Q&A with Bhavdip

What got you into markets in the first place? 

It’s a long but an interesting journey with a few key events that are worth mentioning.

My first exposure to the markets was through my father, who was an investor and a trader. My father used to ask me to read out stock quotes from the newspaper and that was my first exposure to stock prices. All those numbers captivated me! That was the beginning of an exciting journey into the stock market.

Over many years, my father made a small fortune in stocks and eventually lost it all in the 1992 Indian stock market scam.  On August 6, 1992, after the scam was exposed, the markets crashed by 72 percent. As an 8-year-old, I saw a profoundly negative impact it had on our lives and those of our extended families.  Sadly, my father passed away 2 years later and I am convinced that the stock market crash and the related stress was one of the contributing factors to his untimely passing.

Despite the crash impacting share prices, my father retained some investments. We had a bag full of physical share certificates, which my mum kept in a safe. After completing 12th grade, she gave me those certificates and instructed me to sell the stocks in order to pay for my education.

By way of a background, I am originally from a small town in India. The town had a single broker & a small number of “sub” brokers working for him. As agreed with my mum, I opened an account seeded with my father’s remaining holdings and decided to study how stock markets work prior to selling them to fund my education.

I always had a tendency to thoroughly read and research before acting. Prior to selling my father’s shares, I locked myself in the library and read nearly all the books available relating to the stock market. ‘The Richest Man in Babylon’, ‘Reminiscences of a Stock Operator’ & ‘How I Made $2,000,000 in the Stock Market’ were some of my favourite books. At the same time, I also started to trade.

I wanted to master the art my father had previously been so passionate about. By the time I was 22, I was earning more money trading stocks than a GP or an engineer would earn every month. At the time, I had no internet connection and no mobile phone, I had to resort to reading printed magazines, books, annual reports and financial newspapers to gain access to information. Our economy was opening up and Foreign institutional investors were chasing Indian Stocks due to their under exposure in past years. It became a ‘Golden Era’ of the Indian stock market.

In the times of my father, the stock market had enabled my family to generate a lot of wealth before it had taken everything away from us. I was determined to bring it all back to help my family and myself. My father’s experience gave me greater respect for market cycles and risk management (In the period between April 1991 and April 1992, the Sensex went into a frenzy and returned 274 percent, before falling 72 percent in August 1992). Through exposure to this period, I became a more disciplined and risk averse investor and my memories of the period and aftermath is a constant reminder, to take profits along the way.

As I was trading well and spending substantial amounts of time investing and trading, I was courted by the head broker of the town to work for him as a sub broker. I enthusiastically agreed and took the opportunity & worked as a sub broker for 2 years.

In 2007, I observed a crazy exuberance and rush to day trading by every “Tom, Dick and Harry”. I started getting phone calls from friends and from people who had no idea how to trade or invest asking me for advice on what stock to buy today, or this week. This prompted me to consider whether we are either at, or moving towards the end of another market cycle, which is something I had previously experienced through my father. I started liquidating personal and client positions to pre-empt a possible correction.

By 2008 I had saved enough money to travel and decided to move to Australia. Initially after the move, I still focussed on investing in India, until around 2014. This was based on my familiarity with the Indian market relative to the Australian market.

Once it became apparent I would make Australia my home, I spent time studying the Australian market whilst trading the Indian exchange. In 2014 I had ventured into ASX investments through first investing in a company called Pacific Brands. I will expand on the reasoning for my choice later in the interview.   

Can you give us a summary of your investing strategy? 

In my early trading years my main focus has been on strong fundamentals. I chose companies with good earnings and dividends and tried to replicate the same approach in Australian markets.

I started researching ASX companies fundamentals, looking for robust companies with solid earnings. In 2012, while I was learning about the Australia market, I came across RHC Ramsay Healthcare, which fit the criteria. The price doubled in one year and I didn’t buy it but it gave me the confidence that I can replicate my Indian experience into ASX. This early success (not material but strategic) gave me confidence to continue to apply my trading strategy in the Australian market.

