My Core Investing Beliefs

I am not a SEBI Registered analyst, and my views are biased as I am invested
Over a period of investing, my core beliefs have evolved, and these are the relative “truths” that I anchor to :

  1. Belief #1: All Investing is Speculation: You can’t predict returns with scientific accuracy. Future returns are based upon interactions in a multivariate complex system (or as Nassim Taleb would breathlessly say – “Higher dimensional systems – if unconstrained – become eventually totally unpredictable in the presence of the slightest error in  measurement  regardless of the probability distribution of the individual components.”) What it means to me-
    1. I can not predict the future.
    2. I can only calculate odds in my favor.
    3. Markets can not be manipulated by anyone over a reasonable period of time
    4. No computer or propellerhead can model (a) the future (b) human behavior.
    5. All investing is therefore lipstick on a pig, poker for the cigar and brandy crowd – or speculation, for the mensch
  2. Belief #2: Markets are only semi-efficient: In an efficient market, investors would not make supernormal returns, over an extended  period of time (say 20+ years) — yet many have done and this has been extensively documented. Also;
    • Good technical analysis seems to make good returns. It would not do so if markets were perfectly efficient.
    • Efficient Market Hypothesis (EMH) believers tend to be economists and academics with no skin in the game.
    • Semi-efficiency is true of the shallow Indian markets where the ebb and flow of foreign money due to fluctuating macros can create deep discounts from time to time.
  3. Belief #3: Investing is a process of stacking odds in your favor: Based on #1 and #2 above, making money in the short to medium term for Indian markets is often exploiting mispricing, and exploring mispricing is a major calculation to stack odds in your favor for good returns. Over the long term, there are many approaches to stack odds in your favor. I can think of two :
    • Buy and Hold – The most time efficient in terms of research but the most testing psychologically. You may choose to sidecar or copy trades of good investors, or buy blue chips and forget them. May not, on average, yield life altering returns but can make your retirement comfortable.
    • The “Do-ka-char” Journey – Not knowing how it works, I will dramatize it 😃When 20-30% returns are not good enough for you, hermitlike you set out into the wilderness. You read Annual Reports on weekends. You develop your own valuation tools. You err, learn, err again until the neural pathways forged from knowledge and experience turn “supercritical”. Like a “Siddhi” you develop a special strategy or insight based on the synthesis of story (qualitative factors) and numbers. This requires testing, feedback, patience and perserverence. It can however make you good at stacking the odds of turning 2 into 4 (if you haven’t lost the 2 already).
  4. Belief #4: Smallcaps are where the big inefficiencies are found: The trend of ETFs, indexing and the risk averse nature of the average investor ensures that large caps and blue chips stay constantly in favor; money (also analysts) are always chasing large caps.
    • The big risk in large caps may not be underlying or business risk but valuation risk as they tend to get overvalued based on midjudgement of both their steady state and future value.
    • Every blue chip was once a smallcap, so naturally fortune seekers are found here, often digging graves. These are a different breed from the large cap investor; the “FOMO/Savvy” investors –
      • FOMO” is the fear of missing out, which drives a zealous section to smallcaps like flies to honey (and also, equally fast, FOMO drives them away from smallcaps in times of panic).
      • Savvy” is the smart, greedy or often overconfident investor who is looking for supernormal returns. Smallcaps are where the speculation is the most rife, the option value of the business is the greatest, the risk is the largest (underlying business risk and liquidity risk), and the returns are the most rewarding. Savvy investors never stop chasing such opportunities.
  5.  Belief #5: Indian markets offer a unique opportunity: Indian markets are not cheap by most metrics (CAPE, PE, PB etc.). Wealth creation by PE expansion may not be imminent. Indian companies however are on the cusp of an earnings expansion, which will only accelerate with reform. The Indian markets are also unique amongst emerging markets (with the exception of China) in:
    • The diversity of quality sectors and companies to choose from is incredible. Cyclicals, defensives, high-tech, pharma – Indian markets have companies across the spectrum like only the US and Chinese markets
    • Ginormous captive domestic market which decouples it from global macro risks, earning a premium
    • Indian markets are still cheap on one valuation metric : market cap/GDP
    • Domestic money is still to chase stocks the same way it chases gold, real estate and other asset classes
    • When Rakesh Jhunjhunwala says – “the mother of bull markets is ahead of us” – he says so only for the Indian markets 😃 Perhaps also because he is fully invested, and therefore has endowment bias.
These are my beliefs, and like all beliefs they can be wrong. I continue to refine them.

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