Every time you own a stock it’s a part ownership in business and that part ownership of business is reflected in market capitalizations, always remember market capitalizations grows in line with profitability and profitability is never secular there is volatility that is associated with it.
If you are investing in fixed deposits and bonds, your GDP growth or the growth in the economy and your bond returns would have been the same.
Equity v/s other asset class returns past 3 decades
Power of compounding with strike rate:
If you would have invested 85 thousand in 1991 in 2 companies:
Orkay silk (blue-chip company at that time)
Hindustan Unilever
Then that 85 thousand would have turned today into 1 crore (17% CAGR) rupees despite one company has shut (orkay silk). Although your strike rate would have been 50% but your wealth would have compounded well above index (has given CAGR of 12%).
Inflation is a transfer of capital from the savers to the government, inflation is taxation the government taxes higher prices and don’t need legislation around it so they can take prices up but, on a percentagewise you pay a higher tax back to the company.
Example for why we are entering a decade where the optics for every government in the world is going to be great: Tata Steel
Steel prices have moved from 51 thousand rupees per ton to 78 thousand rupees per ton from 2019 to 2022. Tata steel profitability has moved from 30 thousand crore to 60 thousand crores (this is purely commodity price movement). When prices go up companies makes money and from that money, they repay all their debt. Now what is in the optics of the government?
Government is not collecting taxes on volume sold they are collecting taxes based on price it has gone up by.
We tend to believe that if we buy stock today then we have to keep it in perpetuity but things change very dramatically and it is relevant that you continue to move your portfolios or track your portfolios on a regular basis.
Cycles and preferences change (explained through this 2 slide)
What was not popular in 2008 is the major preference in 2020
Try to find companies who can increase their top line as well as bottom line with same amount if invested capital or % wise the revenue and profits should be increasing at higher pace than invested capital. Example: Redington, this company grew its profit 4x (400%) by just increasing their invested capital by 21% from 2010 to 2021.
Avoid incumbents: example:
Paint Industry- Major players- Asian Paints, Berger paints, Akzo Nobel, Kansai Nerolac, Indigo paints.
Industry Revenue- 36500 crore (INR)
Invested capital- 16000 crore (INR)
Industry profit pool- 6000 crore
ROCE (Return on capital employed) – 37%
Market value- 450000 crore
This numbers have attracted the attention of very large business which have deep pockets like Grasim industries, who are willing to commit 30% of industry’s capital i.e. 5000 crores into paint business which will bring competition. Grasim has 55k dealers who sells birla white putty so now they are going to sell paints too of Grasim. This was just one new entrant we also have JSW paints which is also a very strong group. Due to new entrants it might happen that same profit will be spread out on wider base or the next question would be can industry sustain its superlative/ supernormal ROCE?
Kenneth sir’s opinion on startups which are still loss making?
It hasn’t happened for the first time there was a company named Shobha developers IPO’d in 2007 it crosses its IPO price in 2021. I think it’s our savings and our investments that drives that value of that firm so you got to figure out when to step back. Specially for the current companies that are coming out, we are putting our savings behind someone else’s losses, if you got an appetite to take losses then start your own business. Do not venture into unknown territory because you have no control of it.
Identifying top of the cycle:
Identifying the top of cycle is easy, go back to 2007 to 2008 it was very simple every construction company was raising money for the same order book. Every NBFC or every micro-finance business was raising equity to fund the same customer. Valuations are stretched, everyone’s raising money so more capital is not creating profitability that’s where you catch the top of the cycle.
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