New blog posts for the month
Uncommon sense in investing & life in general. The odd post may get you riled up, especially if your worldview is different. Do suspend your prior biases and read objectively.
Staying ahead of the curve
Investing is a brutally competitive game. Just that things are a bit more subtle and beneath the surface but make no mistake, it is yet another constant battle for excellence. Even if it feels more peaceful than an operating business.
A good chunk of alpha generation in investing comes down to anticipation and positioning. If you get it right, you beat the market over the timeframes that really matter. If you don’t, you end up with average outcomes at best. Second guessing what the other market participants are thinking and going to do is part and parcel of this probabilistic endeavor. If it weren’t that way IQ is all that would matter, wisdom and judgement wouldn’t matter that much.
If an investor understands the business fundamentals better than most others, one can anticipate earnings breakouts earlier than the market does. If technical analysis is your forte, you would have noticed that the biggest gains occur when one can anticipate the trend and build positions before the breakout materializes. Whatever be your game, calculated and calibrated anticipation is an integral part of alpha generation. No wonder successful investors spend more time thinking than they do speaking. Howard Marks calls this second level thinking, someone else may call it expectation based investing and few others may call it variant perception. The underlying mechanics and actions are the same and they will always be that way./line
For all the attention stock picking receives, there has been limited focus on selling right in India. It is that way because most of the investing gyan originates from asset managers who want you to stay invested for decades without ever pulling money out. For every stock where ones buys right and the stock goes on to become 30x, there will probably be 20 stocks that go up 3x and then correct 50%. For all of my efforts in identifying businesses early since 2011, I have two stocks that up 40x+ and a few that are up 10x+. A 100 bagger is a very rare occurrence for even the best investors, especially if you are below the age of 50. Seen in a different way, if you don’t see any reason to sell even a single stock in a financial year you probably aren’t thinking hard enough or aren’t working hard enough. A healthy amount of churn by design forces you to calibrate to the current market. The easiest thing to do in a good market run is to count your earnings every week and to take it easy. This can be the very thing that comes back to bite you in the ass once the tide turns, which it eventually does. One should always be looking to tweak the portfolio in a good run, the tide of liquidity helps us cut mistakes without high impact cost.
Investors need to keep an eye on sector rotation all the time. Return from an average business in a strong sector usually beats the return from the best business in a weak sector over a mini cycle. Doesn’t mean one should buy marginal businesses in strong sectors, there are always options that are decent enough with a healthy 12M earnings outlook.
As a good market run matures, agile investors can play stock rotation within these strong sectors. Your incumbent knowledge of the sector allows you to build a quick view on the next rung of businesses that offer decent business quality. It is only when marginal businesses start getting priced at a premium is when one needs to start rotating out of that sector.
The puritan BQ pujaris will scoff at these concepts but they often underperform in a bull run for these very reasons. It is tough to sit by and hold Kotak Bank patiently through a 3 year stagnation when an upcoming bank is delivering scorching growth and moving the needle almost every quarter. Doesn’t mean one should become a long term investor in the emerging bank but no harm in playing the cycle smartly. The more agile one can be, more the concepts one can test out and settle on what works best. Not a bad approach over the medium term if one can manage portfolio risk well.
That said, looks like the current market run could do with a breather. A 25%+ broader market return within 4 months runs the risk of getting too extended if it continues that way without taking a breather.
We continue to focus on taking timely exits and reducing exposure to pockets where we see clear overvaluation. At the same time we are always looking to increase exposure to pockets where we see clear undervaluation, even at the risk of being a bit early. That’s the price we are happy to pay to manage risk well at the portfolio level. Beyond a point gravity impacts stock prices disproportionately.