Why Samir Arora disagrees with Warren Buffett

Long-term investment, concentrated portfolio for alpha and buying companies with a good management -- these are some profound beliefs that most stock market investors and experts hold. Busting the conventional wisdom, Samir Arora, founder of Helios Capital, says even legendary investor Warren Buffett's portfolio does not reflect his popular investment strategies. Speaking at a webinar organised by PMS AIF World, Arora shared an interesting take on bitcoins and also gave suggestion to Indian investors for global investment. We have compiled key thoughts from a two-hour long webinar:

Diversification versus concentration

Buffett says, "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."

Arora believes Buffett has been 'most unfair to the world' in saying so. "His own concentrated holdings such as Coca-Cola, Wells Fargo and American Express have hurt his portfolio returns," says Arora.

Citing December 2019 quarterly data of top 10 holdings of Berkshire Hathaway, Arora shows that Buffett has made 82 per cent returns in Apple, his top holding. However, most other stocks (from second to the seventh) have underperformed the index. "Even for Buffett, the concentrated portfolio has not worked."

In the context of India, he says, in last 25 years, Nestle is up 131 times compared to Colgate (23 times) and Hindustan Unilever (59 times). "How would you have thought in 1996 that Nestle would be a long-term story over Colgate or HUL. Similarly, instead of RIL (up 207 times), you could have bought Grasim (28 times), ACC (up 15 times) or Ambuja (up 23 times). Those who bought RIL would be a hero and buyers of ACC and the likes zero. Our theory is nobody knows anything about anything beyond a point."

'Buy and forget' doesn't work

The theory to buy a stock and hold it for long-term and earn 25 per cent return or so does not work, unlike what Buffett and others often advise. "Warren says buy stocks carefully as if you only have 20 punches in the lifetime. But, what did he do himself?"

Citing an academic report -- Overconfidence, Under-Reaction, and Warren Buffett's Investments by John S. Hughes, Jing Liu, Mingshan Zhang -- Arora says that during Buffett's prime years between 1980 and 2006, his median holding period has been only one year. "Approximately 20 per cent of stocks were held for more than two years and 30 per cent of stocks were sold within six months. This is Buffett himself; no assistants or managers played a role in it," Arora says.

Arora's Helios Capital has been holding HDFC Bank for a long-time. "We still won't say that it is a 10-20-year story. We are not selling it, but we will keep evaluating it. No stock is a 10-20-year story till it turns out to be such a story in hindsight," he says.

Arora suggests that one must keep evaluating the fundamentals of the stock against its valuation. "You should differentiate between whether earnings growth has come from the revenue growth or high-margin induced profits growth. You can cut your cost by firing employees or halting advertising, but cost reduction does not justify 50-60 PE levels. Earnings growth coming from cost cuts is not sustainable," he says.

How to define a good management

A popular stock market belief is to buy companies with good management. "What does it mean? If an MNC is listed in India, then who is its management? Is the parent company a good management or the local company or an individual CEO?" he wonders.

"Similarly, how many years of management experience is required to qualify as a good or a bad management? Should we wait for a crisis and how the management handled it before we buy a stock? This doesn't make sense," he adds.

What is the solution? "We don't know what a good management is. As long as it is not a bad management, 90 per cent of the job is done," he suggests.

Which stocks to buy? Start with what not to buy

Citing a famous quote by author Nassim Nicholas Taleb in 'Skin in the Game' -- Via negativa (acting by removing) is more powerful and less error-prone than via  positiva (acting by addition) -- Arora says there is real value in differentiating between good and bad and not so much between good and good.

Invest outside India

Arora advises Indian investors to take exposure in international stocks via direct route or through mutual funds. "Indian investors should invest at least 10-20 per cent outside India. Most of us anyway know more about foreign companies than many of our Indian companies. The likes of Amazon, Google, Netflix, Walt Disney and J P Morgan are worth owning," he says.

Also read: Alpha in active funds matter of 6 months; futile to time the market: Morningstar

Considering rupee depreciation against the dollar overtime, global diversification helps. "I have seen Indian rupee giving up at least 4-5 per cent against dollar on annual basis. So, there is nothing wrong having investment in global stocks. Besides, not many emerging business themes are there in India," he adds.

Explain the bitcoin price moves

The price moves in bitcoin don't convince Arora. "When Elon Musk says you can use bitcoins to buy a Tesla, then why should its prices go up? Wouldn't it make the Tesla more expensive? If Visa or PayPal are allowing transaction in bitcoins, then again why should the prices move up? If you want to use bitcoins for transactions and because of that the pricing is going up, then why would you use it for transactions in the first place? If somebody explains this to me, I'll buy bitcoins," says Arora.

"Bitcoins are high-beta Nasdaq stock. If it crashes, everything will crash from the US market, global funds to Indian funds," he adds.

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