Learnings from Recent History

‘Recent History’ – an oxymoron, as history is typically measured in decades if not more.

However, given that most PMS funds, hedge funds and all kinds of investors proclaiming their vision and CAGR all over the place by choosing a very convenient 2009-2011 start dates/years to calculate their CAGR, I think ‘recent history’ would serve as a good reminder for all of us that mortality (in investing, as in life) is a good idea to revisit now and then.

Take a look at this snapshot and spend some time reading through the image:

IMG-20151006-WA0002

An emerging STAR fund. Or you can call it by any other name. Portfolio as of Jan 2008. The name of ICICI is not even relevant here, as most mid-cap and small cap funds (and other funds masquerading as value funds) ended up in a similar fate in the great crash of 2008.

Look at the holdings of this fund in detail and ponder. Ponder for a moment, and especially on these lines:

a)Β The holdings in the portfolio were THE emerging names – with ‘quality’, ‘management integrity’, ‘scale of opportunity’ written all over them – back in 2008. Like we have many names now. With all three adjectives being attached to many of the names.

b) Access to Investing wisdom is not new (already available in 2008). Even the fund managers of ICICI STAR fund had access to a lot of investing books and Buffett’s letters.

c) Scuttlebutt is not new. Fund managers have had access to managements for as long as one can remember.

d) Access to networking is not new. Fund managers have always been widely networked. Only that networking has got more democratic because of technology (and especially whatsapp). Previously, there might have been panics in bursts. These days, there is a panic every day because of costless distribution of any written word.

d) Asset heavy businesses got massacred. Oh, well. We “know” about this now – we never invest in asset heavy businesses, right? Wait till the replacement cost bull market takes over.

d) Asset light businesses also got massacred. Either because the management turned out to be fraud or their industry turned out to be irrelevant.

e) What you don’t see in the snapshot is the price multiples one might have paid for those businesses. Given that ‘infra’ was all the rage back then, the P/E multiples were also high, pretty much with similar explanations that we are attributing to some sectors these days.

There are many more points to ponder just by looking at this image, which is basically a snapshot of the investing theme/rage back then.

Now ponder:

i) Why do you think your portfolio of 2015 is not like the STAR fund portfolio of ICICI of 2008?

ii) What makes you ultra-confident (dare I say, cocky)? [I pretty much assume all of us are going to say ‘nope’ to i) above]

iii) What are the steps one might want to take/plug your learnings to not repeat i) and ii) above? [Hint: Whatsapp/Investing forums is definitely not the answer]

George Bernard Shaw made an epic statement when he said – “We learn from history that we learn nothing from history”. The history of markets is replete with same mistakes repeated over and over again, each time with a different twist (mostly unimaginable/black swan).

Given the proliferation and access to information, let us atleast attempt to learn from history this time? I started with an oxymoron, and I think I ended with one πŸ™‚

P.S: Post inspired by a conversation with a friend who chooses to be anonymous, but is bloody brilliant.

P.P.S: If you think ICICI STAR fund didn’t really tickle your senses, and you are craving for more, here is a more elaborate chart on an assortment of businesses – more varieties than you can find in a Walmart store – quality, scale of opportunity, management integrity, vision, mission, goal, rags-to-riches, first generation promoter – choose your poison – and the current market value is not even 1/10th of what it was.

Image

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  1. #1 by Ramamurthy on October 11, 2015 - 12:43 PM

    Frankly Sir,I may be stupid but i cant make out what you want to convey.

  2. #2 by Ranjith on October 11, 2015 - 6:17 PM

    Serves to remind us to keep hubris at bay. From Horace,’and many shall be fallen that are now in honour, and many shall be restored that are now fallen’.

    All the hyped up stories we are hearing and the multibagger we are buying at any price… Back in 2007 the same pattern was playing out. All the stories had long runways for growth, great p and l numbers. Some were asset heavy and some were light.. And they traded at lofty valuations.

