Every family has that one uncle, who is a lot like Charlie Munger. The uncle who gives dead pan blunt replies, which one knows are right, but at times does not want to hear. The one uncle who everyone turns to for the best advice and finally the one uncle whose witty one liners crack the whole room up.
Much like Charlie.
My first initiation with Charlie was when a few decades ago, my brother imported a box full of “ Poor Charlie Almanac’s“ to give to his friends and while at that time I questioned the logic of that, the more I read, the bigger I became a fan. A slight backstory to it, upon knowing it’s not for commercial sale, Charlie did not take a single penny for all those books !
Charlie Munger was in Warren’s own words, his better half and as one reads more about him, his life, his thoughts, one understands why.
We all owe a lot to Uncle Charlie, his quotes adorn our walls and our research reports, his thoughts are imprinted on our investment hypothesis, his mantras are peppered in our decks on things we do and the things we don’t & his way of living and investing are bejewelled in our aspiration goals.
He famously said “ All I want to know is where I am going to die, so I will never go there “ , unfortunately as life would have it, we all go there and we all have to.
There are numerous investing lessons Charlie has left us with, but the ones that stay with me the most are not only investing lessons, but principles & frameworks of life.
Being life long learners, to be helpful to others, conquering envy and finally being an eternal optimist.
If Charlie could be optimistic at 99, I am sure we can be as well.
RIP Charlie – Travel Well
Ravi Dharamshi
Arvind Ananthanarayanan
Aniket Dharamshi
Megatrends are powerful, transformative forces that change the global economy, business, and society.
Megatrends are structural shifts that are longer term in nature and have irreversible consequences for the world around us. Although they evolve independently of the economic cycle, often along seemingly different paths, and timescales, they possess the capacity to redraw the investment and industrial landscape.
The awareness of megatrends in investment processes offer real insights that influence our investment decisions – from how we identify opportunities to where we look for them.
Anthropogenic Climate Alteration, The World’s greatest challenge
Human activity over the last two centuries has accelerated quality of living for vast swathes of population but has come with the cost of ecological impacts. Indeed, the present epoch is called the “Anthropocene” (Era dominated by humans) for this reason. Current prediction suggests that the human predilection for energy use would lead to an average global temperature increase by over 5oC unless suitable steps are taken to prevent the same. Needless to say, such a quick temperature rise is unprecedented in the planet’s history, and threatens with barely understood consequences.
As the planet nears the climatic tipping point, steps are being taken globally to urgently address climate change. At the forefront of these efforts is the energy sector, itself responsible for over 75% of greenhouse gas emissions. To address climate change, a complete transformation in our relationship with energy is underway encompassing production, transport and utilization supported by legislation.
The path to net‐zero emissions is narrow: staying on it requires immediate and massive deployment of all available clean and efficient energy technologies.
Cause for optimism
In this crisis rests a cornucopia of opportunity. Never have investments, policy, innovation, and public awareness been so aligned. History is replete with examples of energy policy being pulled hither tither by often contradictory external “impact” factors, with judicious choice between cost and convenience; national security or environmental protection; availability or inclusivity to name a few. The advancement of technology since the last false start of the energy transition paradigm post the 1970s now aligns previously contradictory forces. The new technologies of the energy paradigm point in a single direction toward a sustainable energy future. Humanity embarking on this journey will open the opportunity of the decade.
Call to action
All stakeholders are committed to reduce emissions: 131 countries covering 90% of global GDP have introduced net-zero targets, 46 countries have implemented or announced carbon dioxide emissions pricing or trading schemes. Globally, 40 national hydrogen strategies have been announced as countries set pathways to tap into hydrogen’s potential to decarbonize, ensure energy security, and spur sustainable economic growth from stranded energy resources. Stakeholders from governments to industries to consumers themselves increasingly recognize that hydrogen is needed to achieve net-zero emissions. Fifty countries and regions are planning to ban ICE cars.
Building momentum
The Energy Trilemma – cost, security, and climate: once at odds, now stand fully aligned with renewable electricity being the cheapest source of electricity in over 90% of the world. Further, 90% of people live in countries with abundant renewable energy. As an icing on the cake, renewables have an ecological footprint c.100 time lower than fossil fuels. Thus, the alignment of cost, convenience, and energy independence/security under the aegis of climate change mitigation is creating the opportunity of the decade. The transition has led to the creation of technologies which cannot be un-invented, vesting irreversibility in this megatrend.
Driver 1 – Economic Reason – Cost & Adoption
Driver 2 – Selfish Reasons – Energy Independence/security
While politically motivated, the recent conflict in Ukraine brought home the importance of energy security. High prices of fossil fuels reduce fossil fuel demand and massively increase the competitiveness of renewable technologies.
Governments have an additional energy security and economic incentive to deploy renewables and increase efficiency. With every crisis there comes opportunities, a conflict in the Ukraine which choked the supply of natural resources, especially energy, will expedite an era of renewable resources.
According to Mckinsey, “The war in Ukraine has also dealt the effort to achieve net-zero greenhouse-gas emissions a powerful supply-side shock. Yet for public and private-sector leaders willing to take the necessary bold steps, the new logic of energy security and economics holds the promise of making this a turning point in seizing the opportunity to address the globe’s unfolding climate crisis.
Driver 3 – Altruistic reasons – Humanity benefits from the age of renewables
A significant benefit of the new energy paradigm is its inclusivity. Unshackled from geographical concentration, the availability of renewables will drive inclusivity. As such, renewable energy is the cheapest source of electricity for over 90% of the population, while the concept of concentration of economic rents is rendered obsolete as no one (or country) owns the sun.
Transition underway
We have all the technology we need
Clear, imminent, and desirable change
Peak Fossil Fuel
The change in demand is reflected in early peaking of the same for incumbents, while the engineering heavy nature of the business leads to a plateau. There can be brief hills on this plateau caused by external factors such as the pandemic or conflicts, which further lends impetus to the transition. These hills however are not a resumption of strength for the incumbent, but an Indian summer followed by sharp declines when the new technology moves to maturity up the S-curve. In 2019, fossil fuels were only 15% of the increase in energy supply. In the crash and recovery of 2020-21, solar and wind supply increased by 7 EJ, and other renewables by 1 EJ. Fossil fuel supply fell by 0.4 EJ. Solar and wind are now 5% of primary energy supply and growing at around 20% a year. Therefore, energy demand growth in 2022 would need to be more than 1% for fossil fuel demand to exceed its 2019 levels.
