In the current world where “everybody knows everything” thanks to the internet and especially the gurus of Twitter and PMS-es, it takes me a while to appreciate what I didn’t have in the early 2010s.
I didn’t have any ready-made brokerage reports (of mid/small cap firms), didn’t have instant Whatsapp alerts on stocks-too-many, didn’t have gurus enumerating global gyaan on twitter/whatsapp and obviously didn’t have ready made tools like screener/tikr/tijori/trendlyne. What I did have were starting valuations which were loaded in our favor (of course, not so clear at that point in time).
Just a bit of quick personal history for context (not that anybody should care): I was a dabbler in the markets for 2-3 years (like everybody else) in the stock market boom of 2005-7. More career-oriented than markets-oriented, I always believed (like any young man passing out of MBA would firmly believe) that building a company/career/becoming a CEO quickly was the main goal in life. Moved to the US, worked for a few years, came back from US due to personal reasons and started investing seriously only since 2010 (October 2010 to be precise). Too little capital, too many investment options across asset classes but somehow, through pure fortune of luck ended up completely into equity investing. Even today, more than 99% of my networth is in equities
This post got triggered ironically, due to one Whatsapp image that was shared today morning – which said that Avanti Feeds moved up 214x, Caplin Point moved up 115x and so on and so forth – essentially stocks which would have made one fabulous returns only if you could identify them back at the start of the decade. And everybody starts discussions around what could be such stocks for the next decade (because, you know, this was the past decade, we couldn’t identify these stocks and no benefit brooding over them – but we somehow now believe we have a magic wand to identify stocks for the next decade like WA social investing/Twitter guru-ing).
What the image doesn’t or will not tell you are the starting valuations across the market in many many pockets across various sectors. They were very cheap. I made 20x of my initial capital in those 5 years between 2011-15. By 2015, the markets had moved up quite a bit, and that capital moved up only by 6x in the ensuing 5 years of 2016-20. All of this was no skill at all – just that the starting valuations were insanely cheap for an exponential rise in market prices when the earnings eventually came (atleast in 2011-15 period, earnings did come).
Some of the stocks were at unbelievable valuations really – ISGEC was at negative working capital, quoting close to cash (which eventually became 7x in 1 year) post a buyback trigger; Mayur Uni was consistently growing at 20% with 25% RoCE at 8x PE (again, a 10x in 3-4 years); Tasty Bites was so cheap and when earnings for 1 quarter came through in Aug 2014, the stock went 3x in 1 year (and eventually a 20x in 3 years); and I can go on and on. Avanti Feeds, Shilpa Medicare, Astral Poly, Bharat Rasayan, Kaveri Seeds and many more. Looking back, it was a matter of choice to decide which stock to buy for more returns than which stock to reject because of downside risk (of course, I am oversimplifying some complications, but not by much because of valuations). The most important thing, and this is the most important thing – was mistakes were made, but the cost of those mistakes was very less, and re-investment into some other attractive stock was much easier. However, in the last 2-3 years given the increased valuations across the market, only Alkyl Amines (6x in last 3 years) and HLE Glascoat (7x in 1 year) provided such asymmetrical opportunities where one could deploy large capital.
Of course, there is insane selection bias when I say multiples have moved up substantially across various sectors in the market but there is general consensus that we now have multiples awaiting earnings over the next few years rather than the other way round at the start of this decade. You make a mistake now at these valuations with large allocations, and it can set back one’s CAGR for many years. That’s the key difference.
Which comes back to my main point. The past decade, whoever started investing in say 2009-12 period achieved super-normal returns in this decade not entirely due to skill (and no skill in my case), but because the starting valuations were so cheap that, like that advertisement goes, all one had to do was sit back, relax and click on ‘Buy’ button. Whoever started in 2014-16 period achieved very good returns (but not super-normal) given the starting valuations were not so cheap. As close to certainty of bet there is (which is obviously dangerous in markets like ours), I am fairly confident that the next decade’s returns will not be as attractive as this decade (neither ‘supernormal’ nor ‘very good’) just purely because of starting valuations across sectors of the market (except for small cap/mid cap infra/cap goods/power, valuations across the board are higher even accounting for Covid abnormality). One will get 2x-3x (in 1-2 years) opportunities periodically even in this market (with more drawdown risks), but for investors with smaller capital, 2x-3x doesn’t change lives.
And that’s the rub. Information explosion + up-to-minute stock updates + twitter gurus cannot beat starting valuations. And we have no choice but to make do with it. Of course, like any good/bad MBA will vouch for (as we are CYA experts), we will always say that there will be exceptions and exceptional people who will find hidden gems which will grow exponentially especially if they have a large opportunity and fire in the belly and therefore have supernormal/very good returns. But they will be very few and far in between over the next decade.
Thanks to this super decade of returns (and thanks to all the close friends from the investing world I have I had the privilege to know personally over the past decade who have made my investing skillset look sharper than it is in reality). Every decade turns up new, churns up new, chews up the old. So, here’s bidding goodbye to 2020 (and the decade of 2011-20) and here’s cheers to 2021 and the new decade to follow!
Disclosure: I have owned stocks mentioned in the blogpost in the past, and may continue to own some of them now (and sold many of the others mentioned in the past already). I am NOT a registered investment advisor and these stocks are NOT a buy/sell recommendation. Kindly don’t base your Buy/Sell decisions based on the above blogpost. My returns have not been audited by any blue-blooded accounting firm, nor do I have any PMS to sell to you – so, please consider all the returns mentioned above as fiction.