The Best Investments are made during difficult times

As a legendary investor said we are all eager to buy bargains but are not willing to endure the pain of price decline that creates bargains in the first place.

Today, no respectable business is available to be bought with a margin of safety, they are overvalued, so the question is which is the cheapest of the expensive ones, this has led to competition from investors which is driving price up. You have to invest when competitors are not there and not when they are willing to pay up more than you are.

investors are hyper worried they may miss out on the rally and are willing to pay a premium, this can lead eventually to a crash as they run out of funds with strong hands unwilling to back them, and then the same investors will regret their decision and leave the markets thus creating huge value for investors, that’s when bargains will be available

As the markets decline, the risks also vanish, on the contrary as the markets spike the risks only increase. A bull market lays the seeds for a bear market and is preceded with the Suspension of all logic in valuation or financial analysis, saying no price is high for this great company.

And suddenly the future changes in unexpected ways. A brief history look up says that the entire business idea itself has disappeared from the canvas, let alone successful businesses, as a result of unforeseen changes and newer ideas replacing them.

People get lucky but they think it is skill. Hyper growth is risky, the best growth is that which is profitable and that can be financed by a company by its own internal resources.

Bruce Greenwalt said growth is not worth very much unless the profit is at the margin they are already doing and can be financed without weakening the balance sheet.

Many Indian companies chase growth blindly by taking on debt and weaken balance sheet or sacrifice incremental profitability for that growth which both leads to unhappy outcome. So growth should be such that capital efficiency is not affected.

Experience has shown the futility of forecasting. When everybody forecasts the same future and it turns out to be so, there is no profit to be made as the probability has been discounted. However when someone is able to forecast a very contrarian view and that turns out to be the outcome, there is profit to be made, but such forecasts can rarely be consistently made and hence it is pure luck.

Today most investors are knowledgeable, thanks to the internet and ‘forward the message’ culture. But what we lack is the judgement and discipline which is a fine art. As Edgar Wachenheim puts it, Knowledge is knowing that Tomato is a fruit, Judgment is not putting it in your fruit salad. To have good judgment you need knowledge + common sense, stable emotion, confidence and a sixth sense.

Carpe Diem

The addressable market-size is the base foundation on which successful businesses are built. In the last 5 years, we have seen that companies like Page industries, which commands high valuation, have continued to grow and offer profits to investors. They were able to grow owing to the large size of the addressable markets that they were in. The story is about where you can go, and not about where are you today. We are constantly in search of companies that are hungry to go far, and when this is coupled with a market that is large enough to grow and a management with a growth mindset, there is no stopping them. Look at Suprajit Engineering, which has delivered in excess of 300 times since listing, or Page or Edelweiss- these are examples of compounding machines, because they were in businesses that could scale. So while evaluating a stock, it is important to estimate the size of the market at a future time and see if the business can have a long runway, so that the stock (business) can compound and create value. The essential question is therefore whether the market potential for the business can become very large.

The character of the management and the economics of the business will be the catalyst for compounding. Take the story of TTK Prestige, the cooker business that was impacted by what we refer to as “value migration”. The onset of nuclear families meant that more people will need cookers. So the trend was that of nuclear families, and the outcome was a long run-way, where companies manufacturing cookers could sell more for a long period of time, as the size of the market expanded.

The “New Generation” business offers an opportunity in outsourcing: companies like T Q S are in the range of 4000 crores to 14,000 crores MCAP. We do need to visualize which of these could grow 2x or 4x in the very big pond of outsourced services, staffing and facility management. For instance, we are witnessing a one-time opportunity in ARC resolution, that Uday Kotak calls a “once-in-a-lifetime” opportunity. (Article link here)

Here we see an E NBFC that has put up a system in place to capture the ARC headroom for growth and is available at a reasonable valuation compared to the growth opportunity; and with a market cap of 24,000 crores- run by a management with vision and integrity.
A growing company needs a large opportunity-size for it to sustain high growth and become a compounding machine. There is a trap in this that sometimes, large market-size does not necessarily contribute to profitable growth like we have seen in the education sector, or in the retail. Merely a large opportunity size is not sufficient; the business should have the right character to seize the moment.

How to make multibagger returns

When the market has been going up in the recent past and many stocks hit their all time highs, its definitely time to be cautious. As an investor said "The best of times always seed the worst of times in the life of every investor. Life turns 360 degrees when you least expect. Something every investor must remember as things seem to only get better with every passing day". This can’t be truer than now. Companies that are making profits are getting crazy valuations and investors are in a hurry to buy at any premium even while many of them were languishing at lower prices only a few years ago. 

Ace investors who believe in making multiples of returns, know this is not a buyers’ market and prefer to look at businesses which are out of favour, making losses but have prospects of turning around. Some believe that luck is imminent to finding multibagger stocks.  Still we can put some method to the madness.

First the stock must be quoting at its lowest in its recent history, which could happen only when the business or the sector is in negative momentum or sentiment like what the pharma and IT sectors are today. Or if the company has huge debts and making losses but has strong management which can make it turnaround in the future. If you are catching a fancy stock chances are that it is already making highs and you might have missed entering at a right value. I know of an investor who invests when company is doing at its worst or near loss making and then he believes they will turnaround because they have a capable, trust worthy management and a ‘spark idea’ that will turn them turnaround.  This forms the basis for long-term high returns and multibaggers. 

Joseph Mazur in his book explains the difference between a coincidence (a meaningful conjunction of things without any apparent cause) and a fluke (an improbable outcome the cause of which is clear – such as a multibagger returns, where buying the stock is what makes the win possible)

The Art of Attracting wealth is Knowledge and Expectancy

Most popular question from a stock investors is "when will I see growth of my portfolio?", very often this question is within a couple of weeks if not months after investing. Otherwise it is from an anxious investors who calls up worried about a decline soon after making his investments. The expectation from almost all is that the stock should never decline and must shoot up immeidiately after investing. No one can answer these questions to the satisfaction of an investor who has not based his investing on knowledge, hence this blog.

As Graham said, the investor has the choice NOT to follow what the market is doing now! The primary reason for investing faliure is because an investor is paying undue attention to what the stock price is NOW. Instead the investor must focus on where is the company headed in future, couple of quaters and years down the line. Is the management capable of seeing the changes and are competent to spot and take advantage of the future opportunties. There are challange in every business, but capable management will ride through tough times and prepare to grow in the best times. To give an idea of business cycles and how managment should take a view and excute for growth, take a look at the Letter from Edelweiss financial services. 

There are various philosophies to invest, some focus on investing in companies selling at very low multiples of assets , earnings or cashflows. Others look for undervaleued small companies and wait for their revival. Then there are those that look at margin of safety coupled with detachment from the market but with great emphasis on future growth. There are investors with no time compulsion who look at making VC type multifold returns, they look at the right stocks which are in negative momentum and at a multi year low. They go against the tide as to capture the larger part of the rally during the growth phase.There are those who avoid profit making companies but run by clean managment with potential to come out of the red, they buy when the stock is making a loss and wait for years to make serious long term return.

Each investor has to decide which style will suit his personlality, this can't be borrowed knowledge and he has to build his individual conviction. If shortterm dilution in value keeps you awake, look to exit the stockmarket and invest where you understand and feel secure.

If you have not experienced a bear market phase that can last for years, it is easy to delude yourself that you have nerves of steel. Reality can turn out to be very different making you to exit at the first drop in prices and causing avoidable losses.

Expectancy : you must expect to be wealthy, as Al Koran said, when you were young,  you expected money form your parents, uncle, aunt who came home. The expectancy got us the money. The magic of getting in expectancy.. and Knowledge of course