Risks
Fossil energy has been the prime mover of global industry for more than a century and this capital-intensive industry occupies more than a quarter of the global equity market capitalization. As peak fossil fuel demand occurs amid consumption slowdowns in China, this directly puts 25% of the world’s capital markets at risk. Additionally, the collateral damage is expected to spill into the lenders and bond issuers associated with this sector.
Opportunity
Larry Fink of Blackrock proclaimed “I believe the decarbonizing of the global economy is going to create the greatest investment opportunity of our lifetime. It will also leave behind the companies that don’t adapt, regardless of what industry they are in. And just as some companies’ risk being left behind, so do cities and countries that don’t plan for the future.”
The challenge of transforming energy systems is also a huge opportunity for our economies, with the potential to create millions of new jobs and boost growth. Total annual energy investment to reach USD 5 trillion by 2030, adding an extra 0.4 percentage point a year to annual global GDP growth. Such broad-based pivots are milestones in human history, and correspondingly rare. Identifying and investing in the companies that will lead this charge will no doubt be enriching and rewarding. The sun is shining bright, and the light is shining through.
The Union Budget for FY23-24 was presented against a backdrop of challenging global macros – slowing growth, high interest rates and inflation. The knock on effect on India is already visible in the form of weakening exports and higher import bill due to commodity inflation. Given this challenging situation, the Honorable Finance Minister did a commendable job of balancing fiscal discipline and growth requirements, while simultaneously taking further steps to promote domestic manufacturing which should help in correcting India’s trade deficit in the long term.
Post COVID, the Government has made an expansionary and credible turn in approach while presenting the Budget with no more “off-Budget” allocations and much more realistic revenue assumptions. The FY23-24 Budget math also followed the template of recent years with reasonable and conservative assumptions –
The Budget mainly focused on 4 broad areas –
The Central Government has been doing the heavy lifting on capex, but Central Government capex accounts for ~40% of total Government capex, with the rest being contributed by State Governments and Central PSUs.
State Governments have been lagging in the execution of their capex targets and it is now time for them to also pick up the gauntlet on capex. It is hoped that with the improving fiscal health of states post COVID recovery, capex execution going forward will improve.
As discussed above, while the Budget focused on fiscally prudent, pro-growth measures, it was also heartening to observe no degree of populism in the budget, given that this was the last full budget pre-elections. In fact, there is a YoY decline in allocation to several welfare schemes in the Budget.
Overall, the FY23-24 Union Budget was a fiscally prudent Budget that focused on the key longer term focus areas of the Government – capex, domestic manufacturing, green energy transition – while providing some relief to the middle class via direct tax changes.
Portfolio Strategy
Our portfolio strategy is based on identifying various top down mega trends that we expect to play out over the next 3-5 years and then finding the most suitable bottom up idea to benefit from the trend. We do not view the Budget in isolation, but as part of the broader economic direction the Government wants to take over the medium term. In that context, we note that our portfolio is completely aligned to the Government’s focus areas –
This interview appeared in the ET Prime on 5th January, 2023 (link)
India is the global back-office and world’s pharmacy, says Ravi Dharamshi, founder and CIO, ValueQuest, speaking about IT and pharma sectors – the two top themes of the last two decades.
In conversation with Ami Shah, he talks about the SCALE framework of investing, stock-market lessons learnt from Warren Buffett and late Rakesh Jhunjhunwala, and things that motivate him.
Are you a value or a growth investor? Why do you say that?
We honestly do not wish to get stuck or typecast in the nomenclatures of growth or value. ValueQuest means itself the quest for value. Growth is inherent and an integral part of value realisation. Lot of value stems from the future growth. Our approach has been to find companies that are on the cusp of a growth phase and identify them before the market has baked the future expectations into the price.
Our goal is to identify ideas or themes that will do well in the foreseeable future of 3-5 years. Connecting the dots top-down, we set out to look for best companies which can capture the opportunity in this theme, and in the process change the SCALE of the company itself.
SCALE framework: Scalable companies with sustainable Competitive advantage, Adaptive on a Long runway with superior Execution capabilities. We believe this is the phase wherein maximum wealth creation happens for a company and that is what we aspire to capture.
What are your learnings from a value investor like Warren Buffett? He also bought Apple at its peak and today it accounts for 40% of his portfolio.
Warren Buffett is the fountainhead of investment learning and lessons and there is so much one can learn and imbibe. For a fund manager or even a normal investor to imbibe his thought process to whatever extent possible should be the first step in the journey of wealth creation.
His quotes and sayings are investment folklore and there are no qualms for us to say that we use his quotes wherever and whenever possible. There is so much wisdom packed into few words.
But from the above example or question, I think the biggest learning is that he is not afraid to change his mind and views and admit his mistakes. From not being too keen on technology companies for various reasons and not having any in his portfolio to having his largest holding in Apple, which has rewarded him well. His flip flops on the airline industry are also well known and his letters to shareholders are full of self-deprecating humour, which is refreshing and brings out a character of humility that is so critical in the investment world.
What according to you were the top 3-5 themes for the last decade?
Two top themes in the last two decades have been IT and pharma. Both industries have gone through the cycle of discovery where cost efficiencies and technical edges were explored and exploited to the cycle of growth. They went through periods of consolidation and eventually innovation and only the best survived. Finally, they are closer to the mature stage in terms of growth and return on capital.
These industries have proved themselves to the world and put India on the map with their scale and ability to seize the opportunity as and when they were presented, be it Y2K or Covid-19. These have also been rewarding investors, with IT giving a 17% CAGR over the past two decades. India has gone on to become the global back-office and the world’s pharmacy.
How important is ESG in your investment philosophy? What are the parameters you look at?
Mark Twain, famously mentioned in his autobiography, “There is no such thing as a new idea. It is impossible. We simply take a lot of old ideas and put them into a sort of mental kaleidoscope. We give them a turn and they make new and curious combinations. We keep on turning and making new combinations indefinitely; but they are the same old pieces of coloured glass that have been in use through all the ages.”
ESG or Environmental, Social and Governance is one such old cocktail. It’s the latest buzzword in the investing world, even if it’s not really new, is one such old idea that is being put through a different lens, every few years.
