Blog 115 - Challenging some universally accepted investment principles with contra data points.

The only rule in investing is there's no permanent rule. Reading this you will truly understand why investing is simple but not easy.

1) Crunching basic number like revenue CAGR and ROCEs is just the start not the END of business analysis.

(a) Pick up any decade all businesses that generated strong returns ratios a decade ago (2002-2012) did NOT result in superior stock returns a decade later (2012-2022).

(b) There will be businesses that delivered superior investment returns this decade (2012-2022) but were NOT generating high return ratios in the past decade (2002-2012). Cases in Point: a) FMCG was a bull market leader in the 2010 – mid-2012 Bull market.

b) Metal was a leader in the COVID rally &,

c) Capital goods was a leader in the 2000-2003 bull market.

2) Don’t believe in any particular investment thesis. Nothing outperforms forever. For example, the concept of only buying the market leader is wrong.

Take an example in FY11/FY12 TCS was a leader in IT in terms of revenue but the highest return generating stock for the next decade became HCL Tech. A similar story has also played out in

a) paints (Berger providing more returns than Asian Paints).

b) Banking (ICICI providing more return now/growing faster than HDFC bank). Sometimes even the 2nd/3rd/4th players provide much higher returns than the leader itself. Remember market pays for two things: not just stability but also for CHANGE. It’s a combination of improving fundamentals with leadership that sometimes matters more.

3) Rather than classifying a business as good or bad we should classify a business into whether the upcoming 2-3 years will be good or bad for any business.

FMCG was a bull market leader in the 2010 – mid 2012 Bull market, Metal was a leader in COVID rally, Capital goods was a leader in 2000-2003 bull market. Even business has a day. Stop classifying in your brain that commodity companies are bad, PSU’s are bad etc.,

Rather than focus on where earnings trajectory seems most powerful in the coming 2-3 years available a decent valuation that allows you to make a reasonable 20% CAGR in a 3-4 years holding time frame.

4) Time is the most powerful asset of a business that keeps on executing.

Compounding works its magic with Time. We all must have read the statistics of the approx. USD 90 bn in wealth generated by Warren Buffett approx. 96% ($86 Billions) have come after the age of 60.

The interesting part is this his CAGR has actually declined over a period time between age 30 to 60 his CAGR was 32% whereas b/w age 60-90 his CAGR is only 11%. That’s the magic of compounding. credits for this data: Jigar Mistry sir

5) History does not repeat but it rhymes

Studying the history of nature, businesses anything gives you a guideline of what has worked in the past and what has not but every few years some things happen which has not ever happened in history. That’s how actually history is created right?

That’s why we need to control for tail risk events in the portfolio. There are a lot of mechanisms that people deploy to safeguard themselves against unknown unknown like having a maximum weightage cap to a single holding or to a sector.

Or using stop losses even in fundamental bets to exit first as first signs of drawdowns, trying to buy stocks at valuations where one is not paying more than 1-1.5 yrs of future growth, making themselves an expert of few sectors to differentiate between:

a)News & real drivers of the business

b)Asset allocation b/w debt, equity, cash, gold & real estate etc.,

6)Incumbents are generally slow to react to disruption due to dilemmas.

To go all in into a new category will burn their existing cash and might also make them lose focus in their existing segment and also going into a new segment will cannibalize their revenues from the existing segment.

And last thing is the new segment size initially is very small so that leads to the thinking that even if we succedd here what’s to gain? So, they keep on building war chest to fight at the right time i.e. till the time new disruption is clearly taking way market share from them.

Generally by that time it's too late. There are tremendous examples here both of international market and domestic market like Kodak Vs Sony in camera, Nokia Vs Apple in cellphone, SONY Vs Apple in music, NSE Vs BSE, currently EV vs ICE engine in India.

The right way for any such business is to proceed quickly where scale up is visible in a new disruption through quicj Joint Ventures with players bringing that disruption apart from consistently focusing on creating new market through own in-house R&D Teams.

A company remains great for a long period of time NOT because it has moats but because it is able to develop new sources of Moat. The reason for dominance changes every few decades. Some years back the CEO of NESTLE India explained that:

In earlier periods distribution used to be strength now due to evolution of digital tools and Direct B2C start ups that is no longer the edge anyone can create distribution easily but it’s the product innovation that matters much more.

Creating more quality products in existing segments and creating new segments by developing new products

8)People who say don’t read economics;politics focus on business models are utterly wrong. We think have completely misinterpreted Warren Buffet or Peter Lynch's statements.

Its very important to understand global demand & supply in lot of sectors to really make money its equally important to understand how strongly a particular government is backing a particular sector to understand tailwinds

For e.g, See the recent government stance on Ethanol or FTA in textile helping Bangladesh & Vietnam, Rise of Indian chemical industry in past decade due to China’s environmental policies or effect supply bottlenecks on shipping companies margins due to COVID.