There and back again

Was I Buff T. Warren?
I dont think so; although the lure of 'great quality companies tend to do well' had been extrapolated far.
I remember my pangs of 'I missed it!'

Klarman was right in 1999 when he asked whether Buff T. Warren's portfolio looks an awful lot like Warren Buffett's... The lure of good quality companies got to WB too.
And if WB can go through it - well, we are but mere insects.


I remember thinking -
no damned Mutual fund owns Y company,
there is no decent report out about J company,
investors dont even know what C company really does,
investors thoroughly doubt W company's ability to grow without losses;
And hence, I believed that I am alright.

So in the end, I have to believe that Mrs. Market is simply depressive.
And as is often believed about depression - no bother! just go for a nice comedy and things will be fine - Mrs. Market's depression has no firm rationale.
As I often tell my wife - 'When you gotta go, you gotta go!' - and then she complains about me being in there for an hour.


I was ready for this I believe. (And yet I was fully invested!)
I started making a folder called 'DONT PANIC' (inspired by Hitchhiker's Guide to the Galaxy) in Aug 2016 when too much money was made too fast.
I have not needed that folder until this week.

And the last 2 weeks' events reminded me of something Arpit had may be said: "All money made in the stock market is only a short term loan ready to be called back".

CM has often said "If you are not ready to take a 50% drawdown, you should not be investing"

Now, as Howard Marks often says: We may not know where we are going, but it's very important to know where we are. I guess he meant it about the investing philosophy.

Where are we now?
- In a country that adds may be 13m + net people a year
- Where people still have to buy their first homes
- Full of extremely young people which may cause odd social problems
- But somehow, everybody is getting access to the internet
- Very high savings rate in the country
- A very good ecosystem to service the world (mfcg and services)
- A nominal GDP growth rate of 11-12%+
- A formalisation of people's way of living - identity, credit, electricity, etc
- An irritable world leader who should be thrown out 6 years from now for sure.
- Overcapacity and bubble in the 2nd largest economy in the world
- Slightly higher oil prices
- A more competitive rupee that harms our import bill but makes our export bill awesome



"Risk for them is not being stupid but looking stupid."
I look stupid right now.
But this seems like the point of least risk.
Seems.

Biased about Biases

There are too many biases.
Actively managing the portfolio is a bias; and being too passive is a bias.
A Concentrated portfolio is a bias to conform to Munger's thoughts and a diversified portfolio is a bias to dissipate risk.
Managing other people's money causes incentive and agency biases, and managing only your family's money makes you complacent.

There are lures of greed and envy and exciting names and fantastic prospects,
As Marathe's post said: Biases about circle of competence can interfere with pursuit of knowledge - - many sectors tend to fall outside a value investor's realm of understanding; and yet, a pharma company or a commodities oriented company or a telecom company are still businesses - and these have generated wealth over decades - so, is it our complacency, or is it our bias that keeps us in the consumer goods/ financials spaces?

As my friend Arpit said, there are no fixed ways, and we have to find our way with our investing styles. And once we find that style, may be the style can change, there are no set templates.

So, what should a value investor do?

If the basic principle is margin of safety, then one should keep reverting to that.
And then, one can pursue a pharma company or a graphite electrodes manufacturer, or a lender, etc.
The balance between price and value, and an operator's ability to be an outlier in his industry, can be maintained.
The balance between a megacap and a small cap can also be maintained. A 100 Cr mcap company may struggle to grow because it doesnt understand the power of IT or employee empowerment, and a 50000 Cr mcap company can grow because it has the world as its addressable market; while we still believe that small caps tend to give better returns than large caps.

I last wrote in April 2017; and since then it seems that India has become stronger, companies have started investing again, we have seen a mad rally in the stock market and a great corrective phase now.
But how are our companies?
There seems to be a big dichotomy in lenders (v strong and v weak), there seems to be an unforeseen impact of China environmental/ economic clampdowns on Indian chemical complexes and paper and recycling, and commodities, Indians seem to be becoming much more mobile - for work and leisure.
Things seem quite good.

As for my favourite bias - I remember Mr. Bean's host in the US in the movie.
Mr. Bean was entrusted with taking care of a valuable painting - Whistler's mother.
And he told Bean: "Do nothing! And nothing will go wrong!"
Of course, soon after, Bean was drawing over the painting with a sketchpen.

So, I remind myself; as long as my companies are good:
"Do nothing! And nothing will go wrong!"
Of course, I could get hit by a cab, but that's another story.

What would an alien say

Some years ago, I wrote that if an alien were to visit Earth - and that sets the stage for how we should see things - they would say that English was invented in the US.

And now it occurred to me that if they were told that there was a global financial crisis in 2008-9, they would say - - ah, it started in Europe and Japan. No wonder they are doing so poorly.
That's quite something - somehow the originator of the crisis is faring rather well right now, and geniuses, and capital following them are still flocking to the US.

What would they say about India?
- may be, why are people leading such sorry lives, especially in very some sorry state of being.

An alien was at Sanjay Bakshi's seminar a few days ago, and she told me that - this is a very large number of people who seemingly dont want to find the next best investment idea... but want to learn about psychology and human fallacies. Pissed off biases and such.

Seeing the forest

As I try to make sense of why my portfolio has done so well, I realise that my concentrated portfolio has done well because of luck, and a very strong tide.

It's easy to say that my chosen X company has done well, performed well, and is building a foundation for future growth; but when I see the forest, I notice (almost all of a sudden and rather scarily) that too many companies have grown manifold.