It will be safe to assume that companies and decision makers, who have a fiduciary responsibility to maximise profit or shareholder value, are incentivised for better performance. However, its very tough to assume they to work solely with the higher goals of ESG in mind and not worry about shareholder satisfaction.
On the other side, societal expectations and requirements for a sustainable future are absolutely essential and need a lot of focused attention and questions asked. However, the definition of sustainability and its framework may differ from country to country and company to company. Further, ESG non-compliance will probably be a key factor going ahead in raising funds/investments and tapping other markets or avenues.
As an investor, having a feel-good factor that you are participating in the change, which is good for the future, may not be the most best investment for returns per se and one may have to walk a thin line between the high road and high returns.
So, it’s our endeavour to find such companies and themes that will benefit in the move towards ESG compliance — be it a transition to renewable energies and ancillary businesses around this.
Which are the new themes that you are exploring seriously?
We have entered exciting times post-Covid-19. As I have mentioned in of our earlier posts, “This is the manufacturing renaissance for India”. There is a shift in the world order and there is a need across the globe to look for alternate suppliers or manufacturers to the products needed by the world. Days of China being the lowest cost and most reliable supplier to the world are incrementally over. Also, the world has realised how much it depends on China. So, the need to reduce dependence is clear and present. Be it in industries as diverse as chemicals or smartphones, the theme of China + 1 will not be a temporary one, but a paradigm shift is on the way. For example, India has replaced Vietnam as the world’s second-largest mobile phone manufacturer. Between 2016 and 2022, India is expected to attract investments worth INR44,265 crore in the smartphone manufacturing sector.
From just three mobile manufacturing units in 2014, India witnessed a jump to 268 smartphone and allied services manufacturing units until 2018.
This has also been massively aided by schemes and intent of the government in its endeavour for Atmanirbharta, be it in defence, textiles, electronics or capital goods. Schemes like PLI have further bolstered Indian companies to relook and enhance manufacturing and reclaim the market share lost to China and Vietnam.
Another theme, which has been very interesting in the last few years but has really come to the fore since the Russia-Ukraine war is the transition away from fossil fuels. Energy literally came under fire and while the push for reduction of dependence of imported fuel has been a long-standing push, the impetus towards renewables, be it solar, wind or even hydrogen, has been extremely high. This and its ancillary businesses could be a great idea for the future.
How do you look at high PE stocks in terms of quality stocks? When should investors completely ignore high PE stocks?
My first boss and my mentor, Late Rakesh Jhunjhunwala, always used to say it’s more important to buy at the right price. He often used to say, “Never invest at unreasonable valuations. Never run for companies which are in limelight.” He strictly followed this rule and used to advise New Age investors to look at stock valuations before making any investment decision. This holds true even in today’s world of high-priced IPOs and we have seen how that has played out for some of them. While they may be good businesses, it’s not necessary that good businesses bought at any prices or unreasonable valuations will be rewarding for investors. Having said that, there is a certain higher PE command for high quality stocks, these 50x, 55x, 60x multiples can be a bit misleading. They also need to factor in the future growth possibilities for an investor.
Markets give higher multiple to businesses with:
So, as Warren Buffett changed his approach from an absolute cigar butt-oriented value investing to Phil Fisher approach of buying superior companies.
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
We also believe in buying superior quality companies, but even that has an entry multiple to it. Valuations do form a major portion of future returns.
One must ensure not to end up giving a high multiple to a business which is sub-scale, sub-quality and where profits are not sustainable due to cyclicality or other reasons.
Given a chance would you prefer to be a highly concentrated investor?
Higher concentrated bets and a low churn rate are our most favoured and ideal scenario. Here also I would like to quote the Oracle of Omaha, “Diversification may preserve wealth, but concentration builds wealth.”
The level of concentration is a matter of personal choice and ability to withstand market vagaries. It is a question of your ability to hold positions for long periods of time. If an external event can force your hand at the wrong time, then you are better of more diversified. We believe 8-12 stocks is ideal concentration for a portfolio.
Do you believe in timing the market? If yes, how do you do it?
“Time in the market is more important than timing the market.” However, when Buffett urges you to buy, when everyone is fearful and sell when everyone is greedy, is also essentially a way to time the market. We wish to be long-term greedy. Our time horizon is 3-5 years. We usually have one 30% correction, two 20% correction and three-five 10% corrections in a 5-year horizon. Our aim is not to get every correction right. But when opportunity presents itself, it is our duty to take that advantage.
We try to be on the right side of the trend and within that we stay invested if the stock and business fit in our hypothesis and valuation matrix. We don’t try and get the bottoms and we certainly don’t try and judge the tops. We hope we can buy reasonably good businesses in an emerging theme, and we hope the business can grow to its potential. We cannot have an investing strategy that focuses on the extremes of the market all the time. In fact, focusing on the same can be very counter-productive. Every future market correction seems like a threat and every past market correction was an opportunity in hindsight. If we give up our obsession with finding the extremes in the market, it will take away most of our worries.
How seriously you look at macro-economic issues. How do you factor it into the investment philosophy?
There is no doubt that macroeconomics plays a very important part in the evaluation of a business, and also how they will impact the market scenario. In fact, the recent memo of Howard Marks is an excellent representation of this — how the macro-economic factors, say interest rates, have impacted and affected asset classes and eventually market performances over the past 2-4 decades. Having said that, investing is part science and part art, and we have seen countless examples of this. In a favourable environment in 2017-18, while the world outperformed, India was dealing with more structural changes that gave us short-term pains. But on the long run, there’s a promise to become invaluable and eventually, as we call it at ValueQuest, it will make India ‘anti-fragile’ to some of the global macroeconomic headwinds.
Further it’s our goal to not look at day-to-day weather patterns but seasonal changes. This broad understanding of the season we are in, whether it’s time to be more aggressive or defensive. Our macroeconomic study is to ensure that we are factoring in the right models and frameworks given the seasons versus the variables of day-to-day weather vagaries.
What are your parameters for investing into deep-value stocks? How do you analyse the promoter?
Since we do not label stocks into growth or value paradigm, our parameters for investing do not change. Broadly, business, promoter/management and valuations remain the criteria for investing. However, in case of smaller companies, promoter/management have far higher weightage in terms of significance.
