Tuesday, December 19, 2023

Lessons to Indian Investors From Munger's Market Beating Run for 45 Years

Finally it happened. Jerome Powell backed off from destroying the American economy and the world economy further by not only pausing from an interest hike yet again, but by hinting that 2024 might witness up to three rate cuts.

It was the perfect excuse that the Indian markets needed to move even further up. Our nation already had structural strengths due to the ongoing economic reforms and infra push, plus the booming mutual fund inflows, and this move by the US Fed is surely a long-term positive.

Did someone mention long-term just now? Yes, and it was intentional, as there is now a chorus that the market will only go up and up. A little more conscientious souls are saying that only the large-caps may move up now, and not the mid or small caps, which are way too heated up already.

But this too has become a chorus now, and every time such a chorus is emerging, beware, a correction might just be around the corner. A 10-15% correction is a healthy norm in a bull market, but it can catch most traders and investors on the wrong foot, as this time around it may involve Nifty diving down by over 3000 points and Sensex by over 10k.

In Warren Buffet’s words, yes, it is a time to be fearful. As the Oracle of Omaha said in near perfect words - “To be fearful when others are greedy and to be greedy only when others are fearful.” But such a dip too is sure to be bought in rapidly, giving you a fruitful opportunity to be greedy.

So, this kind of rapid buys against sharp falls is what the long-term qualifier is all about. And not that the markets will go only up and up. Of course, long-term has much more positive implications in the capital markets. Charlie Munger who passed away on November 28 was one of the best practitioners of it.

It is said that many of the quotes and wisdom that people attribute to Warren Buffett were actually from his long-term business partner Munger. One such quote where Munger likely had a great role was this - “Our favorite holding period is forever.” Such was his conviction about a unique advantage that only comes from the long-term holding of stocks - the power of compounding.

Compounding is no rocket science. At its heart, it is only middle school arithmetic. But 99% of investors in stocks and mutual funds do not get to reap its benefits. In fact, Munger excelled in it precisely because it was only basic math. Despite his towering intellectual capabilities - lawyer, architect, analyst, investment strategist, business head & thinker - he was careful to choose only simple generalized knowledge from the various domains.

Munger had a well-known disdain for specialists and their too specialized knowledge. His argument was that specialists tend to focus too much on their specialized knowledge, while ignoring what a multidisciplinary approach could have easily solved, by bringing together basic knowledge from all connected domains.

Anyway, compounding was one such basic skill that Buffett and Munger excelled in, that it won’t be an exaggeration to state that this strategy had more than a 50% role in their astounding success at Berkshire Hathaway which they together grew into the world’s largest holding company worth nearly $800 billion.

Munger’s appreciation for the power of compounding is evident from one of his best known quotes - "The big money is not in the buying and the selling, but in the waiting." Indeed, what he achieved for Berkshire Hathaway by way of compounding can never be overstated.

In fact, Munger’s strategies including his reliance on long-term compounding was central to Berkshire Hathaway shifting away from Buffett’s philosophy of investing in fair companies at wonderful prices (which he learned at Columbia University from his professor Benjamin Graham, the Father of Value Investing). 

Instead, Munger - who never attended any b-school unlike Buffett - convinced Buffett that what they should be doing is investing in wonderful companies at fair prices. Since this involved buying at higher prices than in value investing, it invariably required the power of compounding to work, and it proved to be so, as most of these companies proved to be really wonderful in the long-term! 

Buffett himself has gone to great lengths to credit Munger for this complete strategy shift and for creating a new blueprint for Berkshire, often saying that “it was Charlie who straightened me out” and that “listening to Charlie has paid off.”

Between 1978 and 2023, that is, for 45 long years, Berkshire Hathaway grew investors’ wealth at a compounded annual growth rate (CAGR) of 20%. Most people don’t readily realize what this achieved for their public shareholders - it multiplied their wealth by 3700 times within these 45 years!  

It is a feat never done before and never likely to be done again in the future. This is especially so as despite this intervening period being witness to America’s largest ever economic growth, that sent its benchmark S&P 500 index over the roof at 163 times wealth creation, Berkshire Hathaway’s performance beat even this superlative returns by nearly 23 times!

So, what exactly is this power of compounding in layman terms? It would be best to describe it with an example. Suppose you have Rs.10 lakhs to invest in 2023. And you invest all that in a stock priced at Rs.50, after a careful study. So you get 20,000 shares.

