Top 7 Value Investing Tips from Kisan Choksey - "One of India’s Top 5 Investors in His Time"

Investing can feel like a minefield sometimes, right? You're constantly bombarded with news, tips, and "get-rich-quick" schemes. But what if there was a more grounded, more human approach? That's where Kisan R. Choksey comes in.

This man has been navigating the Indian stock market for over three & half decades. Kisan R. Choksey, a veteran of the Indian stock market is a renowned figure known for his value investment strategies. As Chairman of Kisan Ratilal Choksey Shares & Securities Pvt. Ltd., and a former Treasurer and Vice-President of the Bombay Stock Exchange.

He was selected by ’Business India’ as one of the Top 5 investors in India in 1998. This blog post will delve into the core principles of his investment philosophy, particularly focusing on his value-driven approach with made so successful. So lets jump into it-

1. Understanding the Big picture

Kisan Choksey's investment approach starts from by doing a top-down analysis, starting with a broad industry analysis and narrowing down to individual companies. By this structured approach he has identified a promising investment opportunities like Dr Reddy, Cipla, MRF, HDFC etc.

Let's break down the key steps:

i). Industry Selection and Analysis:

The first step is to shortlist promising industries. This involves a deep dive into how each industry operates and the technologies driving it. Understanding the industry's dynamics is crucial before evaluating individual companies within it.

"The major factor we look first at is to shortlist the industry that would like to invest in when you shortlist the industry you would like to go deep into how the industry is working and what types of technologies that are in that particular industry..."

This initial screening helps focus research efforts on sectors with favorable long-term prospects.

• Industry Shortlisting: Identifying sectors with strong growth potential and a favorable long-term outlook.

• Industry Deep Dive: Analyzing industry trends, competitive landscape, technological advancements, and regulatory environment

• Circle of competence: A person can also find/shortlist industry which fits in his circle of competence.

ii). Selecting the Best Business within the Industry

After identifying a promising industry, Mr. Kisan Choksey focuses on finding standout companies within that sector. While the quality of the business is important, he places even greater emphasis on the quality of the management, believing that exceptional leadership is the cornerstone of long-term success. Here’s how he approaches this step:

• Management Capability: Leadership is paramount. He evaluates the management team's experience, track record, and ability to execute strategies effectively. For Mr. Choksey, great management can transform even a moderately good business into a thriving one, making this the most critical factor in his decision-making.

• Quality of Business: The underlying business must also be robust. He looks for strong ROCE and ROE, High earning growth Competitive advantages to stay resilient in changing market conditions and Strong cashflows.To get more about quality of business and management, you can read your previous article - Learning from bharat shah for more clarity.

• Investor Friendliness: Transparency, ethical practices, dividend payouts and clear communication with shareholders are non-negotiable. Companies that respect and value their investors earn his trust.

• Technological Edge: In a rapidly evolving world, innovation is essential. He examines how well a company leverages technology to enhance efficiency, improve customer experiences, and maintain a competitive advantage.

Within each sector, Mr. Choksey ensures his selections are guided by a blend of these factors, with management quality standing out as the most influential determinant. To him, great leaders drive great businesses, making them the ultimate asset in any investment.

iii). Evaluating Longitiviety & Sustainability of Business

Everyone wants a company that's going to skyrocket, right? But Choksey reminds us that it's not just about the speed of growth. It's about Sustainable growth. Once you select the company you try to see whether this company has a continuous growth plan and sustainable profit level. For Mr. Choksey, sustainable growth and profitability are paramount. To assess these factors, he considers:

• Industry Growth: Recognizing that a high-growth industry typically leads to higher growth rates for companies within that sector.Industry Tailwinds plays a major role in generating outsize returns.

• Management's Ability to Sustain Growth: Evaluating the management team's capacity to navigate challenges, adapt to changing market conditions, and consistently deliver strong results.

• Profitability Analysis: Examining key profitability metrics such as return on equity (ROE), return on capital employed (ROCE), and cash flow generation. (See whether company is generating real cash flow, or just accounting profits? )

• Capital Allocation: Are they making smart decisions with their money ? Analyzing how effectively the company allocates its capital to drive growth and enhance shareholder value.

  These are the questions that separate the winners from the also-rans. It's like building a house – you want strong foundations, not just a fancy facade. Choksey' s advice to focus on long-term growth, and remembering that investing is a marathon, not a sprint, you can increase your chances of success.

  "It is better to invest in a company which give 18-20% CAGR of return for 10-15 years then just doubling your money in few months."

iv). Timing investments with Patience and Discipline.

We all know that, sometimes it become difficult for investors, to find great business which has been showing High profits growths, strong cash flows and promising growth prospects at reasonable valuations. This kind of stocks which i called "Sarvagun Sampann Stocks" feel almost impossible to find in normal markets.