Our framework for analysing any company management broadly follows:
Integrity – Judged through past actions
Competency – Judged through ability to manage balance sheet during downturn, ability to gain market share, expand addressable opportunities
Alignment of interest – Judged through skin in the game, corporate structure and past actions related to minority shareholders
Allocation of capital – Ability to generate returns above cost of capital over a long term is the true test of any management.
What was the best book or article you read last year? Why did you like it?
It’s actually a re-read of a book. Reminiscences of a Stock Operator: The Life and Times of Jesse Livermore. This book is a wonderful read. No matter how many times you have read it, the book leaves with you some new lessons. Not so surprisingly, it has quotes and enough anecdotes that still resonate almost 100 years after it was first published.
This is the beauty of that book, and this is the beauty of the stock market. It generally repeats and rhymes. For example, one quote in the book reads, “Carefully laid plans will miscarry because the unexpected and even the expectable will happen.” And see how true this has been in the year gone by. Twelve months ago, we were on the way of a commodity supercycle, today we are struggling with a possibility of recession. A year back, we were on the steroids of “free, easy, fast” money, today we are looking at rising interest rates, QT and a much-needed funding winter. Today, its king dollar / rising yields and tomorrow it may be something else.
“The real key to making money in stocks is to not get scared out of them.” – Peter Lynch
Which sports you enjoy? Which match or event was memorable last year?
Year 2022 has been great for sports. I was lucky enough to catch the live India-Pakistan cricket match in Australia, and also witnessed one of the greatest football world cup finals in the history just recently. Both were absolutely enjoyable watch, and both were taken to the ultimate last minute to decide the winner. I have seen and played a lot of sports, but these both games were something else. The winner is sports and while there are so many lessons being eulogised, you cannot but not mention the never-say-die spirit of the runner ups in France and laud the genius and longevity of the career Lionel Messi has had. Hats off.
Which was your inspirational song last year?
So many. I am a complete music buff, and the taste varies from Kishore Kumar to Imagine Dragons. So, there is not a single song that I can pinpoint. However, Don’t Stop Believin’ by Journey is one of the better inspirational songs I have heard. As the lyrics go – Don’t stop Belivin, Hold on streetlights, People.
Name some movies or TV serials you have enjoyed over the last one year.
This year has been for sports documentaries and there have been so many good ones. Two that stand out are Swimmers and Rise, both are about migrants making it against all odds and succeeding under the most adverse circumstances.
Rise, particularly, has had a real fairytale ending with Giannis Antetokounmpo ending up as NBA world champion in 2021 and getting two-time MVP awards. His story, grit and determination has been certainly special.
Tell us your favourite stock market anecdote involving a colleague or an acquaintance.
There have been so many, but two are most memorable. In 2007, when I was in far more illustrious companies amongst the giants of our stock market, they made a statement that the market is going at 100 KM/hour and an accident is around the corner. This statement had so much wisdom and eventually when the global financial crisis precipitated, it made so much sense for a young inexperienced investor like me. This profound wisdom and the logic behind it will remain an eternal lesson for me.
My own small such experience was in the despair of Covid-19 where I publicly stated, “One should sell their house and buy stocks.” While I only meant it metaphorically and wanted to emphasise the opportunity that lay ahead, I got a bit of flak for it. Even though it eventually worked out superbly well for those who did invest in those times, it also taught me a good lesson on standing out on my own conviction and literally keeping my head when everyone was losing theirs.
I must confess, 2022 ended up being far tougher than I thought it would be.
Coming post a tumultuous couple of years with wild swings amidst once in a lifetime pandemic, a collapse of the world economy, the opening up of the world, we saw it all. From negative crude prices to peak crude. From stimulus driven liquidity to tightening rates and purses. From closed shipping routes & freights to the sky and now submerged. From various coins to the moon and back. From commodities which glistened in the sun to back to earth. These were days where years happened.
But amidst all this turmoil, India was standing out as an oasis of growth, stability, and bullishness. Which it did, well at least at the index level it seems all good. But below the surface markets have been far tougher than imagined. Just proves the point, even if you get your macro reasoning and portfolio positioning correct, it is not possible to have a performing portfolio all the time.
A year where the macros could take maybe a small backseat and the businesses could take ringside seats & truly live up to their potential. An opening up trade, a softening of commodities, green shoots in the economy and the animal (read bullish) spirits should have been raring to go.
Mr. Market also had its way with traders / investors akin, The FII’s pulled out big, India would have normally collapsed, instead it’s been rock solid. ESG was supposed to be the theme of the decade, Non ESG stocks had the time of their life this year. Pharma and IT with its hangover in terms of demand and efficiency in a Covid and post Covid world was supposed to have a long runway and were seen as pockets of value and growth, they are amongst the worst performing sectors this year. Private Banks were eating PSU banks market share for lunch, guess who outperformed this year. PSU bank stocks outperformed by a mile. India used to import almost all its defence requirements, not anymore, defence manufacturers and ancillaries are amongst the best performing stocks this year
Despite all of this, not to a surprise to the believers, Indian equity has managed to outperform most asset classes by a wide margin and while Indices flirt with all-time highs, there are common themes & musings you hear within the investor cycle and their portfolios and the disconnect it has with the index.
Such a year definitely calls for some introspection and especially keeping in mind the spirit of the season, the resolutions, the picks of the year, the lessons and threads it brings to us. These are some of my notes for introspection.
Note to Self – second and third order implications are not apparent easily. And on top of that market reaction to the same is even more difficult to predict.
“If the unusual never happened there would be no difference in people and then there wouldn’t be any fun in life. The game would become merely a matter of addition and subtraction. It would make of us a race of bookkeepers with plodding minds. It’s the guessing that develops a man’s brain power. Just consider what you have to do to guess right.”
This year has been strange but in a manner which has been unique and challenging and has often been at loggerheads with its own self in many ways.
The world opened up and declared the end of a pandemic and China went back to lock down and a Zero Covid policy. Europe has been ravaged by war for a greater part of the year and this has caused not only geopolitical implications and see saws, but it has resulted in great economic imbalances, be it energy crisis or shutting of supply chains.
While this appears to be out rightly bleak news, it has brought up tremendous opportunities for India, be it China + 1 / Europe + 1, Atmanirbhar Bharat, the cause of strengthening our defence capabilities or the Renewable Energy push
Timing anything in the stock market can be quite difficult, and that includes recessions. It’s also quite possible a recession will occur before anyone knows and won’t be declared until it is well underway or over. Stay Invested and Stay focused on quality of your business rather than focus on economic outcomes.
