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7 learnings from the contrarian investor, Mr. Kenneth Andrade

“Most investors made money in the third cycle as an investor. If you observe it closely, most investors get seasoned after the age of 50. They just stop making mistakes.”

Mr. Kenneth Andrade (Founder, CIO – Old Bridge Capital Management)

In this blog we delve into the investing wisdom of Mr. Kenneth Andrade, one of India’s most revered investors.

Kenneth Andrade is a name that resonates with success in the world of equity funds in India. But did you know he started his journey as a writer for Capital Market Magazine? Yes, you heard that right! From penning down market insights to running some of the most successful equity funds in the country, his career trajectory is nothing short of inspiring.

Mr. Andrade is renowned for his laser-sharp focus on balance sheets. He has an uncanny ability to identify dominant companies in sectors where capital efficiency is on the upswing. His strategy? It’s all about buying and holding, patiently waiting for the economic cycle to weave its magic and bring in those rewarding returns.

But here’s the twist – this wasn’t always the game plan. His current approach is the result of over a decade of learning and evolving. It’s truly fascinating to see how he meticulously crafted an investment philosophy that many investors follow today.

So, let’s look at how he came up with his investment philosophy.

How Did Mr. Andrade Built His Investment Philosophy?

In the first decade of his investing career, Mr. Andrade didn’t have a set philosophy. Instead, he immersed himself in the vast expanse of the market, scrutinizing various sectors and compiling data. He was so engrossed that he could recite details about any random company on the spot. Imagine this: Mr. Andrade once said, “If someone woke me up in the middle of the night in 1996-97, I could have told him the average cost per spindle of any random textile company, or the capital cost of any steel plant that was coming up.” Now, that’s dedication!

During his learning phase, Mr. Andrade zeroed in on the balance sheets of businesses. He meticulously analyzed companies to pinpoint where efficiencies or inefficiencies originated. Over time, he realized a crucial insight: as capital costs decrease, the longevity of a business increases, bringing all the fundamental metrics into play.

All this hard work and the invaluable lessons he learned culminated in the early 2000s. By 2002-03, Mr. Andrade had synthesized his decade of insights into a cohesive investment strategy, leading to the creation of his first portfolio for Kotak Mutual Fund.

Today, Kenneth Andrade is a maverick who has mastered the art of investing in cyclical businesses and industries. Rather than focusing on earnings and future growth, Mr. Andrade focuses on cash flow and its impact on the balance sheet.

7 Key Learnings from Mr. Kenneth Andrade

1. Dominant Business Requirements

“I look for market dominance and execution. But in businesses that are not doing well, you normally don’t get profitability. When you look at market dominance, it has to be accompanied by higher sales and lower capital employed”.

2. Investment Process

“We basically buy a good company, which is the market leader, at a good price and sit on it. And we just keep doing the same thing again and again. Let the market do the rest. If the risk-free return is x, then I try to work for a number double of that.”

3. Capital Efficiency Explained

Capital efficiency has two parameters:

a) Profit is the numerator.

b) Capital employed is a denominator.

The former is the function of the industry environment, while the latter is the function of the management.

“If we have a certain amount of cash, we reduce that from the capital deployed. Then, we take the incremental profit, which is a function of the market. On the reduced balance sheet size, the return on capital deployed increases. We can’t predict the market or the growth…So we keep reducing the cash flow from the balance sheet.”

4. When to Sell in Cyclical Businesses

a) “You look for a cyclical peak – When the top 2-3 players start leveraging and creating new capacity, you will get price disruption in the industry. Then, all factors will start playing out if there is an enormous amount of profit at the top of the cycle.”

b) “Look for breakdowns in the balance sheet.”

5. Businesses Trading at Higher P/E

“We don’t know how to make money when they are already trading at 40 P/E and the RoE is already at 30-35%. If the incremental RoE on capital employed does not grow, then the downside only increases.”

6. Managing Risk at Portfolio Level

“What we look for is the mortality risk of each component of the portfolio, and we ensure that they are solvent to make it through the cycle. We try to invest in the number 1 in the industry—the company that is capturing or maintaining the maximum market share in the industry.”

7. Business Vs. Management

“If I have to choose a good business and a good management – I will buy a good business. If the wind is in your direction, then a bad management cannot do anything about it.”

We hope you found it refreshing to gain insights from an investor who approaches investing differently from the norm. Thank you for reading!

Until next time, happy investing!

Source: Masterclass With Super-Investors

We hope you enjoyed delving into a mere 0.01% of the wisdom shared by this legendary figure.

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