For this stock to double your wealth, it has to go to Rs. 100 or go up by 100%. Suppose it does that within a year or two. So now you have doubled your wealth to Rs. 20 lakhs. Now, to triple your wealth you know the stock has to triple in value, that is, become Rs. 150 per share. But do you know how much it has to grow now in percentage terms to reach Rs. 150 from Rs. 100? It has to grow only 50%, and it will triple your investment to Rs. 30 lakhs!

If it is an excellent stock in an excellent market, it will achieve that within the next year. So now you have tripled your wealth. You know that if it adds another Rs. 50 to its value, it will quadruple your wealth to Rs. 40 lakhs, that is increase it fourfold. But do you know how much that growth is in percentage terms - from Rs. 150 to Rs. 200? It is merely 33.33%! And similarly for your investment to grow fivefold - from Rs. 200 to Rs. 250 and from Rs. 40 lakhs to Rs. 50 lakhs - all it takes is a 25% up move, which can sometimes happen within a week!

Now suppose you were really fortunate that your chosen stock was one of the best growth stocks in the market, maybe within the top 1% of the best small caps, that becomes a 100X multibagger by 10 years, that is, by 2033. So now your Rs. 50 stock is trading at around Rs. 5000, and your Rs. 10 lakh investment is now worth Rs. 10 crore. What happens now is the real magic.

Do you realize how much your stock has to move up now for it to add one more times in return, that is to add one more 10 lakhs (your original investment), or in other words to move from 100X to 101X? If you are quick at arithmetic, yes, you guessed it right, it should just rise by 1%. Imagine, a stock moving up by merely 1%, and you adding one more times of your original investment to your wealth!

This is what the magic of compounding is all about. Do you think this is a far fetched idea? Absolutely not. Even in the Indian market, there are dozens of stocks that have done this within the last 10 to 20 years, and now with the kind of better quality companies and startups hitting the IPO street, there will be hundreds of companies achieving such feats in the 2023-33 period.

This is why Buffett and Munger always held seemingly boring stocks like Coca Cola and American Express in Berkshire’s long-term portfolio without ever divesting them. These stocks continue to be incredible wealth compounding machines for early investors like them, who have also used their high dividends to reinvest!

And this magic of compounding is what drove this remarkable duo to state counterintuitive stuff like, “Our favorite holding period is forever” and that "The big money is not in the buying and the selling, but in the waiting." It is a wisdom that runs diametrically opposite to the current trend of dangerous practices like only microseconds long algorithmic overtrading, futures & options and heavily leveraged bets.

Saturday, June 3, 2023

How to Exit the Polycrisis the World Walked Into

Until now, more often than not, economic crises were all singular and well defined. The world will either have slowing down demand with its side effect of lower inflation, or the world will have high inflation with its side effect of a surge in demand.

But this time around, things are slightly different. Confusing even many economists, the world is witnessing high inflation but with a slowdown in demand. Now, this is something not only pretty strange, but something that leaves not many levers for the governments and central banks to act upon.

This is one reason why many thought leaders are citing that the world is in a polycrisis. To add fuel to this fire, are the various global developments like the unprecedented war by Russia in Ukraine, the equally unprecedented economic slump in China, the very much anticipated but unprepared-for population degrowth in Europe, and the disruptive advent of generative AI like ChatGPT, to cite just a few.

While many factors are behind all these diverse challenges, for the highly observant mind, it can easily be seen that one social trend is behind it all. In fact, it is not just a social trend, but something that runs deeper, with its roots in the human psyche itself. It is nothing but the human tendency to deliver excesses, in both committing an act and in later correcting that act.

For those who know human physiology in some depth, parallels can easily be seen in how the cells and systems of our body react to various stimuli. For instance, the much discussed dopamine cycle. There is a baseline dopamine level, but achievement, rewards or euphoria spikes dopamine, but it cannot stay there forever. 

Soon it will be time for a fall, and when dopamine levels fall, it will not stop at the baseline level, but plummet sharply below it. In fact, higher the rise above baseline, higher will be the fall below it, sending happy and euphoric people to sudden gloom and doom, within a matter of hours. People who don’t realise this mechanism, often go after reward-seeking behaviour again and again, be it partying or drugs, to get a new high, only to fall even more deeper, and thus maintaining this vicious cycle of addiction.

