The Only Recommendation Worth Following in this Market

Do not invest in the present...

As I was watching a recent interview of Stanley Druckenmiller, this was the advice that stood out the most.

The gentleman needs no introduction. For the uninitiated, he is an American investor and a hedge fund manager, who managed money for George Soros as lead portfolio manager.

He has taken some hits and ridden a lot of highs. He is a sane and experienced voice to listen to in times like these.

When he says to not invest in the present, he is not asking to stay away from the stock markets.

He suggests to focus on what moves the stock price.

It's not about finding a great company which markets love. But how people would think differently about the business two years down the line.

Following this advice a year or so ago would have saved a lot of people from the recent correction in the markets.

Look at all the loss making platform businesses, the state of new age IPOs, the diagnostic players that markets could not get enough of when Covid testing became a norm. If only they thought about where the businesses would be two years down the line.

But then it needs surviving a few bear phases to learn this. The post Covid rally was fueled by a lot of new investors and YouTube influencers making hay when the sun was shining.

Well, it's not too late.

The beauty of this advice is - It is timeless.

As I'm writing this, bears seem to have taken the reign. The Sensex has lost over 1,400 points. The smallcap index is down by over 3%. And individual stocks have fallen much more.

Rising Covid cases, high inflation, the rise in interest rates, and geopolitical crises are crushing the market spirits.

And more correction could be on our way.

If your horizon is a few months, quarters or even a year, this is just not your time to act. And there isn't much for you to gain by reading this article.

However, if you have developed the capacity and temperament to survive and are in the markets for the long haul, you should pay heed.

Envision a business three to five years from now.

How do you see it faring in the industry it operates?

What's likely to happen to the competitive intensity in the industry?

Is it likely to look better than its peers? Does it have a balance sheet better than its peers so that it's better positioned during uncertain times?

Is it even critical enough for its clients and the economy, which will ensure its survival?

Now there will be a lot of businesses where any answer to the questions above would be like shooting in the dark.

These are the kind of businesses highly reliant on a favourable macro situation. Hence, it's hard to envision their 'business prospects' 3 to 5 years down the line. I know I would not hazard a guess in such cases.

While no prediction comes with 100% success probability, there will be a handful of businesses which you know will only grow given the structural and competitive dynamics. And would perhaps emerge stronger.

Here the company's margins and profits would be driven by value addition, efficient processes and technology. They won't move in tandem with raw material prices.

In these stocks, a correction would not bother you, but perhaps make you want to invest more from a long term perspective.

Now that the earnings and management commentary for the quarter is out, it is relatively easier to find businesses that have shown the ability to grow despite inflation and supply chain challenges.

In fact, these are the best times to separate wheat from chaff - to look for businesses that have been resilient during Covid, and inflation.

I believe that the following the famous Buffett quote - be fearful when others are greedy, and greedy when others are fearful - could be too simplistic for the times we are in.

It revolves around the theory of mean reversion. And in disruptive times like this, when valuations are higher than pre-Covid levels, and the global economy seems to be in unchartered waters (this time our own making rather than that of a virus), it could be a lazy approach to investing.

These are times to be highly selective. To be most conservative on the macro front and filter the stocks where you can see enough resilience.

Last week, I wrote to my readers and subscribers about one such stock (Hidden Treasure subscribers can access it here).

Amid the recent correction, the stock is trading at a price cheaper than what big investors paid to own it a few months ago. I recommended a Partial Buy on it.

If markets correct further, and the stock follows, then my conviction in it is strong enough to increase exposure to a full Buy.

That's because unlike its peers, it has shown a robust performance on the margin front despite sharp increase in raw material prices. This resilience has been a function of improving product mix, backward integration, and ability to pass on the price increases, given how critical it is to its clients.

It has recently entered a new segment where margins are going to even higher than what it enjoys in the existing product mix. The new segment is a defensive sector, where the demand for products is not affected by Russia Ukraine war, the degree of rate hikes or inflation.

The product it manufactures has an unlimited demand, in the sense that in the future, the potential application areas could be more that the present.

The business is owned but even operated by technocrat promoters with decent skin in the game.

And more importantly, with increasing tech integration and an evolving product mix, the margins in the long term are on upward trajectory.

In short, this is the business or stock which the markets would think of differently, and better, a few years from now.

And the ongoing market correction is a great time to buy it in my view.

For more long term investing opportunities in the smallcap space... stay tuned.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure