The year in perspective Part 2

Hi,

making the most of a light period at work and just before I take my winter break, here’s part 2.

rarely do you have a year in the market when you feel bad about stock corrections but good about he impact that could have brought to your way ahead. Corrections are a friend of an investor and afford some rare opportunities when you are able to assess things at attractive prices big outside i.e. In the market and within your own portfolio. There are two currencies that work for me.

One is infusion of fresh money and the other if you don’t have fresh money to infuse is using existing stocks as currency to buy what you perceive as better.

today mr porinju, a fund manager in mid and small caps posted if you are an investor in mid or small caps and they correct you should not change course. He equated his example to a local train ticket vs a rajdhani. My own assessment and with due respect is anyone will go for a rajdhani is the ticket of the train falls in line. In other words, value is a guiding factor not price. Hence the debate on a large or mid or small cap is meaningless in isolation to potential gains.

of course it is possible that a small or mid cap does better than a large cap and so is vice versa as 2018 demonstrated. While I continue personally to be a mid cap investor I won’t shy from buying beaten down large caps if I feel the growth will compensate for my purchase.

this example is best explained by the recent trillion dollar market cap of Apple and by Bezos becoming he world’s richest man. Who wouldn’t like to own Apple, Amazon or Disney if the price is attractive to growth.

2018 has given us lots of time to strengthen the portfolio. When you have benefit of several quarters of time to assess the results of comonaies with no price upmove, the ability to phase out and keep adding is at its best. It’s like picking mangoes from a tree at leesure with no fear of missing the right ones in a sense of rush.

periods of downturn are also interesting to observe what managements of companies do to keep their competitive advantage alive, in a sense a moat is truly tested in such environment together with management competence vs in bouyancy when the wave carries all to the shores.

a lot of money in 2018 was accordingly made in highest quality managements in the organized sector that used their skills to the best to adjust for demon, GST, inventory, packaging to deliver more at same cost (economies of scale), buy outs (depressed stock prices) or acquisitions of cheaper assets. Or capex. Many of them should be better placed to ride 2019.

i think there is a lot of adaptation also at work. Cos like Abb took to automation in a big way, while others organized retail network to enhance distribution efficiencies. There were cos like motherson that worked to reduce client dependency, geographical dependency and product dependency to move towards a better future. Many cos increased client satisfaction and others like Bata and Britannia moved up value chain by enhanced product offerings.

I think india has some really smart entrepreneurs who can drive cos to a larger scale. Oyo, Ola were examples from the unlisted space and there are many in the listed space too.

investing is always a journey and pit stops are necessary to keep the car in the race.

 

more to follow….

 

ps: no spell check, article authored in a state of mobility. Not a professional advisor, views are personal. (So is my dream of returns). Co names are illustrative and not advisory. I may or may not own the cos named from time to time.

Cheers

The year in perspective

hello friends,

as we move towards a new year and the customary new year resolutions start making their way atleast in mind, it pays to look back and learn from what 2018 was meant to teach us. While it is true that life is lived by looking ahead, the past carries good learnings.

in a fantastic book called Atomic Habits, James Clear makes a case for small incremental changes being a huge catalyst in big change. James illustrates that a 1 pct improvement every day can add to 37x improvement in a year while a 1 pct fallback every day can end a person at zero by the year end. Compound interest at play.

malcolm gladwell had made a case for a diff between bravery and courage. Courage is inherent and bravery in inculcated with experience, sometimes of fear.

James Clear also speaks about how to make a change impactful  one should examine Outcome, process and Identity. He emphasizes that when someone assumes an identity to work towards, the results are atomic.

2018 was characterized with a greater onsite of disruptive innovation. FAANG continued to lead in this but were characterized with a lot of yearly volatility for their investors. 2018 also saw unprecedented and perhaps explained valuation surge for many unlisted cos with some valuations surging by billions of US $.

Within this universe of surges and volatility, global markets, oil, currencies and of course stocks saw one of the most volatile years in recent times. The story in india was no different. We started 2018 on a high and soon there was a melt down in mid and small caps all across. While it seemed large cap was immune, the fact was very selective large caps showed immunity while most met a fate similar to small and mid caps.

the index does not reflect the true picture of markets where investors found their portfolio returns on the negative. Some survived as they always do while others relatively newer to markets wound up with losses and a good bye to markets. Overlooking the cardinal rule of history that markets do well over time and that volatility and ups and downs are inherent to the process of wealth creation. This is where the analogy to bravery and courage sets in with a debate- is being brave smart? Just as being brave needs you to know something that the opponent may not know- whether about your own strength or some game plan- investing is about looking ahead and being comfortable with capital, patience, temperament and balancing expectation.

When we started 2018, some of us had moderate to low expectation of returns from the market, essentially more to do with excellent returns in 2016 and 2017.

to that extent the reaction of the market didn’t disappoint as much as it could have with much higher expectations. Having said that, one needs to understand the difference between losing money and a drawdown in the portfolio.

