Started My Investment Marathon

By Venu Vallabhaneni, (Managing Partner at CapitalAlphabet)

I am excited to start this new venture of managing outside capital and my focus is to beat index in long term. I follow golden rule of karma “Treat other people in the way you’d like to be treated”. if our roles are reversed, I would like to understand the investment process of managing partner before i commit any capital. So, I would like to elaborate on how I have been handling my own capital over the years and will follow the same strategy to manage this fund. As an RIA, I can’t publicize private returns but I can honestly explain my investing process both good and bad, Only invite partners that believe in this approach of investing, performance returns of this fund will be published annually.

My money mindset was formed very early in my life under unique set of circumstances, I came from very humble beginning and my family was always struggling for basic needs, investing was least of our concern but it taught me the value of money. As a kid, I remember taking free bike rides from strangers and share it with a friend to split his bus fare for pocket money. In College, I acquired some useful computer skills and started teaching part-time after school.Equated money to independence, my goal was always to get that independence and money should work for me not the other way round.

Started working and was always very prudent with money(others might call me frugal), Saved money for house down payment and invested in equities after buying a house. Started my equity investing journey with countrywide and it was a disaster, bought it after Bank of America invested 2 billion and remember talks of my teammates earlier that year about retirement when the stock was trading above 100. I started buying at 16 and thought I am a genius, glaring mistake of rare-mirror investing, learned not all fallen will raise, in next few days CEO Angelo dumped it and stock became a penny stock not only that my conviction of BAC being able to backstop became a nightmare as it dragged even BAC to a dollar during the peek of 2009 crisis. It was a wakeup call for me.

Started reading about great investors, clearly Buffett is on top of the list, read everything on him, all his partnership letters, his annual reports, Munger’s articles on cognitive bias, Ben Graham’s books, it all made sense and was hooked to value investing. The way Buffett teaches you with aphorisms, investing seems simple but once you start practicing it’s all consuming exercise, it takes an investigative journalist mindset to dig up dirt to kill your initial enthusiasm, if you don’t succeed then finding the intrinsic value of company, making sure downside is limited, company has good barrier’s to entry and price a no-brainer with a good margin of safety then take a good size bet and sit on my ass. In 2009 Mr Market was throwing baby with bath water and savings from my paycheck went into good quality stocks and even asked friends and family to do the same.

As a Fundamental Investor started reading sec documents, trade journals, analyzing fundamentals, listening to conference calls and started picking some good business based on return on invested capital and cash flow analysis, noticed new CEO of BAC is making profound changes, completely eliminated subprime, went overdrive on risk which is great for banking like investing, you should try not to loose money during the bad time. Started very concentrated investing in 2011, only kept 3 stocks 2 work-outs like mergers and the only stock I was holding was BAC. Easy to estimate normalized earning to be around 20 billion yearly and stock was trading at less than 4 times normalized earning for a growth bank with solid moat, It became a no-brainer and I invested heavily and even helped my friends to ride with me, At that time no one trusted the management and later Buffett jumped on BAC with his credibility, he made an offer management can’t refuse. I didn’t like the terms Buffett got, but was happy that he validated my thesis and my hero agreed with my analysis.

I follow the same strategy in real estate investing as well, I wanted to settle down and planned to buy a house, it’s an emotional investment for me, brings great joy but if I can find a deal, gravy on the top. so read everything about real estate even got a license and did lot of research and learned that in real-estate , Its all about location and you only make money when you buy, not when you sell. I bought my houses when they are on fire-sale by banks and their motivation is to cleanup their books instead of profits and for me downside should be very minimal i.e. below construction cost. That requires lot of patience and gumption to jump on when you find those. I consider my primary house to be the best investments so far not just because of appreciation but for all my family memories I cherish in this house.

To help you understand my process, will explain a real-estate investment made in 2013 with numbers. Bought a townhome in a great neighborhood with premium school’s and got this house for 140k which is below the construction cost and 35k below the comparable’s, my down payment is 40k and mortgage payment 10k per year for 15 years, other expenses including property tax of 4k and was able to rent for 17k per year. So, I made 3k positive cash flow which returned 7.5% on my invested cash on top of that tenants will payoff my loan in 15 years and any appreciation is gravy on the top. Very seldom you get these deals and I always measured downside risk and believe that upside will take care of itself whether its in real-estate or equity investing. I look at absolute bargains not comparable bargain. i.e. Hypothetically in the above scenario, if a builder can build the same house for less than 140k it doesn’t matter that its selling 35k less than neighboring house now, if there is an irrational builder selling close to his cost then every assumption of future cash flow changes and this house won’t be as appealing.

To find these kind of investment’s , I have to swift through lot of stuff and turn lot of stones, There are thousands of good companies around the globe but usually price is not correct or they beyond my circle of competence, I usually find 1 or 2 ideas a year and some years none, its a laborious process but I enjoy it, while waiting for those ideas I do invest in some workout’s to keep cash ready for those big ideas. This fund is managed as an SMA(Separately Managed Account), you can see all the trades I am making. As a policy, I won’t talk about portfolio holdings, I only hold what i like and think are great business , if I start bragging about our holdings, I will be trapped in confirmation bias and it’s very tough to beat that. We are dealing with probabilities here and equity market gives us good opportunities not to loose money if we can beat our biases. To end it, I will be very honest and show integrity and hopefully will gain your Trust in the process. Money is the last thing in my mind if I can’t exhibit these qualities. As I stated, Investing is a marathon not a sprint, hope you will partner with me in this long endeavor!