Kenneth Andrade - Source: Anish Teli

In his interviews, Kenneth comes across as someone who has got his investing basics really ingrained and a very clear and consistent thinker. I was reading an article on him published in Forbes in 2011 and listening to his interview on CNBC two days ago and he almost used the same words in talking about his investing style and philosophy.

So here is what I think sums up his style:

1. It is important to be on the right side of the longer term trend: He said in his interview on 16th July 2014, " If I step back into history midcaps have never lost money for a lot of people. They have actually been the better part of the market to be in if the cycle is in your favour." (emphasis mine) This is very basic but key long term trend following principle. Remember Patridge from Reminiscences of a Stock Operator: "Its a bull market". My guess is if Kenneth were not a long only MF fund manager he would be clearly be a trend following trader/investor using price as a key input in his decision making. There is another line in the Forbes 2011 article which supports this - "Andrade has become a bit more aloof, choosing to retreat inside his cabin on the sixth floor. There, he stays put for hours, poring over historical charts."
2. Stay within your circle of competence: The mid-cap universe comprises around 1,500 companies, whereas close to about 700 companies are invest-able or can be invested by mutual funds or large institutional investors. “Of the 700 companies you have to bring them down to about 60 companies, which is 10 percent of your invest-able universe. If you have been able to do it in a fairly regimented manner for a very long period of time it is not dangerous at all,”. 
3. Pick companies that respect capital: If companies are able to consistently maintain strong ROE/ROCE it would mean that they are efficient users of capital and have pricing power. In his own words - "Don't buy underlying businesses, buy profitability.". Other things he looks for are virtual monopolies, financially sound companies that are preferably debt free and leadership position of the company its sector/industry. Things he does not necessarily look for is cheap valuation. He says, "Monopolistic companies make all the money. Be prepared to pay a price for it." 
4. Be patient and wait for price to be right to buy a stock: He says, "I have never seen a company at a value I wanted to buy that I could not buy. Stock prices always swing and correct. If you wait long enough you will invariably get them at the value you want." So there is definitely an element of market timing. Has to be for someone whose move will have impact on prices. 

Kenneth also talks about how he goes about picking a winner and how he constructs his portfolio. When ever, he identifies a new space, he buys all the leading stocks in that space and then uses the performance data put out by these companies to evaluate how to re-balance his holdings. As the winner in the pack breaks ahead of the rest, he then lightens down his position in the other stocks and focuses on the winner. Winners stay, losers go.

Now none of the above are some major innovations or new ideas, but they provide a clear framework of what he looks for. Its rare to come across someone who speaks consistently about his process and criteria over years. Regular Biz TV journos are always asking market men for their "big idea" or "big call" but that is probably the wrong question. The better question or bigger takeaway for someone trying to be a better investor is to look at their investing principles and try and emulate them.

Now how to implement the above. That is probably an idea for another post.


( Disclaimer: i am an investor in his funds so my views may be biased. This should not be construed to be investment advice of any kind)