savings, in terms of money, other than perhaps credit that is being created. But there’s not just scarcity only in visible, tangible resources. There is also scarcity in skillsets. There’s also scarcity among the kind of characteristics in character in men that you and I would consider to be attractive.

So, scarcity, in all its permutations, is an important ingredient in any action that deploys capital for the future. Liquidity on the other hand is an excuse not to want to know anything, not to understand anything. Consider capital as irreplaceable, hence capital needs to be respected. Irreplaceability of capital to be deployed in irreplaceable assets.

The idea around endurance and permanence of both capital and the assets selected to represent it – not many people think in this fashion.

What makes that painting valuable is not the canvas or the paint or the fact that there’s only one.

# Permanence or Endurance: There’s a second component which we call permanence. I sometimes think we should have called it endurance but nonetheless, it’s the idea of creating a framework not only within your collection of investments but by extension, within each investment the nature of the investment itself and the people, the participation that it represents. In the kind of policies and the kind of practice and the kind of purposeful behaviour that is designed to endure rather than really grow.

You can grow but become fragile and then die. That’s not interesting to me.

Rather than “grow the company” or “grow the earnings” and invest in the so-called “growth” stocks, it is important and what really matters is the idea of endurance, the idea of durability. looking at investments we owned, that had a history of 100, 150 to 200 years – “How could these have survived that long? What were the ingredients that have contributed to their said permanence?”. Finding these businesses that people think are boring because they don’t leverage out the balance sheet, they don’t chase growth, they don’t do all these things. So, if my mandate is to protect capital from both inflation, taxation and bad decisions then the idea of seeking divine endurance is very important.

It’s not always permanent, you must cultivate it and you must adapt it, nothing is permanent.

# Independence: Dependence makes a system fragile. So, the more independent an organism is from external weaknesses. The more likely is to adapt to its endurance or this strength. So, independence is very valuable and is costly. The threats to your freedom and to your liberty, to your dependence are many. And they change from time to time but a successful practice in which seeks to protect, preserve and enhance the patrimony over many years.

We depend on so many external factors. Perhaps, the situation is not as strong as we think it is.

We have competitive pressures that have come as a result of competition that would not have been there had there not been credit. So, credit creation, the debasement of money has created an environment in which there is falsity within the competitive arena in which companies operate. In order to survive they must adapt to that condition’s end. So, there’s demands on governments for subsidies or for tax abatements or other such things. Sometimes there’s dependence on one costumer.

Hope, the above timeless lessons, framework and the principles provided by Anthony Deden creates permanence in our minds as well.

Disclaimer: Please note that these are my personal views. While, I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.