I am posting my analysis of Bector Foods. Please note this is not a buy/sell recommendation and is only for educational purpose.
You can download the report from this link : Mrs. Bectors Food Specialities Ltd
Please read the disclosure at the bottom of the report
I wrote this note to our subscribers today. Hope you find it useful
At the height of the epidemic, I shared my thought process on the next steps
How does one invest under such extreme uncertainty? One option is to assume that there will be a quick recovery and go all in. The other extreme is to wait till it is all clear and then deploy the capital. In the first approach one is making a bet on a specific scenario which may not occur, leading to sub-par results. In the second case, we may end up with sub-par returns too but only because prices will adjust once all the uncertainty goes away.
We paid a price for being conservative. We lagged the indices in 2020 at a time when others rode the surge in small caps and achieved stellar returns
I wrote the following at the end of 2020
At that point of time the future was uncertain and anyone making a specific bet was ‘assuming’ a specific scenario. If we assume that 50% of the investors bet on rapid recovery and the other 50% bet on the whole thing dragging on, the first group turned out to be right.
You are now hearing from investors who went all-in, in the month of March/April. It could have easily gone the other way and in that scenario, the second group would be highlighting the merits of being cautious, whereas the first group would be silent.
I personally avoid taking a specific view of how the future will unfold. The risk of doing so is high, if you get it wrong. If you are managing money for others (like me), then the risk is asymmetrical. If you get it right, you can tout your performance. If not, then your investors bear the brunt
I continue to stand by my conservative approach, though I should have reacted faster when all central banks pumped in a huge amount of liquidity into the system. By the time, I could appreciate the dynamics, it was too late
I have been following this drama closely and by mid of 2021, felt it was getting crazy. Valuations of profitless growth companies in the US went through the roof, Crypto was all rage and then we had the NFTs.
Some of these innovations could change the future, but why would I pay for a promise? If you are a buy & hold buyer (as many claim), then you should be paying a price which doesn’t discount the future. On the contrary at height of the mania, buyers were paying for the most optimistic future
The last one year has reminded me of the 2000-2001 dotcom mania. I had just started investing and resisted the mania for a long time, but finally succumbed to it in early 2000 when the bubble peaked. I promptly lost 80%+ of my meagre investments in the next few months
The advantage of experience is that if you can avoid repeating the same mistake. I have stayed away from all this madness and just watched it with amusement. You can see all the updates on my twitter feed @rohitchauhan
When the tide goes out
I created a presentation last year but did not upload it then for some reason. Interest rates have been on a 40 year downward trend and were close to 0% (and even negative). The investing world has gotten so used to this zero cost capital, that even a slight increase would be devastating to most assets
Although I could not forecast inflation and other macro issues, it was clear than any normalization or even reduction in the liquidity was going to be a problem for the market
We know what has happened since then – Inflation has surged due to war, supply shortage of commodities and all kind of supply chain issue
The net result is that interest rates are rising and have some distance to go. All central banks, including RBI have to raise interest rates and reduce liquidity to control inflation
Flip the script
So what’s my point in all this ? We all know what is happening.
If a cut in rates and increase in liquidity, resulted in a V shaped recovery, then the reverse should cause an extended downturn?
I think a lot of the correction has happened. However that does not mean markets cannot shoot on the downside. Long term investors often ignore the implications of liquidity
The net result is that the tailwinds of the last 2-3 years are now headwinds. If this turns out to be true, then there is no central bank to bail out investors this time around in the near term
Hunker down
My thinking is colored by my experience after the dotcom bust. As liquidity was pulled back, it took the markets years to normalize and start growing again. The current events are not the end of the world. At the same time, we should not expect that market will turn suddenly and resume their upwards trend
We are holding 20% cash as I write this note. My plan is keep looking for new opportunities (as always) and start with small positions. As these companies execute, we will scale into the position over time
Even as we invest and reshuffle our portfolio, we should expect losses in the near term. No amount of conservatism can save us from that. I have harping about diversification and asset allocation for last 2 years as I felt that a lot of the recent rise has been due to liquidity conditions around the globe
We can expect volatility and a tough slog for some time. The key is to manage the risk and focus on building a diversified portfolio
This was posted recently to subscribers of our advisory. Hope you find it useful
We are seeing what I would like to call liquidity crash in markets across the globe
Let me explain
In the last few months, I have been tweeting about inflation going up and prepared this presentation, which I did not post. I laid out my thoughts in the ppt which I created in Dec 2021 and posted a summary on twitter. Judging from the response, most people did not bother about it 😊
As inflation has risen, the Fed and other central banks have raised interest rates. This caused a slowdown in the markets in the last few months
The nifty and other indices have been flat, and several stocks are down in this period.