Note to Self – Whatever happens in the stock market to-day has happened before and will happen again.”
Not much long ago, words like Defi, Crypto Punk were the buzz words and the future, not being in them, evinced laughter, and scorn. 2022 pushed Crypto over the cliff, the monkeys vanished, and companies and businesses built on empty promises, unsound practices (Including some of our overvalued & much hyped IPO’s) were punished and some would argue not suitably enough. While there is much value in technologies like Blockchain and some of our “ new age” companies do have the potential to turn the corner and reach scale and size in the next decade, this year has not been pretty & this has happened since time immemorial, be it the Tulip Mania, Dot Com bubble or the inflated real estate stocks, every time there is a new “fad” in town there is someone else holding the bag and its always a lot lighter. It’s never different this time.
Note to Self – Be long-term greedy.
“Speculators buy the trend; investors are in for the long haul; “they are a different breed of cats.” One reason that people lose money today is that they have lost sight of this distinction; they profess to have the long term in mind and yet cannot resist following where the hot money has led.”
Markets at times have a feeling of Neighbours Envy, when everything around you is rising & you question your own hypothesis and principles. When you buy a theme you envisage a certain possibility, but at times get carried on with the daily noise and gyrations and you lose your head, cool and eventually your take your eye of the ball. Classically also known as FOMO, this has continued to ravage investors over the years. When we forget the distinction between buying businesses which will seize the scope of potential ahead versus companies that may tend to rise like how all boats rise with a full tide & only when the tide turns, do we know, who all will float or sink.
To be in for the long haul is where the magic happens.
Note to Self “I do not allow my possessions—or my prepossessions either—to do any thinking for me.”
Biases are part of human emotion, and it generally affects our investment decisions even when they are as system driven as possible. Coal is a dwindling source of energy; PSU stocks are untouchables and State run banks are glaring with inefficiencies are just some of the examples
Leaving our biases, be it hindsight, confirmation, information, or recency aside and thinking with a clear mind has become an important skill in the world of investing.
“What you see is important, what you cannot see is more important.”
Note to Self – Carefully laid plans will miscarry because the unexpected and even the expectable will happen.”
12 months ago we were on the way of a commodity super cycle, today we are struggling with a possibility of recession. 12 months ago we were on the steroids of “free – easy – fast” money, today we are looking at rising interest rates, QT and a funding winter. Today its king dollar / rising yields and tomorrow it may be something else.
“There will always be something new & in this every changing world.“
“The real key to making money in stocks is to not get scared out of them.” – Peter Lynch
History has always rhymed, and the stock market is the best example of this. It’s also the place where generational wealth has been made. The only thing we should be clear is our goals, our objectives, and what businesses we are buying and why.
“Know what you own and why you own it” – Peter Lynch
Have a great new year 2023 & see you all on the other side.
Ravi Dharamshi
CIO
ValueQuest Investment Advisors Pvt. Ltd.
Sometime between the 6th and 8th century, all the Gods and Devas came to Lord Shiva with a strange predicament. Having seen into the future, they realised that Planet Earth is going to be quickly depleted of all its resources and man being man, will soon run amok and destroy the planet. Energy which is known as the fuel of life, will soon be at a severe shortage and the future of wars will be fought over them.
The God’s predicament was that they needed to communicate a message to mankind thousands of years into the future, a message which will not only be communicated, interpreted but also understood well enough to save Earth. Lord Shiva & Goddess Parvati patiently heard this worry and told the Gods to not worry, they have the perfect solution to all of this – Lord Ganesha –
There is an explanation on the internet which says “Ganesha, in fact, is the symbol of he who has discovered the Divinity within himself. Ganesha is the first sound, OM, in which all hymns were born. When Shakti (Energy) and Shiva (Matter) meet, both Sound (Ganesha) and Light (Skanda or Kartikeya) were born. “
Before we go ahead, the above story is purely fictional and a figment of an omnist mind, we have absolutely no way in knowing what transpired so many years ago and nor have we read the holy texts to interpret the same. What is, however, not fiction and is playing out today, wars are being fought over energy and fuel, there is shortage and severe crisis and the climate change has heralded a need to conserve energy and transit to renewable resources to ensure a longer sustenance.
Made from soil, immersed in water, radiant like the sun and son of energy and matter. What if the entire festival of Lord Ganesha is an aphorism for us to become one with nature.
What if this all part of master plan of Lord Shiva to save Planet Earth, having realised that there will be shortage of fuel & energy and the only way we can be saved as time goes by, humans will have to go back to their roots and look for answers there.
The answers maybe are found in the holy festival of Ganesh Utsav. If there would be one festival which truly unites India across the spectrum of religions and classes, it’s probably this one. Time spent in the lines to worship the more popular and revered mandals, will validate this notion as you are generally surrounded by a variety of devotees from different backgrounds all united by a common Shraddha or faith.
The legend of Lord Ganesha has so many environmentally positive stories connected with him, it’s almost profound on the message he tries to convey to us.
From his infamous “eco-friendly – energy saving” trip around the world, to his creation from earth and soil to his immersion in water, to his “re-usability” of the elephant face, his mouse carrier & finally to the growing awareness of eco-friendly adaption to this holy festival, there seems to be a virtuous cycle of awareness and realisation set in place which augurs well for the generations to come.
Several potters, sculptors, artists, and idol makers from across the country have been creating awareness amongst the people about eco-friendly Ganesh idols made by using clay and soil from lakes and rivers in the city. This is truly an effort to conserve the environment and promote traditional customs and art forms. It is very essential to change the mindset of people and make them aware and adopt eco-friendly practices. The demand for eco-friendly Ganesha idols has been on the increase, this definitely is a healthy trend. The call for such awareness has seen many different practices being followed across the country. Just as we have moved to eco-friendly celebration of Ganesha, we need to move to renewable energy sources.
The history of mankind has been a lesson in energy transition, from agrarian fuels, fossil fuels, nuclear energy, energy has come a full circle to going back to agrarian or biomass, solar and hydro fuels which will not only be environment friendly, but also will prevent conflicts.