One deals with a permanent loss of capital while one is like stocking an inventory where today there may be no buyers at appropriate prices but tomorrow holds a promise of higher prices. Looking at such inventory of stocks in your virtual shop one should also examine if the stocks themselves have limited shelf life being from a dec,inning industry or trend or something that has a longer shelf life.

low capital had enabled many small and mid cap cos to grow faster either by capex or acquisitions and there small increments in orders or margins (cost of borrowing vs return on capital) caused better and faster returns. With oil at the lower mark in 2017 input costs were als favorable. The environment of under ownership in 2016/17 also aided. If you see the past few years any announcement of a large buyer of equity in any mid or small cap would inevitably cause a price surge but no value change. Things changed later particularly when liquidity dried up and cost of borrowing increased. In the first case, large buyers found themselves struggling with liquidity to exit pressing down many scrips while in the later category, the profitability was impacted. GST also brought some issues with benchmarking performance particularly with some issues on inventory management and input credits. Thankfully GST is now more set into the system and most of the transition issues could be done with.

 

what I particularly liked about 2018 was the crowds got most of it wrong. I am not saying I wasn’t part for crowd at times but market displayed a wisdom against initial votes. Being contrarian paid in 2018 better than in earlier years.

pharma, one of the most hated sectors in 2017 saw a smart return. You either made money on pharma stocks or in true sense they played defensive to any major portfolio erosion and brought in stability with reasonable returns. I personally think most of the USFDA issues have strengthened a lot of our pharma cos. Some of them have interested R&D in the pipeline and are towards the end of a dark time wise tunnel of spending and moving towards the light of monetization. I personally feel, capital has been invested and gestation is ending and returns should follow in many R&D initiatives. I also think the domestic market will grow faster with an onset of several health issues particularly triggered by lifestyle and air and water borne contamination and newer viruses. The organization  of pharma through better channels will also favorably impact sales and profits and if counterfeiting is tackled as a consequence, the profit surge can be huge in years ahead.

 

another sector that stood out in 2018 and about which I had written in Twitter several times was consumption. The impact of move to organized from unorganized post GST played out well. Recent announcements of consolidation in the sector as displayed by leading maganements either through buy backs or brand acquisition or development of better networks should keep the sector efficient while volume pick up with better capital allocation and economies of scale should support the profitability. Valuations however have caught up well and keeping growth high is now pegged vs stock market expectation as reflected in their market caps.

 

finance a much talked about sector in 2018 continued to shine. Private banks are near highs and most made highs in 2018 and continued to outperform market. In between a controversy of liquidity gave a phenomenal opportunity to own some of india’s best positioned consumer nbfcs. Thus even in a year of declining returns, opportunity to buy good stocks in panic has paid well and added some cheer to the portfolios. The analogy is akin to what in my view will happen to many established cos in the mid cap sector. I am not so sure still about small caps as I personally feel many were “marketed” as “multibaggers” with no real moats or dynamic managements or business models. Exhuberance here has paid a price.

there will be a huge change in the use of technology, safety in vehicles. The majors are well versed with this and many are on path to making due changes. Some of these by immision norms, some by safety, some by technology and iOT, automatic and  robotics and some by pure luxury. Meanwhile the sector is beaten out and has a good history of being more of a consumption theme with time. Many cos in the sector are now also defensive with excellent dividend payouts and to me look as good to seriously look at.

I was happy to get mid IT right as an investment theme in 2018 and almost all ideas in that sector outperformed handsomely. I did get large IT wrong but I take that as a good learning that one should always cast a wider outlook even against initial apprehensions unless apprehensions start proving correct.

Infra has been one of the worst themes to invest in from a stock market perspective and nothing changed there. Thankfully was isolated from that sector barring a goofed up investment in some steel pipe and valued added metal products that cater to infra. Priced paid.

Telecom continued its struggle with spectrum and nothing is still looking up there. In fact prices could still get cheaper with more services being offered at the same basket.

there was huge volatility even in the mood of investors. 2018 started on a buoyant note then came lots of fear and finally disinterest has set in. This was reflected in many ways:

1. Some TV channels moved from ideas to day trading and anchors claimed victories even in 1-2 percent moves;

2. Investment blogs saw extended subscriptions or non renewals

3. Investor meets reduced and where a fee was charged turnout was more for trading and how to recoup loss and not make mistakes than invest

4. Stock recos by broking houses saw moderate price targets

5. Influential fund managers in mid caps and small caps lost their charm to impact stocks to circuits by naming them on TV or media

6. Twitter saw more Buffett and munger quotes from the same investors who had multi bagger ideas in 2017. Some even turned more philosophical about life

7. There was lesser interest in all blogs on investing, characterized by tiredness of markets and waiting

8. Every stock with negative news was punished with a tag on governance fitted in. Nbfc were recent examples.

As we move into 2019, to me it appears that the Economy is transmitting well from a demon and GST impact towards a more organized, better governed, more transparent economy. If the govt bites the bullet to rationalize GSt rates and keeps up with its stand not to subsidize the economy but improve its value add, 2019 could end up as a good year for business, economy and hence markets. I don’t think US is headed to any recession and feel trade war will too be settled soon with some balancing.

 

In my next blog post will update on a few positives for companies/sectors/market.

Cheers.

Caveat: not an advisor, not Sebi registered. Opinion is personal and could be wrong.