I think this was the first stage and we have moved into the next phase – that of tightening liquidity. The US fed and central banks have announced a withdrawal of bond buying and other liquidity measures they introduced during the Covid crisis
These measures led to all kinds of asset inflation as liquidity surged across the globe. As this liquidity is withdrawn, we are seeing sudden crashes in asset prices
In the last few months, various tech and SaaS companies have been obliterated. A lot of these company are down 50-90% and the selling hasn’t stopped yet. This is now spreading to other asset classes
We are seeing some early signs in the Indian markets, especially in the small/mid cap space. In the last few days, I am seeing sudden large drops, often for no fundamental or company level reason. This is likely to intensify in the coming weeks and months.
How are we positioned?
This is not new and occurs every few years. What is different this time, is that the Fed and other central banks will not be there to inject liquidity and save the markets. At best, they will continue to deflate the bubble slowly to ensure that markets and economies function properly
We have always been cautious and careful. For example
The coming weeks and months are going to be painful. I have always stressed on asset allocation to all of you and hope you have managed your equity allocations keeping that in mind. Our risk tolerance will be tested in the coming month
The key is to keep the equity allocation at level where a drop in the portfolio will not cause you to sell in panic. We will be tested on that count
As I have repeated ad-nauseum – Survival is key. There is no point making large gain, if we lose all of it and are forced out of the game. That is already happening to a lot of people
Let me share two graphs, which appear quite similar
Are they from the same data but drawn differently? Both graphs show periods of growth followed by consolidation or pullback
Let me zoom out and show the source of this data
The first graph is that of our model portfolio and second is of Vinati organics. One is a portfolio of stocks and another is a portfolio of products. Our portfolio has delivered 24% CAGR in the last 10 years and Vinati organics delivered 40% CAGR over the same period.
There is a deeper lesson in the above charts
Progress is never linear. It happens in fits and starts with periods of stagnation and backtracking.
Short-term thinking and extrapolation
It is easy to enter the portfolio (or a stock) at point A and just extrapolate that trend or at point B and do the same. The problem with this mindset is that the individuals expect progress to be linear and steady (purple line) whereas reality is the brown line of our portfolio
This is a problem no one can solve for us. I have seen this all my life, especially with investing. A lot of investors want immediate gratification and jump in at point A, only to be disappointed.
The right mindset is to zoom out and look at the long term trajectory. Does the mindset and approach of the advisor make sense and will it work over the long run. Is yes, then you must give it time to play out
What drives this behavior ?
I think the problem is our own expectations and lack of patience. We want immediate and consistent results. That’s the point of tweet below
The world is not kind to give something for free. If you want zero volatility – go for a fixed deposit. If you want high returns, the price you pay is the volatility of the returns.
Somehow everyone gets this in other facets of life – everything of value has a price. Patience and persistence is the key to success – in stock markets and a lot of other endeavors
I wrote this note to our subscribers recently. Names of companies are not investment advise and we may or may not hold them in the model portfolio
Hope you find this note useful
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I have identified myself as a buy and hold investor for a long time. I started investing in late 90s and was looking for a guru/north star at that time. This was the start of the internet era and unlike today, there were no online resources on investing
I came across Warren Buffett through a book – The Warren Buffett way and was hooked by his persona and investment philosophy. As it usually happens, once you admire someone, you tend to follow almost everything they say or do
Buy and Hold (or hope?)
One of the core tenets of Buffett’s philosophy has been buy and hold. I have embraced this philosophy whole heartedly in the last 20 years. Even though there was a degree of blind faith in following this approach, I have been amply rewarded for it
Over the course of time, as I have thought about it, I have realized some nuances to it. This has made me question if buy and hold (as I practice) makes sense in ALL cases
The precondition to the buy and hold philosophy is that you buy a great business with great management and hold for the long term to benefit from compounding. If either condition is not met, one should not buy the business in the first place
I have often made the mistake of defaulting to buy and hold inspite of the management or business being below average instead of selling and moving on
Why is selling tough?
The reason is not difficult to see – selling is tough and there is always regret in hindsight. No matter what logic you use, there is always something to regret about
For example
I cannot think of an example where I did not have any regret. When one faces this situation, the natural tendency is to do NOTHING and hope it will all work out. I am trying to avoid that now
Make mistakes and fix them
We sold IEX and reduced our position in Laurus labs recently. If these stocks keep rising, I will regret selling early. I will make decisions against my natural instincts, expecting to wrong a few times. If I am wrong, such as in the case of IEX or Laurus labs, we can always turn around and buy the stock again.
If I am accused of flip flopping, I consider that as a compliment. My loyalty is to the portfolio and you (the subscribers) and not to the stock or the company we hold
Ps: In the list of companies above, I have shared the worst of my decisions in the last 10 years. There are more and it’s a long list. You can accuse me of making dumb decisions from time to time, but no one can say that we try to hide them. All my decisions and thinking can be accessed here and my public blog