It is pertinent to however note that environment consciousness is nothing new for India and it is a cause to which India has long been committed. Protection and preservation of the earth, natural resources, and wildlife are enshrined in Indian ethos, culture, and tradition. From the Vedas and the ancient Sanskrit scriptures (1500 to 1000 BCE) to the royal edicts by Emperor Ashoka (268 to 232 BCE), Indian culture has often invoked concepts of harmony between life and nature.
As home to approximately one-sixth of humanity and one of the world’s most youthful nations, India’s role in making the planet better and sustainable is crucial. Now is the right time to act if India wants to protect the planet and ensure a healthy life for the present and future generations.
So, while we celebrate this festival, we take inspiration from the so many hidden lessons which Lord Ganesha conveys, management lessons, investing lessons and so on, maybe there is a renewable lesson for us as well. Direction for us to become one with nature across the board. The lesson is to move to renewable energies and fuels. The lesson is to conserve planet earth for a better tomorrow.
On this occasion, we invoke the verse in Ganesha Mantra and pray for wisdom and the removal of obstacles for all.
Vakratunda Maha-Kaaya Surya-Kotti Samaprabha
Nirvighnam Kuru Me Deva Sarva-Kaaryeshu Sarvadaa ||
Back in 2013, India found itself relegated to the pack of ‘fragile five’ emerging markets. It has been a long and painful journey but India today is well and truly on its way to carving its own niche and becoming Antifragile in this fragile world.
Know more in the article below –
Presentation made by Our CIO, Ravi Dharamshi @ India Investor Conclave (IIC season 8) at Goa in Dec 2021.
Summary of Presentation:
1. There has been tremendous wealth creation in Specialty Chemicals sector – 60x in 7 years.
2. Currently market has priced the sector to perfection and is ignoring all the inherent risks.
3. Long-term opportunity might remain but odds are tremendously out of favour for the sector from next couple of years point of view.
Our CIO Mr. Ravi Dharamshi was recently interviewed by Mr. Vivek Bajaj, co-founder of StockEdge and Elearnmarkets. Our CIO spoke about successful investing, he has elaborated on the VQ Investing Framework. He discusses at length various aspects of the framework and the process VQ follows.
India stands at the cusp of a stronger economic growth for longer. Never have the conditions been so favourable for Indian Economy as well as Indian corporates. This presentation tries to substantiate the same claim.
Watch the video below –
Presentation link – https://online.fliphtml5.com/prph/gdof/
Pratikraman – “Prati” means “back” and “kraman” means “to go”. It means to go back, to reflect and review, to confess and atone, asking for forgiveness from others for one’s own faults of mind, body, and speech in one’s daily activities, and forgiving faults of others and extending friendship to all.
By Sameer Shah and Ritika Agarwal
The pandemic has been one of the most scarring periods in living memory. Through this unfortunate devastation, if there is one key takeaway, it is that hope begins at home. More than ever before, a home is not just a physical space, it is a feeling. A home is sacred. It is where the strongest human bonds are created. The pandemic has taught us that the three phases of a fulfilling life – learning, earning, and returning can be done from home.
– Chairman’s Letter – HDFC Limited AR 2021
Indian real estate had a massive upcycle in the 2000s which lasted for almost a decade. The next steps were predictable, greedy developers leveraged themselves and launched more than the market could absorb. The massive supply combined with lack of transparency resulted in a lot of pain not only for the developers but also for the economy, banks as well as consumers.
Apart from correcting the excesses of earlier cycle, real estate players had to deal with extenuating circumstances like implementation of demonetization, GST, NBFC crisis and acclimatization of a new regulatory in the form of RERA & finally the decade ended with Covid linked disruption. Sales which peaked at ~4.35 lac units have stabilized around 3 lac units p.a. for last few years.
Prediction is difficult. Particularly when it involves the future – Mark Twain
When covid struck, the discussion was centered around how real estate will be worst affected – job losses, restrictions on construction, worker migration, high ticket purchases will be postponed, etc. Last one year however has turned out to be anything but that. Aided by a variety of factors which we try to analyze in this blog, real estate demand has surprised everyone. This has especially benefited large organized players. Footfalls have improved materially and transactions are happening at a brisk pace. And the segment that has surprised the most is the luxury segment. Take for example DLF’s super luxury project – Camellias. In the last 4 years, they were selling on an average 10 units, which has jumped to 36 units in FY21. The extent of surprise in demand is demonstrated in how analyst estimates for FY21 and FY22 has moved.
Sceptics initially believed this was just pent up demand but the sentiment is slowly turning more optimistic. Foundation has been laid for a sustained revival of residential real estate.
Recent numbers from Mumbai registration data for Aug- 2021 (first month after stamp duty was reinstated to 5%) reflects strong demand momentum. The month of August witnessed property registration of 6,784 units for Mumbai City, ~16% higher than 5,873 units registered in Aug-2019 and 2.5x of Aug-2020 sales of 2,642 units. (Source: Knight Frank).
Interesting points from Consumer Survey by Anarock
– Pricing and developer credibility are the two most important factors while buying a property followed by design and location.
– Prevailing lowest-best home loan rates has been a major factor driving home property sales despite the pandemic.
– 71% property seekers are looking to buy for self-use vs 59% pre-Covid period.
– 46% preferred ready-to-move-in properties pre covid which has decline to 32% post Covid. This could be led by the fact that most of the new supply is dominated by branded developers and there is limited inventory available in the ready category.
– 25% looking to buy properties priced Rs.0.90 -1.15cr post covid vs 16% pre covid while 27% were looking to buy properties priced >45 lacs post Covid vs 36% pre-Covid. Affordable housing buyers have been severely hit economically by the pandemic.
– 32% are looking to buy second homes while 41% are mulling over it for self-use.
Let us look at the key factors driving sector revival.
For the consumers, the affordability for the middle-class customer to buy a home is good at present. Never before in my career of 14 years, there has been such an opportunity in which the interest rates were these low, the real estate price rise average has not changed in the last six years, people salaries have increased, so to buy the same home the EMI to income ratio is at an all-time low for a particular house. I see, the consumers not only buying houses but buying bigger houses and our average size is increasing. I feel, the consumer sentiment in residential real estate will continue to be positive.
– Varun Gupta CEO – Ashiana Housing
India has never seen such low interest rates…. EVER. Salary growth, decline in property prices and decline in interest rates has resulted in best affordability in three decades. Such convergence of rental yield vs interest rates must result in improved demand.
