Unlike the previous quarter, this one produced very little in terms of news-flow unless you consider Summer Olympics to be newsworthy. We certainly do. Everyone needs a little inspiration now and then and what could be more inspiring than watching mere humans do superhuman things? Call us stupid but we fall for the same magic trick every four years. Compare this to the political drama that’s currently dominating the American news media. Nothing could be more uninspiring. Growing up in India, where such nonsense is commonplace, we are largely immune to it. It’s sad nevertheless
We made no new purchases this quarter. There were two significant sales – we sold our entire position in Infinite Computer Solutions for a gain of around 60% and in Aptech for a gain of around 125%. Both these positions were bought in early 2015 resulting in satisfactory IRRs. Infinite is a mid-size IT company and has its roots in off-shoring. Aptech is an IT enabled education company. Neither of these are great businesses in their current form. Our decision to sell these stocks will take a little bit of explaining, especially since we have seldom written about our selling criteria.
As you are aware, our portfolio consists of a) high quality businesses bought at reasonable prices, b) average quality businesses bought at fire-sale prices, c) special situations such as spin-offs, mergers etc., and d) cash. The proportion of each of these components depends on the market conditions but the list roughly reflects our order of preference.
Being cheap skeptics, we find buying high quality companies very hard. We are extremely suspicious of long term moats. There are way too many things that can go wrong in the long run. Furthermore, if we do find something we like it’s almost never available at a price that we like. When we do buy high quality companies our selling decision is rather simple. Either the market price has to increase far in excess of the business’ intrinsic value or there has to be meaningful business deterioration. So for most part when we hold a position in this category, we spend our time updating our assessment of the business while paying little attention to the market prices.
Our approach towards average quality businesses is a bit different. We like buying solid companies in industries undergoing turmoil. We also like companies going through issues that are on their way to being fixed. Sometimes the market is slow to price these correctly, especially as the sell-side suspends coverage and institutional investors leave in droves. We can generate substantial edge in such situations as we do our own research and have a far longer term orientation than an average institution. We start selling these stocks as the stock price converges towards intrinsic value. Our intent here is not to squeeze the last paisa out of these positions. In fact, it would be pure luck if we are able to sell at the highs.
Both Infinite and Aptech belonged in the second category. We will not be surprised if these stocks keep on climbing. Similarly, we won’t be surprised if they do just the opposite. The businesses in their current form are mediocre and the market price fairly reflects that mediocrity. So we sold and moved on. Our cash balance as a result has increased a bit and we are actively looking for viable replacements. Given the market conditions, however, we are not in a terrible rush. As usual we will give you a detailed update on our positions when we write to you next time at the end of 2016.
In closing, our portfolio composition or our investing strategy changed little in Q3. If you have questions regarding this letter or your portfolio, please do not hesitate to ask. As usual, you will receive your statements from NAV Consulting Inc.
Notes & Letters
A collection of our thoughts, views, and excerpts from our investor letters.