Rise in Glow and Glory

06th November 2021

Dear Fellow Investors,

Festive Greetings!!

Hope you are in the pink of your health and wealth.

After being in business for 4 years 10 months and 26 days, a big name in a small industry made the headline of one of the most well-read business newspapers of that time. Certainly not in the good taste, but rather running a full report on how the business model isn’t sustainable and ought to crash due to non-viability and low-customer preference.

Today, Amazon is one of the leading companies in its sector and commands presence as the biggest and most promising company after fantabulous growth for the last 36 years. It has played a pivotal role in revolutionizing two entirely different industries and rewarded its stakeholders (not limited to Shareholders) during the journey.

In today’s market scenario, like all the previous bull runs, momentum stocks are being chased. If a stock hasn’t shown an alpha creation on “Daily-Basis” it is taken as a laggard and ignored by the traders. Though we don’t hold negative views on momentum investing but more than running ahead in the race, it is surviving till the end.

Presently, many stocks look attractive to us. Both in terms of growth and market capitalization, where the management combined with the business dynamics pulls rabbits out of the hat — big rabbits from a small hat. Year after year, producing very large earnings relative to the capital employed — realized in cash and not in increased receivables and inventories.

But before we drown in a sea of stock selection, a crucial — observation must be made. While a few years ago, a business growing at 20% compounded annually would have guaranteed its owners a highly successful real investment return. Now such an outcome seems less certain where the inflation rate will be the ultimate determinant.

Reported earnings in the financial statements need to be adjusted for inflation to check the real earnings for the owner. Only gains in purchasing power represent real earnings on investment.

It is not a recommendation, but rather learning that beyond a point, no one knows how a company, industry, sector, business model might perform. It is important to keep an open mind with a flexible approach.

A business earning 20% on capital can produce a negative real return for its owners under inflationary conditions not much more severe than presently prevail.

If we should continue to achieve a 20% compounded gain — not an easy or certain result by any means — and this gain is translated into a corresponding increase in the market value of the stock, your after-tax purchasing power gain is likely to be very close to zero at a 14% inflation rate. Most of the remaining six percentage points will go in taxes any time one wishes to convert the twenty percentage points of nominal annual gain into cash.

That combination — the inflation rate plus taxes — can be thought of as an “investor’s misery index”. When this index exceeds the rate of return earned on equity by the business, the investor’s purchasing power (real capital) shrinks even though he consumes nothing at all.

There is no solution to this problem; high inflation rates will not help earn higher rates of return on equity.

Another thought we like to share today is regarding the turnarounds. A lot of media attention and investor-gyaan is being dispersed on how these can be potential multi-baggers. Ought to be remembered that, whenever the market participants think in one direction, it seldom turns out to be true.

Rather than consensus, non-consensus investing is required to make profits in turnarounds. Stock is already fairly-valued with everything priced in for upside if everyone else is talking about it too.

Further, our investment experience causes us to conclude that “turnarounds” infrequently turn and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.

The manufacturing cycle is coming back after a decade. The rising freight prices and warehousing costs are a testimony to it.

As we have discussed in earlier letters, this first leg of the industrial cycle started with commodity prices rising. Currently, the manufacturing cycle is churning the economy wheel for higher growth across sectors especially heavy CAPEX, infra and capital goods. Companies have continued to add capacities in anticipation of increasing demands with business optimism hitting new highs.

We conclude by sharing our final thoughts on market movements. It’s not a straight high-way road but a curved scary mountain road full of twists and turns (blind ones too) in stock markets. After a long one-way bull run for nine months, markets saw a minor tweak in October with Nifty coming down from the highs of 18k.

It is the nature of Markets to move in swings and these healthy swings provide support and bubble correction in making. However, we propose “Revenge holidaying, revenge shopping, revenge partying, revenge eating out… are all fine. Revenge stock picking isn’t.” Remember, it’s your own money, and there’s no one to take revenge against.

Therefore, investment decisions shouldn’t be made with the past in mind rather on the future possibilities of growth.

Happy Investing!!

Leaving everyone with a thought -

“We rise in glory, we sink in pride.”

– Andrew Young

With Respect,

Chandranshu & Priyaanshu

+91–9953726305 & +91–8800967088

cachandranshu@outlook.com priyaanshu@live.com