In late 2014 I came across a company called PBG Pacific Brands which was trading lower than the Book Value. What appealed to me was their strong market share position at over 70% of the market, competitive price points, strong equity across their portfolio of brands and great reputation amongst Australian consumers. The company appeared to be turning around after challenging performance during GFC and in the early stages post GFC. I started buying the shares at around 50c.

Share price kept trending down, but due to my conviction in the fundaments I kept adding to my position as the price continued to decline all the way down to 30c.  At that point, PBG announced improved earnings guidance and share price started to recover. In 2016 PBG was acquired by Hanes Brands for $800m and I sold my shares for $1.14. That was my first six-figure win in my early investment experience in Australia. It gave me good confidence and some capital to start deploying into the ASX (noting the cost of living in Australia is much higher than India).

In the same year, I observed many speculative companies achieving share price growth of anywhere between 100% to 1,000% on the ASX. This was very different to my Indian experience & I became determined to get an understanding of the wild world of speculative investments.  I decided to shift into speculative investment, but remembering the lessons of my late father I had developed a set of rules and strategies to ensure financial longevity and to prevent significant financial losses. My basic trading portfolio allocation is as follows:

  1. Invest in mid-caps with strong earnings growth and in the companies, which are relatively cheap or mispriced for reasons other than actual business performance; and
  2. Trade in small caps / micro caps / speculative companies for short to medium term and generate income and capital to invest in category no.1 shares/investments.

I also have some very simple rules/guiding principles. They are simple but not easy to follow:

  1. Accept that no-one can sell at the top or can buy at the bottom, so do not try to do that;
  2. It doesn’t matter if you miss out on first 10%-20% of the move. It is better to buy once the trend share or thematic-wise, has been confirmed;
  3. Cut your losses quickly and early unless you bought it for long term and you have 100% conviction;
  4. Remember, good news travels virally and has many fathers, whereas failure is an orphan i.e. you will only hear glorified stories about how people made a lot of money in one or two stocks but rarely do you get to see the full picture.  You don’t hear about individual losses or about how people lost everything from taking on too much concentration risk – always diversify.
  5. The cumulative effect of numerous smaller profits made consistently add up. The smaller profits combined will provide you with the capital and a profit buffer to go BIG when you see some unique bargains/ opportunities.
  6. In the short term go with the crowd /herd/trend and make quick profits but in the long term remember to be contrarian and go against the crowd. In most cases crowd thinking is wrong, eventually.

If there was one thing you know now that you wish you knew when you first started what would it be? 

Yes … Do not fall in love with or implicitly trust management of the companies. Always do your own independent research. Remember, management gets paid to promote their company and to attract capital investments in their companies. In speculative companies can be really challenging in terms of trust factor as the probability of success if high and they’ll always be overly optimistic. I don’t hold this against them as that’s what is required for success, however I keep it in mind when forming a view about a company/investment.

Numbers and data can tell you better stories than words or people who may have conflict of interest. 

Tell us about your biggest winner? 

I might sound boring, but I don’t think I will ever have a big 100 bagger winner because that’s not aligned to my trading strategy or rules. My strategy is to consistently take profits. My biggest profit was achieved in the current rally, but was spread across about a dozen shares on the day.

That being said, my biggest single winner to date on ASX is APX.ax. The APX IPO was done at 50c in January 2015. I was following it from when they listed but did not have the conviction to buy it at the time. For background, Appen is a pioneer in machine learning AI and how machines communicate with each other using AI. After following from IPO, I started buying the shares in 2016. My average buying price was $2.30. I sold half of my holding in 2019 and am still holding half at $37.

Tell us about your biggest loser and how did you mentally recover from that?

Another potentially boring answer here. The beauty of my trading strategy is that whilst I don’t have many BIG winners, I don’t have many BIG losers either. Refer to Rule/principle 3 above about cutting losses.