Eerily, almost the same thing is happening in global economics too. The world went through a sudden demand slump due to Covid, and central banks responded with easy liquidity by way of lower and lower interest rates. And the otherwise smart companies like the tech majors started thinking that this will remain the new normal forever, and invested more and more into a digital future and in the engineers needed to run that future.

And tech majors alone were not to blame. Some of the otherwise most prudent investors and lenders, like the PE and VC funds, imagined that profits in their funded startups are not important anymore - in this new normal - but that valuations or marketcaps are enough to sustain operations forever.

But inevitably, like the dopamine slump, everything has to correct deeply for the economy to find itself in a stable ground again. Take the recent failure of Silicon Valley Bank in the US that started the most recent leg of the ongoing contagion. SVB was the lender of choice for startups, and the collateral was often the share pledges by promoters of these startups. 

Even more seriously, these young millionaire and billionaire promoters also parked much of their funds in SVB. But when the inevitable correction in the markets came, and the mass layoffs started, the outlook turned suddenly dark, the value of the pledged stocks became only a fraction of their peak values, and the promoters couldn’t take back their deposits in time, and everything came crashing down like a castle of cards.

The world had seen this coming, yet walked into it, mainly because everyone else was doing it. Yet, there have been notable exceptions to this trend across the world. Quite a few companies stood their ground and focused on growing their bottomline along with their topline, paid generous but prudent dividends, and kept aside much for a challenging phase that they saw coming.

There are quite a few measures that governments and companies can take to avoid such excessive behaviours. Firstly, it is important to realise that valuations can never substitute for profits. Secondly, it is important not to over anticipate the durability of an ongoing trend, especially if it feels too good to be true. Such a timely realisation would have been enough to avoid the kind of mass layoffs being witnessed now.

Last but not least comes an objective called sustainable and inclusive development. Governments should realise that the per capita income of their people is way more important than the GDP. Companies should realise that a mindless hiring and firing culture would gradually result in top talents not willing to work at all in their sectors. It doesn’t make sense for the companies themselves to always aim for aggressive valuation growth or even profit growth, but to always choose inclusive and sustainable growth for all stakeholders.

Wednesday, January 11, 2023

Invest MP 2023 Starts with Virtual Address by PM Modi

Invest Madhya Pradesh 2023 - Global Investors Summit - has kicked off to a majestic start in Indore with a virtual address by Prime Minister Narendra Modi, in the presence of Chief Minister Shivraj Singh Chouhan and several international and national dignitaries, including topmost level leaders from the leading industrial houses of India like Aditya Birla, Tata, Bajaj, Piramal, Godrej, Lulu Group, Dalmia Bharat, JK Tyres, Reliance, Adani & JSW.

Invest Madhya Pradesh - Global Investors Summit is the flagship biennial investment promotion event of Madhya Pradesh, the Heart of India. It provides an important platform to engage and connect with potential investors by showcasing and promoting the state's growth potential, investment climate, infrastructure and other advantages of Madhya Pradesh.

7th edition of “Invest Madhya Pradesh - Global Investors Summit” is scheduled on 11th – 12th January 2023 in the commercial capital of the State, Indore. Theme of the event is "MADHYA PRADESH - THE FUTURE READY STATE", the Programme scheduled in the cleanest state and cleanest city of India, will be ‘Carbon Neutral’ and ‘Zero Waste’. 

Over 5000 industrialists, representatives of various industry associations, foreign delegates including more than 500 international delegates from 80+ countries and representatives from all G20 Countries will participate in the event. The event will also witness participation from Central and State Government Ministers/Officials.

The main objective of this two-day event is to showcase the industrial ecosystem of the state, promote state policies, consultation with industrial organizations to Formulate Industry-Friendly Policies, Collaboration Opportunities, Promote Export Potential, Buyer- Seller Meets and Vendor Development. 

The event will be a platform where global leaders, industrialists and experts come together to share their narratives on emerging markets & trends and ways to harness investment potential of Madhya Pradesh.

Summit will have various important segments. On 11th January 2023, Prime Minister, Shri Narendra Modi virtually addressed the inaugural session. H.E. Dr. Mohamed Irfaan Ali, the President of Cooperative Republic of Guyana, H.E. Mr. Chandrikapersad Santokhi, President of the Republic of Suriname, Shri Piyush Goyal, Hon'ble Minister of Commerce and Industry & Textiles, GoI, Shri Shivraj Singh Chouhan, Hon'ble Chief Minister of Madhya Pradesh & Shri Rajvardhan Singh Dattigaon, Hon'ble Minister, DIPIP will grace the event. 