Name any industry and more likely than not you will find that the three strongest, most efficient companies control 70 to 90 percent of the market.
– Prof Jagdish Bhagwati – Rule of Three
Structural reforms in the last few years started the process of weeding out smaller, unorganized developers from the market. The COVID-19 pandemic was the final nail in the coffin as it tilted the scale further in favor of established developers. The extent of supply shock can be seen from the drastic reduction in number of builders as seen from the data below.
Buyers are unwilling to take any risks and their preferences are gravitating towards recognized builders, better quality, closer to completion projects.
In FY21, ~25% of sales come from ready to move in (RTM) projects vs ~10% in FY13, while RTM projects comprise of just 15% of the total unsold inventory (Source: Propequity). There is an increased preference and willingness to pay a premium for projects by developers with an established track record. This tilts the balance firmly in favour of large developers who have gained substantial market share over this period of uncertainty and slowdown.’
In last few years, demand has matched or even outpaced supply leading to inventory reduction. Some of this unsold inventory will remain stuck due to developer issues, hence actual inventory overhang is even lower than what is demonstrated in table below.
Someone aptly commented – IT industry hiring scenario at present: “Trespassers will be recruited”
We have doubled down on increasing intake from campuses across the world as well as re-skilling our existing workforce. We will onboard 33% more freshers in FY ’22, as does the previous year. We also intend to onboard 6,000 freshers in Q2 itself. Growth is our priority, and we will ensure that talent supply is not a constraint to our ambition. In the short term, we will experience some inflationary pressure in people cost. We’ve announced a salary hike for 80% of our employees, effective September 1st, the second hike in this calendar year.
– Thierry Delaporte, CEO and MD, Wipro in Q1FY22 conference call
After initial rationalization of salaries during lockdown shock, most corporates have reinstated and even increased staff salaries. IT sector stands out. A look at the hiring commentary of IT companies clearly shows that it has been difficult for companies to retain talent and some companies have given two hikes in a year to mitigate attrition. This is also the year of unicorns with as many as 50 companies expected to become unicorns in 2021. Net hiring will hit a record this year and outlook has never been better.
Wage hikes are not restricted to IT sector alone. Many large industries are experiencing tailwinds and are raising salaries to reward and retain talent. Albeit on a lower base, Q1 FY22 numbers demonstrate the strong hiring/ salary trend across sectors. Real Estate is expected to be a key beneficiary of this.
Anuj Puri, Chairman – ANAROCK Property Consultants in an interview in 2018 said “I think only disruption can save the day for the Indian real estate sector. Both because of the groundbreaking policy reforms now in place and the changing mind-set of real estate consumers, the old ways of doing business simply cannot prevail any longer. What is required are new ideas, new ways of conducting business, and a far greater focus on accountability and transparency than has been evidenced so far. “
Be it central government, state governments or RBI, regulatory framework for the sector has improved over the years. Over the years, there have been various steps to promote affordable housing.
Steps have been towards bringing more transparency, affordability, and funding. Recent relaxation of stamp duty added to the demand push
New regulatory processes encourage clean ownership, accountability, and faster execution, which augurs well for the businesses themselves and for the consumers. Here’s a bucket list of regulatory actions which, if implemented, can change the trajectory of the industry.
“If you are a buyer, please quickly buy it because prices are likely to go up.”
– Vikas Oberoi, Chairman & MD, Oberoi Realty in Q1FY22 conference call
The Veblen Effect is the positive impact of the price of a commodity on the quantity demanded of that commodity. It is named after American economist and sociologist Thorstein Veblen, who studied the phenomenon of conspicuous consumption in the late 19th century.
Real Estate qualifies here since the demand does increase with expectation of increase in prices. Customers are now convinced that prices will not go down further and have started to inch up. Developers understand this and have started playing to the psychology. We will see a lot more announcement of price increases by developers.
This is playing out in developed markets where the improved finances driven by stimulus has catalyzed a bull market in real estate. Price trends in US and UK are a demonstration of where the market is headed as economy improves.
Large developers have moved away from the land banking model. In fact, developers now prefer JV/ JDA route to reduce the capital intensity for residential business. Focus is now on timely execution, quality, improving brand perception and most importantly sales velocity. Key to achieving reasonable IRR is the ability to sell the project quickly and be able to command some pricing due to quality. Focus of developers has shifted to
– Timely delivery to create brand loyalty and add-on services to build trust with customers
– Accelerate adoption of modern technology and construction techniques
– Embrace strong corporate governance and inculcate the ESG model
– Maintain financial discipline
– Diversify development portfolio; re-align portfolio with market dynamics and market cycles
– Invest in upgrading labour force skill sets
Earlier developers used to launch projects and later apply for approvals which led to elongated timelines for construction post launch. With RERA, developers can no longer launch projects without approvals and have wait for a minimum 6-12 months on an average to launch a project post purchasing a land parcel. Hence, time taken to launch a project post buying land has increased while construction timelines post launch has reduced drastically, as shown below –
Amongst many other shifts that the pandemic brought, digitization of services has been a significant one. As per reports, 60% of the entire property buying process is now being conducted online vs 39% pre-Covid period.
Anuj Puri, Chairman, ANAROCK Group says, “From property search to documentation and legal advice to down payments, homebuyers are leveraging the new tidal wave of digital technology driving the Indian housing sector. Only developers with sufficient online presence will remain relevant going forward. Also, social media are among the most effective property marketing platforms at this stage.”
For long, PropTech meant looking for property listings online instead of in the newspaper. But it is now going full-stack, offering everything from virtual reality tours and Vaastu consultations to moving services, as seen in the chart below –
As larger developers continue to gain, the balance sheets too have seen substantial improvement over last few years which creates a virtuous environment for them in terms of cost of debt. This interest cost saving will make them even more competitive against unorganized players.
Compared to the importance that the sector holds for the economy, the weightage in indices and portfolios are insignificant (even after the recent rally).
YTD numbers include Macrotech Developers which was listed on 19thApril,21
Valuations have moved from throwaway to reasonable but is not anywhere close to being buoyant.
We may never know where we’re going, but we’d better have a good idea where we are. In assessing market cycles, knowing where we stand within them can help us tilt the odds in our favor” — Howard Marks, in his book “Mastering the Cycles”.
Clearly Real Estate Cycle is Right Ahead of us.
