Independent Thought

"It's not supposed to be easy; anyone who thinks it's easy, is stupid."
This confused me; yes, it was hilarious, but I couldn't figure out why it was funny.
In the middle of this COVID pandemic crisis, I really get it.
In fact, I have been 'getting it' for the last 2 years where drawdown after drawdown faced me in my investment portfolio.

And yet, I can humbly say that value investing works. Buying with a margin of safety works. And as my friend AR reminds me, (the same as I remind some of my people), the journey is supposed to be fun; and I must say that the fun is back.

In 2008-9 when the great recession struck, I was still in India, but I began reading about financial stuff, and one of the things that hit me was that the US GDP was $14T in 2010 or so.
As I write this, they are pushing $21T.

What I have often seen now is that people misunderstand GDP as a stock number, but is in fact a flow number; that country's revenue line is $21T or so; in the meanwhile, India went from $1T to almost $2.7T now - which is fabulous when it's measured in % change, but while the US increased its yearly output/ consumption by $7T; we managed to increase the annual output by $1.7T.

The way all this has influenced me has been:
I would like a substantial portion of my wealth to emanate from countries where capitalism is important, to where the best minds of the world are attracted and where the rule of law and recourse can be counted upon.

As I look back at these past years investing in India, I have seen the retrospective taxation by the GOI, I have seen a mass cancellation of mining and telecom licenses, an overnight eradication of hard currency from the system, a closet full of skeletons tumbling out (be it over-indebted loss making PSUs, fancy and sometimes trusted business names, companies with connections with the underworld, prominent business folk running away from India), a Chief minister of a state unilaterally cancelling a bunch of projects/ contracts that his predecessor entered into, and behind which those companies invested substantial amounts of money, a non-existent telecom player surreptitiously buying a pan-India telecom license from another company which is essentially bankrupt now - meanwhile, said telecom company is now the biggest in India and nobody mentions how it got a pan-India license, a complete and total illiquidity in the wholesale financing market for non-banks, a humungous backlog of bad loans by the public and private sector banks (which includes many cases of blatant fraud and complete oversight in other cases).

Many folk in the business circles call this a 'trial by fire'; a change in the way India will operate, where there is a fear of the law, where a businessman cant keep looting public money, where politicians are accountable, where the mythical magical Indian middle class will finally emerge, and how the companies that survive will reap and spread these benefits to the population.

The beauty of capitalism is that some companies adapt and continue chugging along, they manage to change with the times - by enabling a certain culture, or by borrowing cheap in the overseas markets, or by diversifying their field of operations, or by narrowing their focus on the things that matter - all the while figuring out how important people and balance sheets are.

COVID
The more things change, they more they remain the same.
There is a flurry of activity in webinars, politicos, news and the like about how life is going to change, about how there is a growing resentment towards China, how global supply chains will change, how a lot of these first world countries will make contingency plans to deal with such a pandemic again - and I believe that while things will change, the forces of the free market are so strong that it will be difficult for a country to begin erecting trade borders with tariffs/ embargoes.

Eventually, money flows to some of the best companies in their geographies/ fields; while this may be the new gold rush towards specialty chemical companies in India or SE Asia, only the better companies will thrive as has always been the case when market dislocations reach equilibrium.

What could be?
I wonder - is it high time that the Eurozone breaks up? I believe it has gone on for far too long. How can Portugal continue caring for Greece continue caring for Germany and so on?
How could it be that the US has the ability to pay 1% p.a. for 10 year money?  That said, how did Japan do it for all these decades?
As LL predicts, will China finally move towards a free-r market system where the government only plays the role of peace-keeper and co-ordinator? Could the RMB become a major international currency? May be the route to that will be after a strong devaluation in the RMB...


