This version of the monthly digest is delayed but the damn virus eventually managed to break into our household. As I type this out we are recovering from a bout of persistent fever for almost a week, hopefully we’ll be back to normalcy very soon.
The second COVID wave has literally knocked the stuffing out from this country of ours. Till March we were singing songs of how great the Indian immunity was, the virus had other plans though. We got hit with a lag, and how. Easily the biggest health crisis across the world with no signs of abating yet. The remainder of the month of May will be spent under lockdowns of some form, this might extend to June too unless we see the case count starting to drop soon.
Q4 FY21 earnings season has started, I wouldn’t give too much weightage to what turns up here given the recent turn of events. Some average businesses are running at peak margins, peak realization and are getting priced as high quality businesses. A few good quality businesses have seen a slowdown in momentum and are being priced reasonably. Market moves over the short term tend to force those with a longer term horizon into making a few mistakes. It is not easy to keep allocating money to a business whose price hardly moves while some other business keeps moving 5-6% every now and then. But the market is a forward looking mechanism, base rates do not change too much over a 5 year rolling period, though they can see ebbs and flows over a 2 year timeframe.
Never lose track of your investment timeframe. We should do things that are consistent with this timeframe, we should also do things that we understand well.
Contrary to what some other investors around us are doing, we need to trust our pacing and timing. Commodity prices maybe on a tear right now but can we reliably make investments into those businesses with a 5 year time frame? See the 5/10 year price charts of a few commodity makers and come to your own conclusions. One of the largest PVC resin makers in the country has gone on record multiple times in investor calls that pricing is something they have never been able to predict reliably. When a promoter who has been running the business for 25 years says this, what great insights can a retail investor expect to have into how PVC EDC spreads might move over the next 12 months?
A few investors believe that they can ride trends well and exit early enough once the trend reverses, I am not blessed with such spectacular confidence. I’d rather play a game reliably over time than punt without knowing what the odds are. Value added converters with a favorable industry structure and competitive advantages are better vehicles to play the commodity cycle rather than betting on a pure commodity maker. We do have a few of those in the portfolio and you can see the returns for yourself over the past 6 months.
Participate we will, but only in those pockets that are worth participating in over the medium term. If anything this thought process has only gotten reinforced since the beginning of this CY. The market not doing too much since February at the benchmark level has been a healthy sign, this sets up the field rather well for stock pickers to do what they are good at.