I have invested in some mining companies with “early production “promises and 3 of them ended up getting suspended from trading. Because of my rule around diversification and getting out of loss-making positions quick and early, I dodged the bullet and got out from two out of three of those companies with minimum pain but got stuck in one company and its still in suspension. Symbol Mining SL1.ax is the company.

Another big loss which I attribute to my complacency/at the time was Cronos Australia (CAU.ASX) IPO. 

Just before Cronos lodged their prospectus, I had 11 straight wins from IPOs (IXC.asx, IMR.asx, OSX.asx, KTG.asx, VRI/HWH.asx etc.). that success made me complacent and a little careless. On reflection, I had skipped some of my normal screening processes and ignored some red flags. The sector, Medical Cannabis was no longer in an uptrend at that time, etc. On the day it listed it opened 22% down and it ended the day down 30%.

Due to my cumulative gains, I ignored my rule of cutting losses early – in fact, I bought more Cronos on market. Finally, some sense prevailed and I booked the loss of $38,000 this is to date my biggest loss. Perhaps unsurprisingly the loss dinted my confidence but on a positive note it forced me to reflect and sharpen my focus on risk management and screening.

In terms of money it wasn’t a big deal due to my gains prior, but psychologically it took me a while to recover from it and regain my confidence. I eventually overcame this through reflection and formed simple conclusion, regardless of my due diligence, loss is a part and parcel of this game and provided you’re right more than you’re wrong (both in quantity and money terms), you’ll win. Once I accepted this fact, I was able to move on. I became a better investor as a result.

Some Questions on twitter

How many brokers does he deal with? How did he find brokers the brokers within the firms that actually deal in this space? Does he consider himself a trader or investor? Does it matter what the companies he invests in do or is he catalyst driven?

I make no secret of the fact I have several brokers! Mainly because when I started there was no online deal aggregators e.g. like Fresh Equities,180 Markets, On Market Book Build or Raise Book. Lately I use these services more than any of my brokers. I like their democratised approach when it comes to allocations.

Now that I have built a good capital base, I increasingly consider myself a high conviction positional trader and long-term investor.  I have both clearly defined system for specs and LT investments, which are independent of one another.

Of course, it matters what companies I will invest in. Especially in Biotech, which has become a favourite of mine.  I typically screen for companies with the lowest valuations and with short to medium term catalysts.

Noting you’re a voracious reader, what books, publications or reports would you recommend?

  1. Reminiscences of a stock operator
  2. Fooled by randomness
  3. Margin of safety 

What do you do/read that provide the most actionable ideas/insights?

All upcoming IPO prospectus and company presentations. Then I do independent research and come to the conclusion.

What is it about markets that motivate & get you up in the morning? What are your goals from trading over MT?

Price and value discovery in the market fascinates me the most. I love to see how market ignore some stories for years and suddenly they become “stonks” of the day. E.g. market inefficiency.

I used to have goals but I changed my thought process since 2016. Now I don’t have any financial goals and I found a more random approach motivates me more than the strict goals-based approach.

Was there a memorable moment you realised you were getting a handle on / feeling proficient at trading?

One night I was drunk and placed a speculative short trade on Tesla via a CFD. By the time I woke up, I had lost USD $26,290. Whilst It was a loss and a negative experience, it was very timely as I needed a royal spanking like that. I was becoming complacent in my trading and it was a healthy reminder to always stick to my discipline and trading plans. I have been more disciplined since and the experience reminded me to remain hardworking and focused.

Who’d he has as the opening batsmen for this summer’s test cricket?

David Warner and Joe Burns are doing well. Joe Burns needs to work a little bit more on his Risk/Rewards strategies! Ha

Thanks Bhav!

I’m really thankful for the time that Bhav spent putting this together. I am continually amazed by the amount of time and effort guests on the QnA spend writing such detailed overviews of their history and strategy.