Ep47: Awais Abdul Sattar – Understanding the Risks Related to Commodity Cycles

Awais Abdul Sattar is an Investment Professional with 5+ years of experience in the field of Investment Analysis and Portfolio Management. He started his career as a buy-side research analyst.  He is currently Head of Research at MCB Arif Habib Investments, one of the top-rated asset management companies in Pakistan which are managing $700 million assets.  He favors a bottom-up approach in the analysis of stocks while factoring it overall asset allocation via a top-down approach. Awais believes abnormal returns can be generated by looking for stocks which are off the radar or not under active coverage.

In this episode, Awais shares his story of loss when he ventured in the commodity sector specifically the textile industry. Listen to his story as he shared his rollercoaster experience of the commodity cycle, its peaks, and its trusts. Learn why it is important to find out at which part of the cycle you are in. And why you should be very cautious about the future outlook of the investment.

 

Do take the risk, but do your complete due diligence and try to have a complete understanding of the business and sector you’re investing in.”

Awais Abdul Sattar

Topics Covered:

01:56 – Awais tells about investing 15% of his portfolio in a textile company and the exceptional gains he received from it initially

06:00 – He shares the shocking and unexpected results of his investment after 3 months

07:15 – His realizations on this investment loss

09:41 – Narrating the three important lessons he learned from his experience

12:43 – Andrew provides a brief background of the guest

14:16 – Andrew sums up his takeaways and relating those in his books and research

17:12 – A very notable advice from Awais – “Do take the risk, but do your complete due diligence and try to have a complete understanding of the business and sector you’re investing in.”

 

Main Takeaways:

Lesson 1: Commodities have their cycles. They have peaks, they have trusts and they are very easy to replicate. Anyone can imitate them. And investors should first try to find out at which part of the cycle the commodity is. If you are at the peak of the cycle, then perhaps you should be very much cautious about the future outlook.”– Awais Abdul Sattar

Lesson 2: “If the margins are far higher than the historical level, generally it implies that it’s a peak because margins have a tendency to revert back to the main level.”– Awais Abdul Sattar

Lesson 3: “Never ever invest at the peak of a commodity business. And if you ever invested, do find it out. Do know about the emerging trends that are going in the industry. Don’t ignore the developing trends in the industry in which you’re investing in.”– Awais Abdul Sattar

Lesson 4: “When I was analyzing the company, I ignored the degree of operating and fixed leverage. Companies with high degree of operating and fixed leverage tend to have very high sensitivity to earnings because they’ve got higher fixed cost per unit of production. That’s why in no time the company I was investing in turn to loss”– Awais Abdul Sattar

Lesson 6: “Sometimes you can get the company right but get the overall macro story wrong.  And in this case, it was a commodity.  But remember, it’s more than just looking at that company.”– Andrew Stotz

Lesson 8: “Beware when margins are high and they are very high in the US and they are high around the world.”– Andrew Stotz

Lesson 9: “I always say it’s a little bit like jumping in a car, pushing the gas, driving as fast as possible and not knowing what a seatbelt is. You’re exposing yourself to risk and risks that you don’t even know, but unfortunately, you don’t get rewarded in this world by taking on risks that you could have avoided.”– Andrew Stotz

 

Resources:

 

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About the author, Andrew

Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company that provides institutional and high net worth investors with ready-to-invest stock portfolios that aim to beat the benchmark through superior stock selection.

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