We have bought a diverse set of companies over time. Say a ‘high quality’ secular consumer company or a ‘defensive’ healthcare company or a ‘cyclical’ metals company. All kinds of strategies have the potential to earn returns, though great historical long term track records of delivering material alpha have primarily come from holding companies which managed to consistently scale profitably over time.

If one is buying a company, managed by competent people, with a bright industry future, backed by strong unit economics, one can err on the timing & valuation, and still emerge relatively unscathed over the long run. For strategies, in which elements of timing & luck are more important, for ex buying a me too company or a heavily cyclical company, both of which have a good outlook on earnings for next 3-4 years, are attractively valued, but are not in a position to be very competitive or cannot scale or don’t deliver a reasonable rate of return on capital over a cycle, it’s very hard to consistently make returns on such investments over the long run. Timing is extremely crucial here and can make or break portfolios. One can be too early or too late in executing an entry/exit.

At some point, one probably will fumble and damage returns. Buffett has rightly said, Rule no 1 in stock markets is don’t lose money, because once you lose money, you get in a position which is never going to recover, leading to permanent loss of capital. Over 1 cycle? Very possible to show high alpha. Over a span of multiple cycles? We think the odds are stacked against it.

Broadly, we would like to allocate a large portion of the portfolio to companies which can scale profitably & are attractively valued. The caveat of not attaching ourselves to a ‘high quality’ or ‘secular’ label is because the world is inherently dynamic & complex and entry valuations indeed matter.

There can always be situations, when such names become very expensive or are few, or become very hard to rightly identify, and hence the real prospects are elsewhere. We need to remember that market labels & perceptions of what constitutes ‘quality’ or ‘great’ companies change over time. Sectors & companies can find their labels being changed in a fortnight.

Need to employ both first principles & analogies in our thinking. Analogies are extremely helpful, but situations can arise which really hurt returns if thinking via first principles are ignored.

Market cycles can be very long, deploying money in stock markets in expensive periods may ensure one optically makes money in the near term, but can find themselves with muted returns down the road.

Think of these 2 scenarios.

1. For 3 years, markets are euphoric, you find yourself making high absolute returns of say 30-40% cagr, now in year 4, markets go through a significant correction & your portfolio drops by 60%. This means your initial investment of Rs.100 went up to Rs.219 and at the end of year 4, it stands at Rs.87
2. Markets remain stagnant for 3-4 years. Your initial investment of Rs.100 does not move up materially in these 4 years, you get frustrated, exit. Get bored with equity. Now in Year 5 end, you revisit and you see that 100rs would have become 250rs had you remained invested.

In essence, this is the biggest issue in markets. Having a good perspective on where things stand on long term averages, periods of consolidation, being mindful of sharp drawdowns, being patiently invested as well as booking of profits at the right prices, not getting carried away on a few years of super performance or dismayed by a few years of underperformance is everything.

Onus on Alpha.
Our desire is to be a performance focussed fund, delivering high alpha to our clients.
Our mission, desire & challenge are to beat the markets materially.

While absolute returns are important, reality is it’s not easy to separate oneself from the market. If markets give poor returns over an extended period of time, we aim to deliver material alpha, but absolute returns can indeed suffer, make no mistake.

It depends. We can hold 5-6 companies or even 15-20 companies. Being a PMS, we have no limitations here, nor do we want to subject ourselves to any predefined constraint for the sake of it.

Yes, we do. Technical Analysis is a tool just like any other, which can aid in either identifying a company or buying/selling at the right prices.

We can give you a conventional answer of 3 years. But we don’t know. Money in equity can get made in 6 months or 6 years. Market cycles are extremely long, and history has shown it can take a very short time for returns to be made & destroyed. Stay invested for the long run & have moderate to low expectations is all we can safely say.

We prefer profit sharing fees over management fees. We are flexible. Kindly contact us for more details.