In a recent interaction, Mr. Abhishek Lodha said that he expects Macrotech to scale to 30,000 crs sales p.a. from current 7,000 crs by 2030. Some of the other data points also point out to similar optimism amongst the market participants. Industry is expected to grow from $180bn in FY20 to $1 trillion by end of this decade. This is a staggering number.
It is anticipated that the housing market is likely to attain a new peak by 2023. This optimism is reflected in the commentary about new launches by large builders.
We know that real estate cycles are long. The sector has witnessed and navigated economic slowdown, high interest rates, NBFC crisis and stricter regulations. We are now entering an exciting period of demand revival, improved regulations, transparency, and supportive macros.
Real estate and construction industry has significant linkages (both direct and indirect) with nearly 300 sectors like cement, steel, paints, and building hardware which not only contribute to capital formation and generation of employment and income opportunities, but also catalyze and stimulate economic growth. Hence, the revival holds significant importance not only for sector but the economy as well.
This lays the foundation for a multi-year growth journey for the sector. We believe we are in the initial phase of the upcycle. Just as one swallow does not make a summer, sighting the swallow, marks the end of long winter.
Paryushan parva is the king of all festivals for whole Jain community. It is a time for self-analysis and soul searching, it provides a break from routine life and allows us to reflect and contemplate on our past conduct. Paryushan is not just a festival to rejoice and celebrate; instead, it is a ‘parva’ in which all Jains try to discipline themselves. People try to live with the utmost simplicity.
It is a time to reflect, introspect and seek forgiveness. Everyone needs a reset button, a Ctrl-Alt-Del mode where we can just reboot and restart. We often, especially in the markets wildly sway between our emotions and most of us wish that we could have just done somethings differently or behaved differently or given another chance, when faced with defining moments.
While it’s impossible to go back in time and rectify your outer deeds, it’s easier to clean, audit and analyse our inner balance sheet, our inner score card & the significance of Paryushan in Jainism is one such opportunity which can be analogised with our journey as investors. Its founding pillars have many valuable lessons to imbibe, and we can draw so many parallels for them in the investing world.
Paryushan stands for practices like Non-Violence (Ahimsa), Self-discipline (Sanyam), Fasting (Tapah), Study of scriptures (Swadhyay), Introspection (Pratikraman), Repentance (Prayaschitta). Incorporating and applying these practices as process in your investing process can tremendously improve one as an investor.
Ahimsa – In Jainism, ahimsa is the standard by which all actions are judged. Practising ahimsa makes oneself aware of their environment. It makes people more empathetic towards others, which makes us humble. Jainism tries to imbibe humility in individuals by making them appreciate the tiniest of living being and empathising with them.
Humility is an important trait for an investor. As they say, there are old investors and there are bold investors, but there are no old and bold investors. It is because market has humbled them many a times and they have learnt their lessons. Humility is a discipline that can help protect investors from letting their emotions overrule their common sense.
Sanyam – Jainism encourages Individuals to maintain whatever self-control is possible.Discipline and self-control are a large factor to navigate the various ups and downs of the market. As Warren Buffet says “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
Tapah – Fasting instils discipline and helps in building will power to delay gratification. According to Jain texts, abstaining from the pleasures of the five senses such as sounds and dwelling in the self in deep concentration is fasting (upavāsa). Knowing your circle of competence and ‘practicing’ upvas’ of other sectors shows great discipline.
Delayed gratification is a muscle that you can grow to serve your future selves. Delayed gratification is the ability to resist the temptation of instant pleasure, it helps you overcome your impulses. Benefits of delayed gratification should be well enshrined in the minds of investors if they want to succeed.
Swadhyay –The simple meaning of Swädhyäy is “to study.” The word Swädhyäy consists of two words, Sva and Adhyäya. Sva means self, and (soul is the self). Adhyäya means study. Therefore, Swädhyäy means a study of one’s own self. Reading, listening to and reflecting on the life elevating teachings is useful in keeping the mind healthy.
Warren Buffett is known to be a voracious reader. Charlie Munger is described by his children as book with legs. They claim to read at least 500 pages per day. One who does not read has no advantage over a person who cannot read. At the end of the day, good investing requires the collation of large amounts of information. It is a pre-requisite for successful investing.
Pratikraman –“Prati” means “back” and “kraman” means “to go”. It means to go back, to reflect and review, to confess and atone, asking for forgiveness from others for one’s own faults of mind, body, and speech in one’s daily activities, and forgiving faults of others and extending friendship to all.
It helps to reflect and introspect occasionally to get rid of our biases. There is no other way an investor can be liberated unless he is free of all biases be it confirmation bias, hindsight bias or even loss aversion biases. There is no way an investor can get liberated if he is not free from ego, as Warren Buffet said it succinctly “Failure comes from ego, greed, envy, fear, imitation. I have success not because I am smart, but because I am rational. One can achieve rationality only by reflecting on one’s own behavior.
There are and will be many moments in our investing journey, when we are blinded by ego in our wins and successes or thundered by negativity and pessimism in unfavorable times but what gets lost in the din is the need for equanimity and calm, as Howard Marks says the superior investor is mature, rational, analytical, objective and unemotional.”
Prayaschiita – Finally repentance, forgiveness, and acceptance of the supreme nature of the markets is the ultimate knowledge. As Seth Klarman said, “We know that we are fallible and must therefore consider the possibility that for every investment we make we may be wrong” Being egoless and accepting our mistakes will be the ultimate forgiveness seek from the markets.
It’s the grueling unforgiving nature of markets, its full of events, scenarios, results, and views. Somewhere between the facts, interpretations and hubris is our basis for a successful investment & as investors and students of the markets, we, perhaps too should follow a similar soul searching “parva” to reflect on our actions and inactions in our journey & quest to become better and wiser investors.
Markets are always full of regrets. I wish I had deployed more in March 2020. I wish I had bought more of my winners. I wish I had gotten rid of my losers sooner. Markets are filled with regrets. Quickly overcoming the regrets and not repeating those “sins” is the way to nirvana in investing.
In conclusion, on the last day it is customary to request forgiveness from everyone we know and meet by saying
“Michhami Dukkadam”
In addition to requesting forgiveness, one must grant forgiveness too. Thus, by forgiving everyone and requesting forgiveness from all we clean and clear our conscience and seek a better approach to investing.
With bowed obeisance,
Michhami Dukkadam to all and wish you all a wonderful investment journey