To dealt with this, Kisan Choksey emphasizes the importance of creating a list of quality businesses within chosen industries and patiently waiting for market corrections to buy them at attractive valuations. He firmly believes that "the market always provides opportunities to buy stocks at the right price." To execute this, investors must cultivate discipline and patience, ensuring they stick to their predetermined price points before making a move

He says "Generally, in the stock market, most people would like to invest when the market is improving. That is not a correct thing. But, if you select the stock and then follow it up and buy when the market is giving you an opportunity, I think that strategy is more sensible."

• Shortlist High-Quality Companies: Within those industries, carefully select companies with strong fundamentals, experienced management, and a sustainable competitive advantage and make a list of stocks that you like and track them continuously to find the right time to take the position.

One should had courage to act and take big bets if its necessary which only comes from a deep understanding of the industry and the company, enabling investors to capitalize on price advantages with confidence. This disciplined approach turns temporary market dips into long-term wealth-building opportunities.

• SEQUENCE OF FINDING STOCKS -

1. FIND GROWING INDUSTRY

2. THEN SELECT A COMPANY -

   (Quality Business)& Management)

3. SUSTAINABLE ROCE AND CASH FLOWS

4. FAIR VALUATIONS.

2. Avoid Churning (Hold stocks for atleast 1 year)

Kisan Choksey, a steadfast long-term investor, advocates for avoiding unnecessary churning and having strong conviction in your investments. He emphasizes that companies often need time to realize their full potential, and frequent buying or selling can hinder long-term gains.

• One-Year Minimum: Kisan suggests holding stocks for at least a year, giving companies the opportunity to execute their strategies and showcase their real value.

• Holding for long term: Ability to hold stocks for long-term only comes from true conviction which arises from deep research into a business and its industry. When you thoroughly understand a company's potential and the market dynamics, it becomes easier to stay invested, even during volatile times.

• Stay Invested if the Story Remains Intact: If the business continues to perform as expected, Kisan advises staying invested and even adding more to your position. Selling with the intention of re-entering at a lower price can be risky, especially with high-growth companies where opportunities for re-entry might be missed.

"When one is convinced that a company is doing well, and that it has good prospects, and the market gives an opportunity of such price advantage, one should seize it with courage and conviction." – Kisan Choksey

Kisan Choksey has a proven track record of success, having successfully invested in companies like Ranbaxy, Dr. Reddy's, Cipla, Infosys and many more. These successes highlight the importance of his investment philosophy, particularly his emphasis on long-term thinking, thorough research, and the courage to stick to his convictions.

3. Diversification of Sectors, Not Stocks

You've probably heard that you should "never put all your eggs in one basket." While that's true to some extent, but Choksey believes that diversification is more about Sector Diversification, rather than simply owning a large number of stocks.

In order to build huge wealth in longer term , one has to make some big bets on few companies in which he/she believes that, multiplication of capital can happen.

"Diversification is a rule for those who don't know anything." ~ Charlie Munger

• Concentrate Within Selected Sectors: Once you've identified these high-growth sectors (like pharmaceuticals, FMCG and technology) you should concentrate your investments within those sectors, selecting the most attractive companies within each.

• The 10-Stock Rule: Choksey believes in maintaining a focused portfolio, typically consisting of no more than 10 stocks. He argues that concentration can actually improve the probability of success, as it allows you to conduct more in-depth research and make more informed investment decisions.

Think of it like this: Imagine you're building a portfolio of different types of trees. Instead of planting a few of every single tree species, you might focus on a few varieties of fruit trees, a few varieties of ornamental trees, and a few varieties of fast-growing trees. This focused approach allows you to better understand and care for each type of tree, increasing the chances of a healthy and productive orchard.

4. Management Competence: The Unsung Hero of Investing

We often get caught up in the numbers – revenue, profit margins, market share etc. But there's a crucial factor that often gets overlooked: Management quality.

"I believe that the caliber of a company's leadership can truly make or break its success." - Kisan choksey

Think about it, even the best business model can falter if it's led by the wrong people. Strong leadership is essential for navigating challenges, making sound decisions, and driving long-term growth.

Assessing Management Quality: An Art, Not Just Science

Unfortunately, there's no single formula to assess management quality. It's more of an art, honed through experience and observation. Here are a few key indicators or checklist that Kisan R. Choksey uses to assess the quality of management:

• Transparency: Do the promoters openly share information with shareholders? Are they transparent about the company's performance, challenges, and future plans? or they always hiding the crucial information and transactions.

• Dividend Payout Policy: See whether they have intentions to share their success and wealth with shareholders ,through consistent and meaningful dividend payouts?

• Cash Flow Distribution: How do they allocate cash flow? Do they prioritize reinvestment in the business, debt reduction, or rewarding shareholders?

• Bonus: Man of His Word
  Kisan Choksey emphasizes that a reliable management team is one that consistently delivers on its promises. Integrity and consistency, he believes, are the cornerstones of long-term success. This principle can be put into practice by reviewing a company’s past concalls and annual reports to assess whether they have achieved the goals and commitments outlined in previous years

Why Management Matters -

• Execution: Strong leadership translates into effective execution of the company's strategy.

