Weeds & Roses
08th March 2021
Dear Fellow Investors,
Hope everyone is doing well.
“There are answers worth billions of Rupees in ₹100 history book.”
Looking back, if one remains invested over the long term, short-term market swirls provide opportunities rather than dangers. Market “gyrations” help in cutting the weeds and watering the roses. This is why the wise father of value investing, Benjamin Graham, said:
“Price fluctuations have only one significant meaning — an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”
The main idea remains that whenever extreme fear grips the market and enough investors exit, it doesn’t take much liquidity for the markets to rebound as very few sellers exist for the buyers to buy from. March end the previous year was a recent example. The reverse works during times of euphoria.
Markets generally are ahead of most of us in the risks and by the time we act, it’s too late. It’s easier to make money over the long term than in the short term. Historically markets have risen on a little over half of the days, 62% of months, 68% of quarters, and 73% of years. On a rolling 5-year basis, its posted gains 88% of the time and for rolling 10-year periods, you’ve made money 93% of the time.
Adding on to the thoughts of “Weeds and Roses”, every investor claims to seek good businesses. In this maze of searching for good businesses to invest in, one must “Reject before Accept”. It is like Sturgeon’s Law — “Ninety Percent of everything is crap.” Crap includes, but not limited to the bad business, but also business which one can’t understand. After rejecting 90% of everything, the remaining 10% is the circle of competence and investment universe.
Further, investing framework is unique for everyone. The circle of Competence differs for each one and this circle of investing horizon should be definitive and not based on trends and the latest sentiment. “Framework doesn’t change with sentiments, business cycle or tail/headwinds”
And this framework should be consistent across different companies and industries. If a sense of cash flow is crucial to valuation, it should hold across industries. Investment thesis shouldn’t vary with macro either.
This will lead to a lesser number of companies in the portfolio and lesser diversification but positively saving investor from “Deworsification”. We are personally way more comfortable holding a few stocks which we know something about and where we think we have an advantage. It’s hard to be good at new things when there’s no coherent basis for anything.
Certainly with this tight framework for investing the portfolio might under/out-perform at a certain point in times. Any coherent approach will have lots that will not fit into it. Missing opportunities is the price to pay for improved odds in whatever does fit into the framework.
Further, as seasons change and tides shifts, life-long learnings and advancements lead to change. One can’t sit with companies forever when the business dynamics change. Over the past 30–40 years, many businesses didn’t survive and exceptional new businesses came up too. Business like MoserBaer CDs no longer exist. But certainly, businesses like Gaana & Paytm did wonderfully well. India is fortunate to have various promoters who have survived multiple shocks and emerged over the past decade much stronger and ready to take on the global competition. We believe, with the help of government incentives and reforms, they will get an easier environment over the next few years to become global players.
These days everyone is comparing the returns on benchmark indices or other model portfolios or comparing those to ace-investors returns. It should be always kept in mind that “Absolute Returns are all that matters”. More than just the % returns, it’s important that investors make wealth. The only thing that matters is whether your portfolio is providing enough growth to meet your future financial needs. If you are unable to meet your financial needs with your current returns then, yes, underperformance feels terrible. However, your absolute performance is what you should care about.
Finally, coming down on thoughts for the current market situation. We remain on the “For” side in this Bull Run and remain assured with the positive news in the economy, FIIs flows, D/E levels, Corporate Profits and Cashflow improvement, Global Equities, Covid Vaccination for the best days ahead.
However, we wouldn’t build our portfolio based on hope. Time is much better spent on evaluating individual companies as their analysis is much more suited in pricing and valuing the business.
One must be cautious and careful in this market. One way Northwards ride in the market is too good to imagine. We certainly are in a long bull rally but one ought to look out for small corrections on the way up. Keep an eye out on the movements and those would not only provide opportunities to buy-in the bulls but also help in sell-out the shares in which the rally is saturating.
What should investors do in these kinds of markets?
1) Patience: It’s a key attribute of a successful investor. An investor must be able to survive bear and corrective markets. As they are inevitable.
2) Positivity: A negative investor never makes money in the market. Be positive, but be realistic too. Always have a longer-term vision and horizon.
3) Discipline: An investor must be disciplined enough to invest when times are bad. And disciplined enough to take profits when times are good.
Leaving Everyone with a thought to ponder upon-
“The man who doesn’t read good books has no advantage over the man who cannot read them.”
— Mark Twain
Chandranshu & Priyaanshu
+91–9953726305 & +91–8800967088