    Of the list shared by Kiran I have personally lost big money in crest animation(animation story. Alpha and omega was an animation feature that was supposed to take the co. To a diff. Orbit) and bartronics( bar coding and its huge opportunity size .. ). Got out of Deccan chronicle( cash cow newspaper investing into newer themes like bookstores and sporting franchise) and punj.lloyd with some losses(/we thought this was the one next l & t.)

    Can be argued that I paid too much for these stocks. But in reality I think it was because I couldn’t look past the glamour and euphoria to see that there was a possibility that the businesses would become irrelevant, or balance sheet would deteriorate so much or even the possibility of outright fraud happening.

    In hindsight I could say this went wrong that went wrong . but at the time of investing these risks were glossed over and I paid with permanent loss of capital.

  3. #3 by Sameer Shintre on October 11, 2015 - 10:31 PM

    Well thought and well written article.

  4. #4 by Nishanth Muralidhar on October 13, 2015 - 1:02 AM

    Touches me personally..I owned this fund in 2008 and some of the stocks contained in this portfolio. Luckily I was diversified , so while this fund and the stocks caused me grevious losses , I still came out ahead because I had invested in other , decent ,funds.

    All good learning experiences :)..Moving from ignorant and stupid to aware and stupid feels great:)

  5. #5 by Pankaj pant on October 13, 2015 - 1:40 AM

    kiran

    I am shit scared .Ilost a lot of money then and today i have decent …ok good paper profits.your article makes me through up.I am a regular retail investor and all charlie and munger and buffett just went out the window.man.. is the doomas day around the corner.
    i think i just lost my sleep
    good morning
    10;12 pm

  6. #6 by thestoic on October 13, 2015 - 5:06 AM

    Kiran, boy can’t you see- this IS value!!! *mock astonishment*

    πŸ˜€

  7. #7 by shankar on October 13, 2015 - 4:03 PM

    What started out as a i agree with Kiran reply, turned into a what-if analysis of had i bought exactly on the screenshot day of 31.1.2008 and held this fund till now. Result as per valueresearch has been 8.4% cagr vs 4.9% for midcap index (w/o accting for dividends). While 8.5% is not high, it seems respectable considering that most of the stocks mentioned in the portfolio don’t even exist today ! My respect for long term investing only keeps growing !

    That said, agree on the broader idea from the distant History that “many shall fall that are now in honour”, Horace i think did not have in mind stocks when he said many that are fallen shall be restored to glory πŸ™‚

    P.S : To set the record straight, Seems Horace was talking about words when he said that many that are unused now will be used and many words in usage will fade away
    P.P.S : Being a mutual fund advisor i tend to see nails everywhere to prove that my MF hammer is good. so do take my observation in that light πŸ™‚

  8. #8 by Kiran on October 18, 2015 - 5:28 PM

    @Rama – I was pointing to fallacies of overconfidence in thinking that current ‘quality’ portfolios last forever.

    @Ranjith – Thanks. Echoes my thoughts here. Experience is a good teacher, but in markets, it pretty much comes with loss of money

    @Sameer – Thanks.

    @Nishanth – That’s an excellent line – ‘Moving from ignorant and stupid to aware and stupid feels great’. Even Fisher was learning at age 80. We are probably still in embryo stage then πŸ™‚

    @Pankaj – The post did not indicate either a top or bottom. Just that we have to be guarded in our evaluation of the businesses we hold.

    @thestoic – πŸ˜€

    @shankar – What started off as disagreeing to your comment, eventually proved to be false as, as always, you are spot on. The portfolios don’t even resemble one another in the interim 7 years, but as a SIP candidate how are you bothered what your portfolios contained. Excellent though. And a very different and stark example that for folks who don’t have the time to track markets, SIP for a long time always works.

  9. #9 by Anon on October 21, 2015 - 4:59 PM

  10. #10 by Gouri on June 24, 2016 - 8:38 PM

    Long time… no new posts…

  11. #11 by Stock Broker on July 13, 2016 - 2:17 PM

    Really a good blog , Tell me something more about Mutual fund watch……

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