Investment Philosophy
“I don’t look to jump over 7-foot bars; I look around for 1-foot bars that I can step over.” – Warren Buffett
We believe that Mr. Buffett’s quote captures Banyan’s investment philosophy perfectly. We strive to buy businesses run by share holder friendly management teams that have track records of superior corporate governance practices. The second filter is a combination of (i) Quality of the business model and (ii) Valuation.
For an average business, we purchase the security at a significant discount to its intrinsic value, which Ben Graham called an investor’s “margin of safety.” In such cases, the securities are generally sold as the market price approaches intrinsic value, with the proceeds reinvested in other situations offering a greater discount to intrinsic value. For a business with a durable competitive advantage, we pay a reasonable price and intend to own the stock for a long period of time as long as the valuations are not beyond their historical ranges.
Adhering to the principles of intrinsic value and margin of safety results in an investment policy that runs counter to the general market psychology, and seeks to reduce the decision to purchase or sell securities to a discipline rather than an art. As mentioned previously, corporate governance is very important to us in committing our capital behind a management team and if we have any doubt on this count, then our discipline commands us not to pursue the idea any further. For each potential investment candidate that passes this test, we conduct a deep-dive fundamental business and financial analysis supplemented by primary and secondary research on the industry. We analyze the valuation multiple ranges for over a ten year period to determine the attractiveness of the current market price. Our experience has made us appreciate the power of compounding in a concentrated portfolio.
By limiting our investors’ capital to a handful of businesses we are able to invest in our very best ideas. Typically, less than 30 positions constitute over 80% of the portfolio. Our risk management philosophy at the portfolio level is based on the valuation multiples of the Indian equity market. We envision investing 100% of the corpus in fixed income and cash-like instruments during the phases when price to earnings (P/E) multiples are historically high and vice versa. We believe that the flexibility to allocate capital between equity and fixed income securities enables us to protect capital during the bull markets and invest prudently during the bear markets. At an individual security level, we control risk by not investing beyond 10% for an equity security and 20% for a fixed income security. In addition, if the valuation multiples for a security stretch beyond their historical 10-year ranges, we take appropriate actions accordingly. We also hedge portfolio through derivatives selectively and manage currency risk for our overseas clients as per their risk profile based on the market conditions and valuations.