Although this was a calendar year end, with the kind of volatility markets have exhibited since Jan, the last 12 months make for a good time to take stock and introspect. As an investor in the Indian public markets, I saw a market crash for the first time in my career in March 2020. I felt the tightening knot in my stomach and a stab of fear as my substantial savings in the stock market plunged by 40% in a span of 15 days.
I had always laughed at the prospect of being a deer caught in the headlights (being frozen) and thought being greedy when others are fearful would not be that difficult. As it turned out, I was the pansy on the table. It is very true that you either get a good price or good news. I can give you many legitimate reasons on why this rally is unsustainable and is on Fed steroids, of how unbelievable it is that Fed Reserve printed more money than the size of India’s economy in last 9 months and yet there are no consequences, why calling the market bottom in March 2020 had no objective basis (even in hindsight), and yet what I say does not matter.
It does not matter because there were some good quality companies at low valuations, where I had done some extensive work, and when the time came to invest in them, I could not. I can think of CDSL and IEX, both were very much at a good valuation, were likely to remain unaffected by the pandemic, and their long term drivers not only remained intact, but were likely to improve. I do not say this because of the subsequent rally in their share price (although I do think that is playing a small part in my head), but I think they were good bargains at that point in time, and all i could not profit from these.
Further, my equity allocation, which was 50% pre covid, gave me ample opportunity to increase weights in my existing positions and add some incredible long term ideas (reducing my reinvestment risk), but all I could take this to was 65%. The names I added were the large cap companies that were more macro driven with less individual insights – ITC, HDFC Bank, HDFC parent and HeroMoto Corp, not having written a thesis in any of the above. Equity allocation is now at 45% – removing deep value ideas like J&K Bank, DB Corp, Oil india (all bought pre covid) and booking profits in Nucleus Software.
This post is not a sob story, nor a self-flagellation in public. I only write this to clarify my own thought process, document my learnings, and hear from any of the readers who resonate with this (I am grateful for some incredible feedback on some of the posts written earlier). With a low capital base and a long investing runway, i could not have asked for a better condensed experience with a reasonable financial paper loss. I borrow Morgan Housel’s advice that it’s a bad idea to learn specific lessons from the past and its better to have general lessons, so rather than saying I’ll bring the house down if Nifty falls below 8,000, here are some of the things I aspire to achieve in 2021 –
- Identify my universe of companies and have a list ready
In my quest to find the next actionable idea, I committed 2 major mistakes – 1. I would be unable to have a detailed research concluding with a written thesis since I was simply chasing the price movements. 2. Because I was unable to delve deep and understand the sector, the drivers and the business dynamics, the learnings from researching a specific idea did not get concretised, nor did it add to my knowledge base that can compound simply because these insights were too fleeting, never translating to learning from first principles, never to be applied when a similar pattern emerged. So for the coming year, I am going to define a set of companies and study them irrespective of the CMP, and have a list of companies ready to deploy my capital when the time is right.
2. Understand my circle of competence
For the last 5 years, there has been a constant conflict in my head on what I find reasonably priced. I have realised that its been nearly impossible to visualize a journey of a business on a high growth trajectory even for a medium term. I just cant fathom the thought that competition will not take away these returns, and that days of super normal returns for a company are always numbered.
For me, the growth function of a business has always been = Population Growth + Increasing Penetration + Entry in new markets + Entry in new products + Gain in market share + increase in prices. Thus its always hard to patch these things together and have a reasonable assessment of what a future looks like. I have stayed resolutely away from high growth companies and just cant bear the multiples that they trade at. I realize I get attracted to those ideas that have a mispricing in their intrinsic value based on its history, not a mispricing of their future growth. I doubt i have the vision to hold on to Page, Eicher, Wipro for 20-30 years, and its mostly got to do with my temperament. I am inherently a pessimist, reveling in looking at the next disaster unfold, simply because being a cynic is so easy.
So for 2021, I want to identify 30 good quality companies that have a competitive advantage, understand their business well, have a valuation band for each of them, and continue deriving insights of their markets and competitors, so by Dec 2021, I have 10% of Indian universe of good quality companies in my head. I will conclude this exercise by deriving a base growth rate of their underlying markets.
While the pandemic and the lockdown led to a significant difficulty and tragic losses for a lot of people, I am grateful to the universe for the safety of me and my loved ones. All the things that you have read above could be even thought of because my basic needs of food, shelter and affection were covered. Everything else is a bonus.
Happy investing, and wish you a ridiculously good 2021!