{"id":280,"date":"2017-10-10T17:46:51","date_gmt":"2017-10-10T17:46:51","guid":{"rendered":"https:\/\/2point2capital.com\/blog\/?p=280"},"modified":"2018-05-03T05:25:38","modified_gmt":"2018-05-03T05:25:38","slug":"how-we-generated-alpha","status":"publish","type":"post","link":"https:\/\/2point2capital.com\/blog\/index.php\/a2017\/10\/10\/how-we-generated-alpha\/","title":{"rendered":"How we generated \u201cAlpha\u201d"},"content":{"rendered":"

This section will address queries that our readers had on how we could outperform in a rising market despite 1) being conservative\/risk-averse in our investment strategy and; 2) holding an average of 25%+ cash in the portfolio.<\/span><\/p>\n

    \n
  1. Being greedy when everyone was fearful<\/strong><\/span><\/li>\n<\/ol>\n

    During large parts of last year, we preferred to remain in cash rather than buy stocks at exorbitant valuations. There were long periods when we did not buy or sell a single stock. We used this time to research and build a pipeline of stocks we would buy if prices fell to attractive levels. This discipline of being patient and staying true to our value investing philosophy helped us create a large alpha.\u00a0<\/span><\/p>\n

    <\/p>\n

    While markets have been frothy throughout large parts of last one year, we still managed to invest our portfolio at what we believed were right prices. Markets turned fearful during events like demonetisation, surgical strike against Pakistan, and the North Korea scare. These periods allowed us to buy some of our wish-list stocks at reasonable prices. We believed that these events would have no material impact on Indian businesses over the long run. During such times, we tried to stay calm and focused on the fundamentals rather than on the noise.<\/span><\/p>\n

    During demonetisation, some cash dependent NBFC stocks (like microfinance) crashed as much as 40% for a disruption which we believed would have only a short-term impact on the business. Among others, we invested in Bharat Financial Inclusion (one of the strongest microfinance players). The stock has significantly re-rated since then, as the business recovered from the demonetisation blues and became an acquisition target of a leading private bank.\u00a0\u00a0\u00a0<\/span><\/p>\n

      \n
    1. Buying the Under-Researched \/ Undiscovered<\/strong><\/span><\/li>\n<\/ol>\n

      A significant part of our alpha was generated by investing in stocks that were undiscovered and under-researched. These companies were not actively tracked for various reasons like limited sell-side coverage, illiquidity, and inaccessible management. Our research on such undiscovered companies started with secondary research and forensic review of past annual reports \/ financials. We followed this with an independent on-the-ground diligence on the company that included attending Company AGMs, talking to industry experts, doing channel checks with customers, suppliers, competitors, ex-employees and current large investors.\u00a0<\/span><\/p>\n

      Investing in relatively unknown companies is avoided by many investors due to lack of information which limits the conviction levels. However, by conducting thorough on-ground diligence, it is possible to develop a high conviction even in unknown companies. Our small size also ensures that illiquidity isn\u2019t a major constraint. One such company that we invested in was Garware Wall Ropes at a starting price of 500 which has since appreciated by over 80%.<\/span>\u00a0<\/strong><\/span><\/p>\n

        \n
      1. Investing in the right themes<\/strong><\/span><\/li>\n<\/ol>\n

        We are constantly on the lookout for structural changes that will benefit a certain sector in the medium to long term. We attempt to identify them before the market does. One theme that we bet on and that worked for us was the organized luggage space. We invested in both the listed players in this space \u2013 VIP Industries and Safari Industries (both have more than doubled since our initial investment). Few reasons we liked the luggage space \u2013<\/span><\/p>\n