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Why Negen’s Neil Bahal Was Sworn By Special Situation Strategy


Bahal, founder and CEO of Negen Capital, follows the ‘special situation’ style of investing, championed by legendary investor Warren Buffett and American academic and hedge fund manager Joel Greenblatt . Bahal shared his portfolio details, investment strategy and financial journey tomintseries — Guru Portfolio.Edited excerpts from an interview:

What brought you to the stock market?

Actually it was a coincidence. I was probably the first person in my family to get into the stock market. When I was in school, I was watching a business channel one day and I was hooked. It is lightning love. When I was 15 years old, I started investing and my first stock pick was Infosys in 2002. My father set up an ademataccount for me. Initially, I invested with very limited knowledge and without any guidance or advice. It’s like buying a stock and then selling it.

Are you investing from your own pocket?

My father gave me some money. My real investment journey started with the IPOs (initial public offering) of Yes Bank and PetronetLNG. These are my first two big wins. When I was a kid, I made a lot of money. Of course, the profits are very small, but when you start to earn a decent amount as a percentage, you are even more attracted.

What was your initial investment strategy?

I am a very typical retail investor and have no real strategy as such. It’s whatever you like, you buy. For example, if there was something good for a particular sector in the union budget, I bought a stock. Since India is such a great story, anything I buy goes up in price. I run into winners by chance, but it’s mostly luck.

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Take us through your early professional life.

Ever since I was in seventh grade, I’ve been selling old stamps and posters. At that time,Sports starmagazine used to read images of cricketers and other sports. I will try to sell these posters to myclas smatesfor 20-30. So I never thought to do any work. I want to be a full-time investor but it’s not easy, because I need money for it. So I started my own business in the final year of my degree at SP Jain Institute of Management and Research, and Negen Capital came out as a sub-broker in 2007.

Did you burn your fingers during the 2008 market crash?

Well, 2008 wasn’t good for anyone. I also saw my portfolio fall by a huge margin of about 70%. But an important lesson from that period is that even when my portfolio went down, the period after was still good for me, especially in 2014. The lesson is as long as you own the companies. be kind and invest systematically, you will be fine because India is a very good story. The crash of 2008 was a major event because it completely took away my fear.

How has your investment strategy evolved?

Around 2014-2015, I was introduced to a new way of investing, which was an extension of investment valuation, called special case investing. That really changed the trajectory of my life.

Is this strategy a serious investment start?

Yes it is. My brother, who works at a hedge fund in London, introduced me to special case strategy after he came across Joel Greenblatt and his story. Today, my brother manages his own alternative investment fund.

How does this strategy work?

So the special situation is essentially an advanced way of value investing. In value investing, you buy a business at a discount, a strategy Warren Buffett famously made. Then the internet appeared and people started getting information about a business. So your good businesses start trading at very high valuations, and any business that’s cheap is largely due to a reason, be it corporate governance or a The industry is going through a bad time.

A special situation is a type of corporate action, such as delisting, delisting, or completely changing promoters, which radically alter the DNA of a business. This gives the investor enough time to find out before the market makes how the DNA change of the business will change the valuation of the business.

For example, the biggest special situation in the world is the US-based Berkshire Hathaway. Before Warren Buffett took over the company, it was a failed and cheap textile business.

When Buffett came in and took over the business for $14 per share, it changed the structure of the company. They get into chocolates, furniture and even insurance. The business has changed radically and this is what you would call a special situation where something happens that changes the DNA.

If you can become an expert in special situations and do it consistently, you can generate a huge amount of alpha. Both Buffett and Greenblatt focus on special situations. There is no special situation in the scarcity market. In India, there may be 200-300 examples of such opportunities.

What is the average holding period under this strategy?

In special situations, our goal is not to earn double. The goal is to disappear underrated and seek re-evaluation. When the re-ranking happens, you’re better off looking for the next special situation. In my opinion, 2-3 years is a good holding period according to this strategy.

How much property do you currently manage?

So one fund is PMS, where our current assets under management are roughly 450 crore, and then we have AIF, approaching 100 crore in AUM.

Can you walk us through the programs you offer?

We are very clear that in PMS for example we do not want to confuse our customers. So we have only one schema which is a special case schema. We also have AIF where we invest in startups.

What is the current asset mix in your personal portfolio?

I’m fully invested in capital markets – in terms of equity and in startups. I have nothing in real estate, gold or debt. I have a house, but I don’t consider it an investment. My total portfolio will be 70% equity and 30% for startups.

Do you want to re-adjust this allocation?

I wouldn’t consider my startup exposure to exceed 30% because equity and India are in a very special position. Equity gives you growth and liquidity. Startups also give you good growth, but slightly less liquidity. At the same time, I wouldn’t be averse to taking a little risk if something good came along.

Do you invest in international stocks?

Just a little, just to get my feet wet, but nothing serious. We don’t have the bandwidth to do the research you require to monetize small and mid-cap US companies. Of course, I could buy Google or Apple, but we won’t make alpha to do that.

How has your portfolio performed over the years?

In my PMS, the two-year CAGR (compound annual growth rate) is around 59%, while the three-year CAGR is 39%. In terms of equity, my personal portfolio would be somewhere in the same region.

One strategy is right for your portfolio and the one that doesn’t work.

The strategy that has worked for me is trust in India. Another thing that has worked for me is betting on special situations strategy.

On the other hand, trading didn’t work well for me in the past, so I stopped trading altogether. Now I just focus on investing.

What are the areas where you are bullish or negative?

I am optimistic across the board. As Rakesh Jhunjhunwala said: “It’s a buffet, eat whatever you want but don’t overeat”. This has shaped my mind that everything in India is an opportunity for everyone, from entrepreneurs to investors. I am most optimistic about restaurant quick service (QSR). I think this space will grow 20% over the next several years. I do not discount any such stock or sector.

Which stocks have contributed the most to your portfolio?

There’s Max Healthcare, where the demerger played really well for us. In addition, GreenpanelIndustries and the strength of corporate governance have done well for us. Before that, YES bank did very well for me in percentage terms, but it was only very small.

How many stocks do you hold in your portfolio?

We want to own between 20 and 25 shares. We did some math around this. Suppose you have a portfolio of two stocks. Here you will have 96% risk, if something goes wrong with that one business, your portfolio can completely go up in smoke. Now, when you reach 16, your non-market risk is reduced by 96%. Now, the diversification bit is done in 16 stocks. By our math, 16 stocks is a sweet number, but we typically own 20 stocks in our portfolio.

How many months of emergency funds do you reserve?

We have a small lump sum that is enough for five and six months. This emergency fund is held as a simple bank fixed deposit.

Do you let your wife participate in your financial affairs?

I agree. I just keep promoting any particular company or opportunity that I like. She is qualified to become a fund manager herself. The best part is that she gives me a lot of advice, and I think having her perspective has really improved my thought process.

What does being rich mean to you?

I’m completely satisfied with whatever we got. More wealth won’t change me, as I still drive a 13 year old car and I don’t have any luxury watches. So wealth is a by-product of what you’re busy doing.

How do you define yourself as an investor?

I would think I was a little too reckless. That might not be a good thing, but I just don’t mind if the market hits a lower low or not. I will say that I am an eternal Indian believer.

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