In this edition of LEARNING OF THE WEEK, let’s dive into the investment philosophy of Mr. Shyam Sekhar.
“Long-term investors are where they are not just because of stock picking, but because they were able to understand the business ecosystem.” – Mr. Shyam Sekhar (Founder – ithought Financial Consulting LLP)
The journey of great investors often follows an unexpected path. Many do not set out with the intention of becoming equity market investors but instead stumble upon it serendipitously, guided by curiosity and a thirst for knowledge. This chance discovery frequently evolves into a life long passion for wealth creation—not just for themselves but also for those who are inspired to follow in their footsteps. The story of Shyam Sekhar, one of India’s most respected investors, exemplifies this narrative.
Born into a family with deep roots in business, Mr. Sekhar’s early life was intertwined with his family’s industrial chemicals enterprise. Founded by his grandfather and expanded by his father, the business shaped his formative years. Following the family legacy, Mr. Sekhar pursued chemical engineering and went on to lead the business for 22 years. However, a pivotal moment came when he stumbled upon an annual report while visiting a neighbor’s house. That neighbor, who would go on to become his mentor, unwittingly introduced Mr. Sekhar to the world of stock markets. This chance encounter ignited a spark that led to a transformative journey of relentless learning, exploration, and growth, ultimately establishing Mr. Sekhar as a prominent name in the investment world.
Even as he navigated equity research and investments, Mr. Sekhar adeptly managed his family’s industrial chemicals business through the challenging economic landscape of the 1990s and 2000s. Finally, in 2009, he made the leap to full-time investing by founding ithought Financial Consulting LLP in Chennai. The firm embodies his disciplined approach to thematic investing—leveraging macroeconomic trends to uncover undervalued opportunities—while skillfully blending the principles of growth and value investing.
Here are the top 8 learnings from Mr. Shyam Sekhar.
1. Importance of focusing on the Balance sheet:
“The growth that you see in the P&L comes out of how the balance sheet is structured. A balance sheet supports a P&L, not the other way around. It allows the P&L to grow.
If you focus on P&L instead of B/S, you will always need to pay a premium. By the time it gets reflected in P&L, the valuations would have already gone up. But in balance sheet investing, you have to live through the waiting period”.
2. Idea Generation Process:
“My idea generation approach is largely theme-based. I write an investment theme and then identify stocks that fit the theme and provide attractive financials.
Theme-based investing helps me create adequate choices among ideas, choose the best amongst them, and provide ample clarity in why a specific business is superior to others.”
3. Developing Business Understanding:
“I do a lot of lateral exercises to understand a business. I use critics of a business or company to improve my understanding. Finding the negatives of a business is an easy job, there are a lot of people doing it for you.
Finding positives is more nuanced, as you must go beyond the obvious and discover what it takes to grow the business to the next level. Often, you need to see something much before others will discover it.”
4. Keeping an Eye on Business Trends:
“Understanding a trend is very important. One must be a good observer. If one has a keen eye, they can see things coming….A (business) transformation clearly is a progression, and it will show up as a trend.
It will not be too difficult to catch it or to be convinced quickly if one keeps an eye all the time on how trends are playing out.”
5. Top-down Vs. Bottom-up Approach:
“I realized that bottom-up investing is a lot more accidental than top-down. You need to stumble upon something. Here, you need more luck than one can gather to grow.
Top-down method gives me an advantage. Ideation happens much better. Ideation gets better mobility too, and one rarely gets stuck in the middle of the ideation process.”
6. Portfolio Structure:
“There is a core portfolio, with 70% allocation in about 7 to 10 stocks. The balance 30% is an exploratory portfolio, which has 15-20 stocks. It is my ideation lab, where I load up initial positions, keep growing my conviction within them in specific ideas, and then scale the ones where my conviction grows.”
7. Early Entry in a Cyclical Turnaround:
“Being an early entrant into a cyclical turnaround is never easy. You need to be a high-conviction contrarian. If you are in very early, you enjoy the best margin of safety and the highest returns. This always helps you exit early and yet make huge profits.”
8. Thoughts on Market Bubble:
“In every bubble, there will be more people swimming in the shallow end of the waters. They are crowded around each other, pushing and jostling to buy the same stocks.
When I think that the markets have reached or are around bubble territory, I move into the deep end of the waters. I buy stocks that are out of favour, microcaps that have clear visibility of growth for five years, and deep-value special situations plays.”
These insights are valuable and timeless in nature so be sure to bookmark this newsletter for easy access whenever you need it in the future.
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