It reminds me of the 2010-2012 time frame when people looked back at the 2004-2008 boom and said that you could throw darts to choose your companies and you would have doubled and tripled your money in quite a few names.
Pharma, housing finance, finance, textiles, chemicals, consumer products (but not FMCG), some auto, agrochemicals - a ridiculously large number of companies have been priced very strongly - and at times those prices seem to reflect true value, and in other cases they have gone way beyond their optimistic values.


And yet, infrastructure, telecom, hospitality, some auto, public sector banks, have performed rather poorly - - here, the prices seem to reflect the capital destroying capabilities of these companies.



The question is: Will today be a day when I will look back and say - man, this was never sustainable, and I was being too rosy about my own companies and it was all luck
Or
yeah, sure, there was a big correction but quite a few companies became stronger through the ensuing period even though I was lucky to have made returns up until this period.


The tide is bound to go out.
I have to focus on keeping my focus on the facts.

We are only human

How much will our world change?
Will Brexit mean that the UK actually wins against a disintegrating european Union? Already, German current account surpluses are ridiculously high, and the euro only keeps aiding it; history shows that when the tide turns, the impact of one strong parameter can really unsettle an economy.

The number of stories about China's shadow banking and shadow investing - - investing using apps, debtors not being able to pay money to P2P lenders, who then cant pay the gullible small guy who gave money away using an app chasing a yield 3x that what a bank offers;
Chinese companies using devious ways of routing money using LCs and collateral to invest in foreign assets that dont make any strategic sense - - why would the largest jewellery company want to buy an Australian utility?

Why would Tencent buy a stake in Tesla after Tesla buys out the sister solar company, and trades at an absurb valuation?

Meanwhile, in India, there is a sense of complacency creeping in... 'this company will grow because it has the most superior distribution model, and the CEO is fantastic... yes, it deserves a 35x PE multiple because it is a good quality company'
'this guy is a star investor, and as head of a diversified conglomerate he has made some very shrewd moves... the company is going to be one of the biggest in India.'

Odd global investors have started putting money directly into Indian companies/ projects
And quite a few companies are raising foreign debt at super low rates, low covenants, and extended maturities...


And on the technology front - - driverless, VR, crazy amounts of data, an increasing reliance on consuming data, an extremely interconnected and public life, new materials, 3d printing, drones, new terrorism tactics, new ways of routing money and raising money... all these things vs just 12-15 years ago of a very nascent internet, and no google just shows that the world is going to be starkly different by 2030.
And hopefully, the humans and the planet is safe then - that will make for interesting times.


On a personal front, returns have been too high, and I will be punished.
March 2017 - - just a little less than three in 60 or so... luck has to run out.

How do you feel?

It seems to me that its not the world thats so bad.... sorry...
It seems to me that people are beginning to believe the India story, and that housing finance will be availed by multitudes soon
And that farm incomes will rise, and govt will spend and enable infrastructure investments.

It seems that nobody is worried about an acquisition going wrong
Or the Eurozone breaking up
Or China's consumption sharply dropping, or them devaluing the currency aggressively
Or the effects of bad climate

It seems to me that I have been wrong for more than 6 years now - perpetually worried that something bad is around the corner.

But history has proven that these are fertile grounds for new villains, accounting scheming, and promoters enriching themselves.

That said, I do what Howard Marks says, staying cognizant of potentially bad stuff but moving ahead with caution.

Coming to valuations, future upside is getting based on business performance, and highly dependent on something not going bad... But things have a way of going bad.


I predict that some of the foreign borrowings, and M&A activities will soon haunt companies, not to mention the unsustainability of very rich valuations...

I keep telling myself what my friend AR says: All money made from the stock market is often just a short term loan from Mr. Market.

The pendulum is towards optimism for India, but very far from euphoria.

We wait

Climate change is happening, and yet we wait... lack of political will to suffer I believe.

Similarly, what do we know?

1. That central banks the world over are beginning to nationalize. I think it is simply that - - it's a matter of one pocket instead of the other. Rather, the developed world is nationalizing its assets - - debt, and in Japan's case - equity of companies.

Truth?
I dont think its more complex than that - - I have reached this opinion based on the last 5 odd years of reading and thinking.

2. There is a crazy bubble in China. People are incentivized to invest either in trusts, WMPs or real estate. How do they have the money to invest in real estate? (Oddly this is one topic I dont read much of... who is financing the home buyers?)

Do housing bubble always pop? or do they at times, gradually deflate?
Gradual deflation of bubbles dont create juicy stories or mania - - I believe they tend to be under-reported. A gradual deflation could easily happen, where people begin to realise that other assets make more sense.

That said Chinese equities also seem quite expensive - - not on the main indices, since they tend to be SOEs; but rather the more privately owned companies.

This is unlike companies in Korea or Japan - which are still relatively cheap.


Another odd facet of China is that - there are some spirits in the economy at work. Chinese goods can be very good quality, services too - and consumption does not seem to be trivial.

Truth?
All in all - we know that there is overinvestment, overcapacities, state-support, financial repression juxtaposed against good brain power, ingenuity, and the willingness to take risks and invest internationally - and in turn get good talent.


3. There is immense friction in the EU. Countries are getting sick of each other (either because of politics, immigration, jobs or economics), and yet seem joined. But one day an Einstein will come by with a beginner's mind and say - the emperor has no clothes; that leaving the EU and the euro aint too bad; after all, things were fine before the euro came into being.

Truth?
A member will leave, and the domino will start. And finally - a country will be able to re-orient itself to its actual competitiveness... Companies will suffer, and companies will become stronger



The hilarious thing will be - in 2019 or 2020; people realising that there was no great deflation, there was no great inflation, and the world just kept muddling along.
We are the all singing all dancing crap of the world