Ten Things I Learned Over This Last Samvat
The combined wisdom of Madhu Kela, Saurabh Mukherjea, Ridham Desai, Devina Mehra, Shankar Sharma, Kenneth Andrade, and Mr. Market.
It is the season of giving, something that is right up there in terms of the biggest joys one can experience. We try to embrace this as we wish that you make it big with your investments and trades this Samvat and the following ones to come to come, and share the top ideas and learnings in the year gone by.
1. New Ways To The Top
This Netflix tweet was a big statement:
Squid Game showed us how word-of-mouth is more powerful than an advertising campaign, propelling a Korean drama series to being the best ever for the FAANG company. Various points may have propelled that, be it sharing with friends or on social media platforms, or its presence in physical and online Q&A - it was all about Squid Game. With memes flooding the internet, and #SquidGame trending on social media for a number of days, the series stood proof that advertisement bombarding is not the only way to reach the top.
2. Follow Your Own Style
‘So, what is happening internationally to a company like Zoom Video Communications, Inc.? If it is trading at 30 times revenue, someone like me can never buy it even after knowing that it may make money. So, you have to pursue a particular style.’
- Madhusudan Kela, MK Ventures
You often hear a lot of smart investors speak like this. A few months back, when the Zomato IPO rolled in, Rakesh Jhunhunwala said he was giving it a miss, that he ‘need not go to every party in town.’
Net-net, you may not have bet on Netflix or the Squid Game, but that is okay. Be happy if you had an HDFC Bank or a Reliance Industries, or a Berkshire Hathaway too. They all made money.
3. Is A ‘Permanent Bull Market In The Portfolio’ Possible?
“Whenever people ask me whether the market is going to go up or down, my answer is - which market?”
- Devina Mehra, First Global
Mehra rightly asserts that because there is always something that goes up and something that goes down, at least in an investor’s consideration set, if not in actual holdings, one should consider all geographies and all asset classes, if one wants to be in a permanent bull market. Whether it results in a permanent bull market or not is one thing, but it certainly results in diversification.
4. Value Always Exists
‘We just have to build portfolios irrespective of where the market cycle is, and purely on a price-to-earnings multiple basis, you will still see pockets of value if you look closely enough.’
- Kenneth Andrade, Old Bridge Capital
Andrade maintains that one should look at the value in the stocks they buy. To illustrate his point, he explains what happens in an economy in a downcycle. He says that the weakest link goes bankrupt, which takes out the supply from the system. And then, as businesses are cleaning up their books, some of them have no appetite for growth, because they just want to survive. So you buy the stronger ones, which not only survive but thrive.
5. What Not To Buy
‘If you and I don’t invest in companies with very strong pricing power, then input cost pressures will wipe out the benefits of strong topline growth. In our country, the temptation in a period of rising GDP growth is to buy franchises like metals, real estate, and cement. Its a reaction that people need to watch out for’
- Saurabh Mukherjea, Marcellus Investment Managers
The earnings readings for Q3FY22 onwards will offer evidence about whether this holds out to be true or not. Already, in the Q2 numbers, we have now started to see the pinch of higher input costs impacting stock prices. Maybe, for the really long-term, pricing- power based investing might hold well over tactical buying.
6. Managing Risk
“We have to decide what is the acceptable risk and what is unacceptable risk.”
- Shankar Sharma, First Global
As Sharma put it neatly, the point of investing is to not look solely at returns, especially if one is managing others’ money. People focus excessively on one end of the market, which is returns and returns alone. Maybe, in the larger picture, successful investing, as Sharma said, is about managing risk. Don’t be out of the game during a downturn.
As long as you take knocks that only scare you and don’t knock you over, there will always be another round to fight.
7. Valuations Always Matter
For some periods, valuations are ignored, and sometimes they go completely out of whack.
IRCTC traded at 100x or 120x, depending on the analyst you chose to track. Unjustified valuations, most would say. Yes, there were some valid arguments made about what multiple Zomato fetches versus what IRCTC can get, but that was a hope argument because the businesses are different. Similar arguments justifying high valuations were made in the speciality chemicals space, where every remotely-expensive stock was compared against the newly-listed Clean Science and Tatva Chintan, which traded at exorbitant valuations. But then, trees don’t grow all the way to the sky. And they didn’t.
8. The New Age Craze
“India’s internet sector has progressed a little differently from the U.S. and from China because of the Aadhar superstructure. We have a transaction-based internet economy, where I think internet companies are going to be able to realise earnings very differently. There are some very exciting businesses out there that hopefully get listed and will give more choices to investors over the course of the next few months.”
- Ridham Desai, Morgan Stanley
The subscriptions of recent issues thus far, and price levels of the very few listed consumer-tech businesses holding steady shows that the interest is alive and kicking. It only shows that while some naysayers will quibble about valuations and overheated markets, there is a bunch of voices who liked the same businesses, invested in them, and made money. New age may be a craze, but is it surely a bubble? Maybe not.
9. Always Seek More Than One Opinion
“Bitcoin is tried and tested, it’s been through two massive bear markets. It’s been around long enough for now that I’m assuming it’s not going to go away. My base case is this bitcoin rally will continue, and the other big driver of the bitcoin rally is the institutionalisation.”
- Chris Wood, May 2021
“Cryptos can neither serve as a store of value nor medium of exchange. No sovereign will give up its right to print money.”
- Rakesh Jhunjhunwala, 2021
If you are the follower type, then always make sure you hear the counter opinion to your primary position. Most times, we live in an echo chamber. In order to make a more successful investment decision, it will help to hear the counter view and measure it against your own or the view of the one you follow. While Bitcoin is an extreme example as it has the world divided on its utility, the distance between Wood’s and Jhunjhunwala’s views shows how two eminent investment gurus view the same product in opposite ways.
10. This Time Really Is Different
The global financial order “built by the U.S, for the benefit of the U.S.” in the aftermath of World War II has lasted 75 years but it is dying, says Charles Gave of Gavekal Research. In his opinion, all these years, the United States’ current account deficit financed its budget deficit. With trade surplus countries parking their dollars into U.S treasuries, the greenback stayed stronger than it should have been and sent U.S. interest rates lower. That allowed American companies to borrow cheaply in dollars and make overseas acquisitions.
Gave points out that this dynamic is now turning. As of the quarter ended June, 23% of the trillion-dollar forex reserves held by the Swiss National Bank were as equities, of which a record $162 billion were investments in U.S. stocks – including a $6 billion stake in Amazon and a billion-dollar holding in ExxonMobil.
Gave says the implications of this are enormous, from countries having relatively lower dollar liquidity and more fuel for the heightened valuations of American companies. Is it a shift in the world order in reserve currency matters? Time will tell.
But For Now...
Don’t bother about whether the dollar hegemony will end or not. Focus on the sweets, the crackers, and... the giving especially. The world, large parts of India included, needs us to focus on giving what we can this year. Happy Diwali, to all!
Niraj Shah is Markets Editor at BloombergQuint.