My life
While the country around me is struggling with making ends meet, or trying to get back home, where 70% of rural India does not have access to running water (and the WHO can keep shouting 'please wash your hands) I am sitting in a privileged position where I am reaping the benefits of the work done by my ancestors.
What is my dharma towards the world?
There is a new being entering my life in 2-3 months, how will that bugger change me?
And how does all this tie-in with my investing style?

Lessons:
A more diversified portfolio.
A more stringent quality check on promoter quality.
Knowledge that more things can happen than will - the next crisis will be really different; it might actually be a crazy bubble in gold?
The relation between price and value is still sacrosanct; but the thing I need to learn is change in value over time and how Mrs. Market perceives companies where value is changing.

Do I own too many companies today?
Am I too lenient towards my smaller holdings, and I just let them run...?
Will Real Estate offer me the rewards I can imagine today?

Or - is the primary lesson that I cannot allow my sleep to be hindered, while I had this condition earlier too; I guess I was too naive. As is said, I should be able to learn by the time I get through the first 30 years or so.

My companies
Cheap, ready/ readying for the future, becoming stronger, have proven to be good at their work and will soon face new crises of their own.
Auto, Finance, Wealth, Chemicals, Consumer Brands, Real Estate, Pharmaceuticals - but the string running through them is: cheap, good runway, good balance sheets, global operations and yet - not very high on ROC.
Is this a big mistake? Or is it my inability to pay up? Or is it my inability to connect high ROC and low growth?

A thought that has stuck with me is: " My portfolio is the best." What this means is that each investor or fund manager surely believes that his or her portfolio composition is the best that could be done; and interestingly, the permutations that it throws up for the number of companies that are deemed investment-worthy is extremely high.
All of which implies that we can only do a certain amount of justice with the cards we have been dealt.
The smartest and most hard working or most experienced investors can still say that they have looked under far more rocks than the newbies, but there is simply a lack of time or initiative or luck with most of us.

And all this leads me to the superinvestors of Graham and doddsville. This is THE document which got me here and where WB postulated that all his fellow monkeys had their own set of companies and varying styles of investing but the central tenet was that things need to be bought with a margin of safety and that price is what you pay and value is what you get.

So, this is where I stand.
We are surely on the cusp of the next round of 10x and 100x in this country.
We are also relatively lucky that while the world is being extremely carefree about the perils of modern monetary theory, we have thus far reined in our looseness. 

While there are clouds of a strong devaluation of the rmb, or a break up of the euro zone or extremely high inflation or stagflation in the US, I can see that the Indian economic engine can surely find a way of finding niches and chugging along.

We are still on the ground floor when it comes to per capita wealth, and we still live in the country where the urge to pee in peace is greater than the urge to pray.


Dharma
To have fun while attempting to increase knowledge and wealth.
I am sure I'm going to do well, but as CM says, envy is the deadliest sin.
This COVID mania ought to pass.
We will soon have a bigger problem on our hands...

Doubt

I am throwing in the towel now. Have had enough. Nothing seems to work.
Reminds me of the Zombieland quote: " I avoided people like they were zombies before they were all zombies. Now that they're all zombies, I kinda miss people."
I miss the good old days when India was a great success story, and companies were strongly geared for growth - wait, was that just 1 year ago?

This is the despair phase of the market. The same market that I entered in 2013 when the older investors were tired. The cast is different but the eternal truth remains.

If I buy (hang on to) good companies at cheap valuations that earn decent returns on capital, and are good to weather most kinds of storms; I ought to do well.
- Now that was a mouthful and also, a mindful.

Mrs. Market is depressive. And there are decent pockets of pessimistic valuations - I am saying sub 7 PE types.  

But now I ask, 'How do I escape my old ideas?' 'Am I stuck with older companies because I believe in their value?' 'Have I become complacent in my assessment of newer companies?'
'Am I reading enough?'


Doubt - I think it makes for a good future.The stress that I had been under was worth my time; and somehow there is a certain peace now that my losses seem to have crystallized.
Somehow I am accepting my fallibility.

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.