India's Third Giant Leap

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The Megatrends I Like the Most... And Stocks that are Riding Them

Sep 13, 2022

How Long Should You Hold on to Your Winners?

A few months ago, a financial journalist approached me.

I was asked to share my views on crude prices in the future, and about where I see the investing opportunities considering its elevated levels.

I shared the comment. It was with full disclosure that I have no clue about oil prices, where they will be a few days, weeks, or a few months from now. I had no stock names to offer based on oil prices. I do not believe is a reliable reason to pick stocks.

As I write this, the oil prices have hit seven-month lows. It has taken down with it the valuations of potential beneficiaries - the upstream oil companies.

In contrast, the market cap of BSE listed firms is touching all-time highs. The Sensex has gained 16% from June 2022 lows. The smallcap index is up 26%.

The FIIs are back. The amount they have invested in August alone is over Rs 500 bn. The concerns about Fed interest rate hikes have moderated. Corporate profits are on the road to recovery with inflationary pressures easing.

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Indeed, there has been a rebound in stock prices that no one was anticipating.

On the other hand, the entire narrative about commodity super cycle has lost relevance as prices of steel, oil and other commodities has cooled down.

The SPAC proponents have disappeared from twitter. And so have their followers.

The crypto experts and young millennials whose financial investment journeys started with dogecoin are learning new lessons.

And yet, little has been learnt.

It's one thing to spot structural shifts in the economy that could benefit certain industries and companies.

For instance, the China plus one trend has really benefitted the textile stocks and specialty chemical industry. In fact, it has added a new leg of growth for some specific companies. A case in point is our microcap recommendation - a plastic processing company that got orders for toys from global leaders in toys because they wanted to divert the supply away from Chinese manufacturers. Subscribers of Phase One Alert can access the recommendation here.

Similarly, the 'Make in India' drive and increased spending on defense has been a real game changer for defense stocks. As I write this, a defense stock that we recommended in Equitymaster Ventures service is up 71% in less than three months. Subscribers can access the recommendation here.

The increasing penetration of electric vehicles in India has charged up the business prospects of EV stocks that are catering to this revolution. And a smallcap stock I recommended under Hidden Treasure is riding the megatrend, gaining handsome returns from battery -based segment that it ventured into two years ago. Subscribers can access the recommendation here.

These are the real megatrends in the making. And they deserve all the study, attention, and analysis.

But unfortunately, a lot of print space and prime time is wasted on predicting macros and cycles and taking cues from it to pick stocks. This is a highly complicated exercise that no one has been consistently good at.

This reminds me of the famous saying:

    There are two kinds of forecasters: those who don't know, and those who don't know they don't know.

    - John Kenneth Galbraith

I believe this is a disservice to new investors who look up to expert views, to make investing seem so complicated. Yes, there is an army of people to make it sound complex, analyst community included.

As they say, more fiction has been written in excel than in word.

Not surprisingly, none of this expertise delivers results.

Instead, a focus on bottom-up analysis of businesses and behavioural aspects in investing could achieve the results.

You see, investing is simple, but not easy.

I studied calculus, statistical analysis, macroeconomics, trigonometry, and a lot of fancy mathematical and physics concepts. In my over 10 years of experience, none of these has been used in investing, barring the concept of mean reversion.

All you need to spot a potential multibagger stocks is a basic understanding of businesses, managements, financial accounting, valuations, and probability.

By the way, do watch my colleague Rahul Shah's video on how to approach investing decisions,

The rest of the skills are behavioural. No business school and listening to macro commentators can teach this. It comes with experience.

Learning from mistakes is an integral part of it. Afterall, investing is not a perfect science. There are no clean mathematical equations where a defined number of variables and a function between them will bring a unique output. In investing, the new variables can enter overtime. The pandemic is the best case in point. Even the relationship between existing variables may change overtime.

Howard Marks underscores the futility of this process in his recent memo - The Illusion of Knowledge:

I imagine that for most money managers, the process goes like this: "I predict the economy will do A. If A happens, interest rates should do B. With interest rates of B, the stock market should do C. Under that environment, the best performing sector should be D, and stock E should rise the most." The portfolio expected to do best under that scenario is then assembled.

But how likely is E anyway? Remember that E is conditioned on A, B, C and D. Being right two-thirds of the time would be a great accomplishment in the world of forecasting. But if each of the five predictions has a 67% chance of being right, then there is a 13% probability that all five will be correct and that the stock will perform as expected.

Investing success indeed needs skill, and there is also an element of luck - being in the right place at the right time.

But the real test of wealth is longevity. And it happens when you follow a time-tested process that works irrespective of, and across different cycles.

Humility and discipline are some of the essential traits in investing.

Accepting what can't be predicted is important.

So work with the limitations of forecasting and focus on opportunities where odds are in favor, stick to the margin of safety and circle of competence. And let the magic of compounding work.

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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1 Responses to "The Megatrends I Like the Most... And Stocks that are Riding Them"


Sep 14, 2022

A wonderful note of advice, thank you

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