All Leading industrial houses like Aditya Birla, Tata, Bajaj, Piramal, Godrej, Lulu Group, Dalmia Bharat, JK Tyres, Reliance, Adani, JSW will be on the dais.

Along with the Inaugural session, other key highlights of the summit are Thematic & Sectoral sessions, One-to-One Meetings with CM, Industry Ministers and other State Officials, Exhibition & Cultural Zone. 

Session on various Themes & sectors such as Pharmaceuticals, Medical Devices & Healthcare, IT & ESDM, Automobiles & Auto Components, Textiles & Garments, Agriculture, Food Dairy Processing, Logistics & Warehousing, Natural Gas & Petrochemicals, Tourism, Renewable Energy, Urban Infrastructure & Mobility, Fostering Exports from MP, Social Infrastructure Financing, Access Madhya Pradesh, International Business Opportunities,I2U2 (India, Israel, USA & UAE), MP contribution to 5 Trillion Economy, Aerospace & Defence, PLI- Boosting Manufacturing in India and Role and MP, Education & Skill Development, MP Startup Ecosystem. 

Business to Business meetings have been organized to provide a platform to industries for collaboration, business-related partnerships, product exchange, different services and related information. Through G2B meetings, private sector industries will be able to discuss various opportunities and collaborations with the government.

Buyer Seller Meet and Vendor Development Program is being organized to help the MSMEs of the state to reach the global market and to promote exports from the state. This mainly includes buyers from USA, Canada, England, Japan, Israel, Netherlands, Singapore, Thailand, Cambodia, Bangladesh and African countries. 

More than 1500 exporters of the State from different sectors such as pharmaceutical, textile, engineering, agri and IT services have confirmed their participation.

During the two-day summit, 20 different sector-specific sessions will be organized with industry captains & industrialists from different fields and, senior officials of the concerned ministries of GoI & MP shall be brainstorming in these sessions. 

To protect the environment, Hon’ble Chief Minister, Shri Shivraj Singh Chouhan has pledged to plant a tree every day and multiple kiosks have been placed within the Convention Centre and Exhibition to enable the participants plant a tree with Hon’ble Chief Minister. With the contribution of participants through this initiative, plantation of different varieties of trees will be done at Global Park by AQI Warriors.

More than 100 industries will display their products related to various sectors such as Pharma, IT, Automobiles, Textiles, Garments, Chemicals, Cement, Food processing etc. 

In the exhibition, a dedicated Madhya Pradesh Pavilion showcasing the industrial infrastructure, existing and upcoming industrial parks, major investment projects, flagship government schemes which are planned and are under implementation in the State. State’s various aspects such as Heritage, Culture, Wildlife, Natural Resources etc. will be showcased along with Digital Exhibition, Industrial Exhibition and a Cultural Zone in which One District One Product (ODOP) & local arts such as Gond paintings, Bhil paintings, Zari-Zardozi, Jute, Bagh print, Dolls, Bamboo Art, Bell Metal Craft and handlooms such as Chanderi & Maheshwari etc. will be  displayed by the artisans.

The 7th GIS holds significance as it is being organized when India has taken over presidency of G20 and the State is looking forward to a proactive participation from the Investors interested to Invest in Madhya Pradesh – The Future Ready State.

The event will be streamed live through DD news, and Jan Sampark, MP through the following platforms: FB - @jansampark.madhyapradesh, Twitter- @jansamparkMP, Youtube- JansamparkMP.

Monday, November 21, 2022

Bangalore Airport To Be India's First Listed Airport?

Indian listed companies have had airport subsidiaries before, but Bangalore International Airport Ltd (BIAL), the owner of Bengaluru's Kempegowda International Airport may become the country's first directly listed airport company. Its majority owner, Fairfax India Holdings Ltd, belonging to India-born Canadian billionaire Prem Watsa's Fairfax Group, has set the ball rolling on an IPO of between Rs. 3000 to Rs. 4000 crore, which will value the company at around Rs. 30,000 crore. Airports are profitable entities in India and BIAL has been well managed so far, making this direct listing of an airport, an opportunity to be considered seriously by investors. Led by aviation sector veteran Hari K Marar as its MD & CEO, BIAL has unique claims to its credit like being the fastest growing airport in the world, the busiest airport in South India and the third largest in India.


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