Unlearning the superficial lessons of 2016-21
Big statement right there, calling investing lessons superficial. Not all investing lessons are durable, some are just extrapolations of a medium term trends that are good so long as they last. I made this mistake myself in the 2013-17 small cap run, what worked brilliantly for 5-6 years unraveled quickly in 2018 and gave me more durable lessons. The key word to watch for is “always”. Whenever someone throws at you a statement like “small caps always outperform large caps”, you know today that it is bordering on immaturity and lack of experience.
On similar lines, “the quality theme in India will always make for good investments” can unravel too; as it already has to some extent in the past 18 months. One of my blog posts touched upon this in June 2021, well before the underperformance of the quality theme was apparent. Maybe the theme will pick up from here, but it pays to acknowledge the possibility that one could be wrong for years together.
So what were the lessons that got ingrained into investors through 2016-21?
High valuation is irrelevant for a chosen few stocks
Interest rates will stay low across the world for many more years
PSU banks, Infrastructure stocks rarely have a reliable, secular run
SIP in equities is the best way of saving for the future
All of them have already been challenged to some extent or the other. PSU banks and economy facing stocks have beaten most other segments of the market in terms of return and earnings growth over the past 2-3 quarters. Global interest rates are already at a level few could imagine even 2 years ago to the extent there is no dollar denominated negative yielding debt in the world right now. People have made more money from a plain old FD since the mid of 2021 than from equity.
We need to stop putting well known investors on a pedestal, though we should all learn from them. Many of them started investing in the mid to late 90’s when interest rates were in the high double digits and equity market participation was low. Read the latest Howard Marks memo on what a huge tailwind declining interest rates have been for both equity and bond investors till 2021.
So how should one update the macroeconomic context for the next few years?
Macro follows some trends but it doesn’t have a defined playbook. Talk to 10 random investors and most of them have a perception that inflation is a secular trend within a cycle. Many of us cannot comprehend a scenario where inflation rises for 2 years, then stays directionless for an year and then starts a steep up climb again. For the simple reason that we haven’t seen anything like that in recent years; but that doesn’t mean that it cannot happen.
Anyone who has invested into chemicals businesses has experienced what a supply chain whiplash can do to margins YoY. Who is to say it cannot cause similar gyrations in inflation too? Central Bankers might keep toggling between the transitory and structural for some time as they grapple with a world that is moving away from globalization and wants to become more supply focused. The era of demand centered monetary and Govt policy might be behind us for a few years. Each one of these possibilities has massive implications for macro, interest rates & equity prices as a logical extension.
So what can investors do?
Stop obsessing over the long term till we see policy stability
View the long term as a series of medium terms than as a secular trend Don’t build models with exit multiples higher than the 10 yr average
Don’t be afraid to calibrate and correct mistakes more actively from here Spend more time listening to experienced macro voices We should not be guilty of letting some asset manager’s marketing narrative become our only investment philosophy. Sometimes the best approach is to have ears to the ground and to constantly take cues from what the market is telling us; rather than sitting back and saying that the market is an irrational beast. This might be one of those times as the market continues to pivot to a new operating environment – a dynamic approach that calibrates with time might work better even for long term investors till we understand what the new normal is.