Thursday, August 22, 2013

Saving the Shirt

If you look at the state of our economy, the outlook seems very gloomy, the macro economy environment has deteriorated. Nothing much has changed over the last one year, the government apathy & indecision was the same, the structural imbalances remained. Still the view from outside our country about India has very negative. Interesting to observe for an investor, there are no new IPOs coming, no rush for dmat accounts being opened and the retail brooking volumes are very subdued. The valuations of some of our leading businesses have dropped off their cliff. This is certainly a great time to buy stocks of diamond grade companies. Money invested at the heights of maximum pessimism, is most likely to yield fantastic returns. However it is any one's guess, if there is further downside to the markets or it is going to recover from here necessitating a staggered investment style.

A great learning in this crash is in observing how the valuations of some very successful companies have come crashing. Some sector leaders have gone by the way side. In-spite of the tough economic environment, there are a few companies that performed better than their competitors, clearly indicating that the people running those businesses have made the difference.

Companies like TVS have gone down in the same tough environment that Bajaj auto have performed well, or look at how Infosys under-performed their peers like TCS until recently in the same environment. The point therefore is, never overpay quality, as the leaders of today and can become laggards tomorrow. Always provide for margin of safety and account for unknown variables. That’s precisely why I like today's uncertainty as they offer stocks at sufficient margin of safety.

There are stocks that are expensive, but do not deserve to be expensive, yet there are those that deserve being expensive but are available cheap. We must differentiate price and value. Old business models are getting replaced with newer ones. Unlike in the past, newer companies come in faster and exit with equal speed. Look how the telecom stocks looked revolutionary at one time, today they are languishing. The old investing wisdom will have to be refreshed to keep pace with today’s reality.

Regular readers may recall of our ready-made apparel company, with a very high p/e that almost doubled in a couple of years. So calculating future valuations and hence the margin of safety gets tricky. We can't any more say, that p/e is too high or too low unless we determine the growth and earnings into future.

I met Ashwin, an investor friend at an AGM. He believes you can't stick with one strategy for ever. When he was not maximizing returns from his investments, he analyzed what went wrong and observed he was overexposed to Indian equity. So he increased the weightage to International equity, currencies and commodity by reducing  Indian equity. He invested in equity mutual funds across North america, Latin america, ASEAN & China. He explains ASEAN fund has delivered the highest returns of about 30% in one year.  For Ashwin, diversifying across stocks or sectors is an old idea, diversifying across countries makes more sense. Investing in multiple countries reduces volatility of portfolio, and increases returns.  Always concentrate on reducing risk, returns will come, he explains. He used every tool in the kitty & is well positioned to make 18% return this year. Here is an example of risk migration to manage returns.

The old ‘buy and hold’ strategy may not just yet be the best. After all, saving the shirt is a serious business.

To know how to invest in international mutual funds, you can contact Ashwin Iddya / Ashwin or write to us at