Core Beliefs
Helios – Powered by EITM
Our investment philosophy has its genesis in the first few years after Samir Arora moved back to India in 1993 to set up Alliance Capital’s Indian operations, where Samir was the CIO and Fund Manager for various schemes managed by Alliance Capital.
Since then our investment philosophy has been further fine-tuned in light of Samir’s, and each of the senior team’s, 25-30 years of experience and learnings in the market. This investment philosophy is today ingrained across our entire investment team and across all our investment processes.
Core Tenets of our Investment Philosophy
The three overarching tenets of our investment philosophy are:
Elimination Investing utilizing our unique EITM framework
Elimination Investing is a unique approach that uses 8 fundamental factors to eliminate (ex-ante) poor performers and narrow down to a buy list of “good” stocks that “Cannot Be Eliminated on Any Factor.” This process has repeatedly proven to be effective in weeding out poor performers, gravitating towards winners, and creating a sustainable outperformance profile.
Avoid Permanent Loss of Capital
This is an overarching objective at every stage of the investment process, at stock level and at portfolio level. This is achieved by limiting leverage, respecting valuation, and screening out stocks with potential to permanently derate, stagnate or go to zero, using our EITM framework.
Invest with Tailwinds
It is always better to invest with a tailwind, rather than be left fighting headwinds. We are fundamental bottom-up investors who believe an investing strategy must be cognizant of, adjust to and take advantage of changing dynamics of macroeconomics, market conditions, industry trends and thematic tailwinds.
Additional Investing Beliefs
There are other important beliefs that also define our investment philosophy and process:
1. Deep Fundamental Research
Fundamental research must underpin all stocks in our Buy List. We seek to conduct intensive, 360-degree, research with internal models and research reports. A good research process entails mentoring from seniors, sector specialization, and multiple levels of reviews on research output.
2. Knowledge Based Investing
We seek and apply knowledge. We believe that the real difference amongst investors is no longer information, it is knowledge. Accessing information through a 360-degree coverage of the space is important. How to interpret information and to put it in a consistent framework is even more important than the information itself.
3. Seek the Truth
All information is, and must be, questioned. This stands whether it comes from the market or managements!
4. Invest in Steps of 1-3 Year Terms
We seek long term winners but invest for a series of 1-3 year terms. We recognize that few companies do very well over the long term. Industry trends, disruption, company strengths, government policies, etc. are visualized more easily over such shorter horizons, and we must adjust the portfolio and its positions as the investment cases evolve.
5. Sensible Diversification over Concentration
Diversification beats over-concentration. No one knows everything, and it is impossible to know anything for certain beyond a point. It pays to not put one’s eggs in too few baskets.
6. Risk Management is a Core Value
Risk management is central to the entire investment process. Capital when protected allows compounding over better times.
Elimination Investing or EITM Framework
We believe that the highest conviction decisions we exhibit in life and in investing are in the paths not chosen. These paths are rejected by us with high conviction as these are not for us, are sub-optimal, and will not lead us to our destination. This rejection happens earlier, along the way to us reaching our final destination.
Since our “higher conviction” is in ideas we reject, we believe we need to have a robust framework that rejects ideas based on clearly defined criteria, and synchronizes with how decision making is actually done in real life. This is the very basis of the EITM framework.
We know that arithmetically roughly about half the stocks comprising any market index do better than the index each year, and the other roughly half do worse than the index. It can also be observed that the top performing one third of stocks in an index do really well and significantly outperform the index, and the bottom one third of stocks do really badly and significantly underperform the index, over any time period. This is true of all market indices, although in India this dispersion in stock returns is way more pronounced compared to, say, the US markets e.g. S&P 500 index (see our Investor Guide for more details). Whilst this presents the opportunity to generate strong performance, this also exaggerates the threat to performance from the underperformers, and we believe these need to be weeded out as a first step.
Therefore, as a starting point, instead of conducting extra-detailed due diligence on all stocks in our broader universe to look for “reasons to buy“, we work with a much higher conviction first, looking primarily for “reasons to eliminate” stocks based on our initial fundamental work, to arrive at a “cannot be eliminated on any factor” universe of stocks i.e. our Buy List. It is on this Buy List of stocks we undertake the most detailed research work, and from which we look for stocks to ultimately buy for our portfolios.
In effect, our EITM framework leads us to rejecting the potential problem stocks and to ultimately select companies from amongst a short-list of “Good” stocks, that have robust, sustainable business models, typically in areas that have a good thematic or sectoral construct. We are therefore ultimately selecting positions from amongst a universe of good, and perhaps less good, but definitely not bad, companies.
Whilst we thought of this approach independently, we have found that we are not the only ones to think this way. In his book “Skin in the Game” Nassim Nicholas Taleb says:
“We know with much more clarity what is bad than what is good” and that “via negativa” (acting by removing) is more powerful and less error-prone than “via positiva” (acting by addition).”
Our EITM framework also aligns fully with the wise words of Charlie Munger. In his book “Seeking Wisdom: From Darwin to Munger” the author Peter Bevelin quotes Munger:
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Our EITM framework, applied in a diligent, disciplined and consistent manner, gives us the same long term advantage.
