Why did Neil Behl of Negen swear by the Special Situations Tactics?

Bahl, founder and CEO of Negen Capital, follows the ‘special circumstances’ style of investing, which was championed by veteran investor Warren Buffett and American academic and hedge fund manager Joel Greenblatt. Behl shares his portfolio details, investment strategy and financial journey for the exclusiveMintSeries-Guru Portfolio.Edited excerpts from an interview:

What brought you to the stock markets?

It was by chance, actually. I am probably the first person in my family who has come into the stock markets. When I was in school, I was watching a business channel one day, and I just got hooked. it was love at first sight. At the age of 15, I started investing and in 2002 my first stock pick was Infosys. My father set up the ademat account for me. Initially, I was investing with very limited knowledge and without any kind of guidance or consultation. It was like buying a share and then selling it.

Were you investing with your pocket money?

My father gave me some money. My real investment journey started with the IPO (Initial Public Offering) of Yes Bank and Petronet LNG. These were my first two big wins. As a young kid, I made good money. Of course, the returns were on a very low basis, but when you start making good money in percentage terms, you get hit even more.

What was your initial investment strategy?

I was a very typical retail investor and had no real strategy as such. It was what you like, you buy. For example, if the Union Budget had something good for a particular sector, I bought a stock. Since India has been a great story, everything I bought grew. I stumbled upon winners, but largely due to luck.

Tell us about your early professional life.

I had been selling old postage stamps and posters since the seventh grade. That time,sportstarThe magazine used to spread photographs of cricketers and other players. I send these posters to myclass\smatesfor . will try to sell 20-30. That’s why I never thought of doing any work. I wanted to become a full time investor but it was not easy as I needed money for it. So, I started my own business during the final year of my degree at SP Jain Institute of Management and Research, and Negen Capital was born in 2007 as a sub-broker.

Did you burn your fingers in the 2008 market crash?

Well, 2008 was not very kind to anyone. I also noticed that my portfolio has gone down by a huge margin of around 70%. But an important lesson from that period was that even if my portfolio went down, the period after that was good for me, especially in 2014. The lesson was that as long as you own good companies, and make systematic investments, you’re going to be fine because India is a very good story. The 2008 crash was a big one as it completely dispelled my fears.

How did your investment strategy develop?

Around 2014-2015, I was introduced to a new method of investing, which is an extension of a type of value investing called special circumstances investing. It really changed the course of my life.

Did serious investing start with this strategy?

Yes that is correct. My brother, who works at a hedge fund in London, introduced me to the special situations strategy after learning about Joel Greenblatt and his story. Today, my brother manages his alternative investment fund.

How does this strategy work?

So, special position is basically an advanced way of making value investing. In value investing, you buy a business at a discount, a strategy made famous by Warren Buffett. Then the internet came, and everyone started getting information about a business. So, your good businesses started trading at very high valuations, and whatever business was available at a cheap price was largely due to a reason, which could be a corporate governance issue or going through a bad phase. Could be industry.

Special status is a type of corporate action, such as delisting, demerger or outright change in promoter, that completely changes the DNA of a business. This gives the investor enough time to figure out before the market how the DNA change of the business is going to change the valuation of the business.

For example, the US-based Berkshire Hathaway has the largest special status in the world. Before Warren Buffett took over the company, it was a failing textile business and it was cheap.

When Buffett came in and took over the business for $14 a share, it changed the DNA of the company. They got into chocolate, furniture and even insurance. Trading completely changed direction and this is what you call a special situation where an event happens that changes the DNA.

If you can specialize in particular situations, and do it consistently, you can create a huge amount of alpha. Both Buffett and Greenblatt focused on particular situations. There is no dearth of special conditions in the market. There may be 200-300 instances of such opportunities in India.

What would be the average holding period under this strategy?

Our goal is not to compound money in special circumstances. The goal is to move away to the devaluation, and look for a re-rating. Once the rating is done again, you are better off finding the next special position. In my opinion, two to three years is a good holding period under this strategy.

How much property are you currently managing?

So, a fund is PMS, where our current assets under management are close to 450 crores, and then we have an AIF, which is coming 100 crore in AUM

Can you tell us about the plans you offer?

We are very clear that at PMS, for example, we don’t want to confuse our customers. So, we only have one plan which is a special situation plan. We also have an AIF where we invest in startups.

What is the current asset mix in your personal portfolio?

I have fully invested in capital markets – in equity side and in startups. I don’t have real estate, gold or anything in debt. I have a house, but I don’t count it as an investment. My overall portfolio will be 70% in equities and 30% in startups.

Would you like to modify this allocation?

I don’t want to take my startup exposure more than 30% because equity and India are in a very special place. Equity provides you with growth and liquidity. Startups also give you good growth, but the liquidity is a bit low. Also, if something good comes along, I won’t hesitate to take a little risk.

Do you invest in international stocks?

A little bit, just to get my feet wet, but nothing seriously. We don’t have the bandwidth to research what you need to make money in mid-cap and small-cap in the US. Of course, I can buy Google or Apple, but we won’t make an alpha doing that.

How has your portfolio performed over the years?

In my PMS, the two-year CAGR (Compound Annual Growth Rate) has been around 59%, while the three-year CAGR is 39%. On the equity front, my personal portfolio will be somewhere in the same sector.

One strategy that works for your portfolio and one that doesn’t.

The strategy that has worked for me is to believe in India. The second thing that has worked for me is betting on the strategy in particular situations.

On the other hand, trading hasn’t worked out well for me in the past, so I stopped trading completely. I am focusing on investing right now.

Which are the sectors on which you are bullish or negative?

I am bullish across the board. As the late Rakesh Jhunjhunwala said, “It’s a buffet, eat whatever you want but don’t overeat. It has shaped my thinking that everything from entrepreneurs to investors in India is an opportunity. I am quick to serve.” But I am most optimistic about Restaurants (QSR). I think this space will grow 20% over the next several years. I am not bearish on any stock or sector.

Which stocks have contributed the most to your portfolio?

Max Healthcare is where the demerger played out very well for us. Also, GreenPanel Industries and CG Power did well for us. Earlier, Yes Bank had done surprisingly well for me in percentage terms, but on a very small basis.

How many stocks are in your portfolio?

We like to own 20 to 25 stocks. We’ve done the math around it. Let’s say you have a two-stock portfolio. Here you will have a 96% risk, where if something goes wrong with that one business, your portfolio could be completely melted. Now, when you reach number 16, your non-market exposure is reduced by 96%. Now, diversification is done on bit 16 stocks. By our math, 16 stocks is the best number, but we usually have 20 stocks in a portfolio.

For how many months do you make provision for an emergency fund?

We have a small lump sum amount which is sufficient for five-six months. This emergency fund is kept in the form of an ordinary bank fixed deposit.

Do you involve your wife in your financial matters?

yes i do I just keep grumbling about a particular company or an opportunity that I love. He himself is eligible to become a fund manager. The best part is that she gives me a lot of advice, and I think her approach has really improved my thinking process.

What does money mean to you?

I am completely happy with what we have. More money isn’t going to change me, because I still drive a 13 year old car and don’t have any fancy watches. So, money is a byproduct of what you are busy doing.

How do you identify yourself as an investor?

I think I’m a little too fearless. This may not be a good thing, but I don’t care whether the market will take a lower circuit or not. I would say that I am an eternal India believer.