• Navigating Challenges: Great managers can steer the company through crises and adapt to changing market conditions.

• Building a Sustainable Future: They prioritize long-term growth and create a positive impact on all stakeholders.

Investing in the Right Leadership

While financial metrics are important, it's equally crucial to assess the quality of the management team.

5. The Power of Cash Flow

Kisan R. Choksey considers the cash flow statement the most critical document in a company's annual report. He believes it's even more important than the profit and loss (P&L) statement.

Cash flow statement should be made mandatory on the first page of the annual report ~ Kisan Choksey

Here's why:

• Profitability vs. Cash Flow: Profits can be manipulated through accounting techniques. Cash flow, on the other hand, reflects the actual money coming in and out of a company which nearly impossible to manipulate.

• Sustainability and Strength: A company's ability to generate consistent cash flow is a key indicator of its long-term health and sustainability.

• Valuation and Investment Decisions: Kisan Choksey emphasizes the importance of valuing companies based on their cash flow generation capacity. This provides a more realistic picture of a company's true worth.

Valuation: The Cornerstone of Investing

Valuation is a key parameter for him for investment decision, on which he will never compromises. Manytimes investor thinks to compromise the valuation aspect because of the having FOMO. But Kisan choksey sir says that"I will never have a ’left out’ feeling driving my investment decisions, Patience always pays."

• Discipline and Avoiding Regret: Thorough valuation analysis helps him make disciplined investment decisions and avoid the regret of buying overvalued stocks in hype markets.

• Relation of Cashflows with Valuation: Cash flows are a key driver of a company's valuation, as they represent the actual financial health and profitability, which investors use to estimate the intrinsic value by discounting the future cashflows to the present. Higher predictable cash flows generally lead to a higher valuation.One must have the visibility of future cashflows in order to realize the true value of business.

6. Momentum investing vs Value investing

In recent years, investing has become increasingly focused on short-term gains and sacrifice quality. Many investors seem more interested in chasing the next hot stock than in conducting thorough fundamental analysis. This "momentum investing," where investors buy stocks simply because they are rising in price, can be a dangerous game.

• Beyond the Hype: Many times, investors make the mistake of judging a stock solely based on its price performance in the market. This cognitive bias is commonly referred to as the Theory of Reflexivity. It highlights how market prices can influence investors' perceptions and decisions, often leading to misjudgments about a stock's true value.To avoid this, Choksey advises investors not to get caught up in the hype surrounding rising stock prices. Just because a stock isn't moving up doesn't mean it's a bad investment.

• Resisting the Urge to Chase Trends: He advises investors to resist the temptation to chase short-term trends and instead focus on building a portfolio of high-quality companies with strong fundamentals.

• Finding Opportunities in Market Volatility: He believes that market volatility can create attractive buying opportunities for value investors. When the market panics, the prices of fundamentally sound companies can temporarily decline, offering a chance to acquire them at a discount.

  "Don't see Volatility as risk, but as great earning opportunity"

Growth in Value – Kisan sir focuses on a company's intrinsic value, its profitability, and its long-term growth prospects – is the only key to long term sustainable investment success.He buys such a companies which grow there earnings every year,becauase of which P/E ratio became cheaper on the future earnings.This make us realize that, one should not only see the past alone but also look at the future cash flows.This the key lesson I learn from him.

7. Risk management is an integral part of investing

In the exciting world of stock market, Most of investor do not look at risk factors but only look at returns. However, Kisan R. Choksey makes us remember the critical importance of Risk management -

• Understanding Market Risk vs. Business Risk: He differentiates between market risk (fluctuations in stock prices due to market sentiment) and business risk (inherent risks within a company's operations, such as competition, technological disruption, or regulatory changes).Example- Asian paints is currently facing the risk of intense competition because of the new entry made by big players like grasim, pidilite, jsw etc in the paints segment.

• Margin of Safety Always : Choksey strongly advocates for building a "margin of safety" into investment decisions. This means buying stocks at a significant discount to their intrinsic value, creating a buffer against potential losses.

• Patience is Key: He emphasizes the importance of patience. Rather than diving headlong into the market, especially during periods of euphoria, investors should wait for attractive entry points and avoid impulsive decisions.

Sustainable Returns: A Realistic Goal

Choksey believes in sustainable, long-term returns. He suggests that investors should aim for compounded annual growth rates of 25-30%. This level of return allows for significant wealth creation over time (Doubling your money every three years is goal every investor should aim for).

"This blog draws inspiration from Kisan Choksey's insightful interview of kisan choksey (mainly by Indian Money Monarch). We hope these timeless lessons empower you to navigate your investing journey with wisdom, make well-informed decisions, and build enduring wealth. Here’s to thoughtful investing and lasting success — Happy investing!"