Some reorientation of global supply chain especially in important sectors like pharma, food grains, Chemicals which are essential for multiple reasons is inevitable given need to reverse just in time principle advocated by management consultants too principle of redundancy and buffers which nature demands to an extent to cushion adverse supply shocks. However Industry don’t have to come to India and could move elsewhere given fact that our legal system is time consuming and we don’t rank much high on welcoming corporates which create jobs by reducing redtapism, unnecessary friction via bureaucracy and rent seeking behavior of society at large is the norm at times. Coming specifically to chemical industry good part is we do have know-how and can create viable business and serve as go to alternate supply destination. Volume can flourish and market share gains possible. However pricing power in long run is unknown and pricing could be any guess based on supply which can come on stream from anywhere including China and reducing demand. I don’t think you would get a too high a premium if alternatives are cheaper and there is pressing need of supply. So one will be better served by checking individual supply and demand scenarios as applicable to most business.
Times of stress are usually times of introspection as usually when going is good, most common sense of caution is usually thrown to wind. Everyone is busy dancing while music is playing and post mortem usually starts once music stops. I would not like to go in to a specific name or business but would state that without hell there cannot be heaven and hence such episodes are part of our evolutionary process and feedback loops both positive and negative are needed for course correction and accelerations. This is how humanity and business evolves. Business which serve a tangible need or deliver value to some customer pain point ought to do well though better options can always emerge in the process. Lening is the oldest business in the world and i am not too worried about that but some players might make mistake and new one can always emerge. Also profit pool is so huge in lending that it feeds on sales of many industry like mortgages, auto etc and that not going to change in near future. Also though much will change in short term as we deal with Pandemic at hand, it would be problematically right to assume that if definitive cure is found many of the past behavior patterns would be reappear and not much will change in long term. I have said this before that Lot of things have changed in short term. And many things have to be changed about our lifestyle and consumption pattern in medium term. But in long term I think so human ingenuity will prevail and go back to our society way of interactions and doing the business. However some weaker players in many business could face existential crises. This is essence of capitalism… Also I worry top down but invest bottom up so one needs to eliminate probability of business failures on case by case basis.
FANG and Microsoft have healthy cashflows and platform effects are more evident in sense their product offering are more in demand now vis a vis the competition. If you go too slide 32 of my CFA presentation recently it talks about optionality business which VC invest in and there is definite demand for this kind of investments where few winners pay for sins of many loss. This funds a many innovation out of which few go on to became mainstream offering and large no of players fail or get taken over. On other hand of spectrum is companies generating high FCF and high return on capital get very rich multiples which is mostly suited for more traditional investors. Low interest rates typically move many investors to take higher risk and many business models which are mindscape grab have come to fore. This happened in 2000 but then survivors of those are winners today. Nothing new here…even queen of Spain who funded Columbus was also one of VC of world and hence this is nothing new. Its just that emerging new technologies like cloud and low interest rates is upending and accelerating pace of innovation and new business model. Please refer to my past presentation on Flame university website and you shall come across many nice material to read on same
This reform if implemented in right spirit is a major reform impacting lives of half of Indian Population. This will cut frictional cost and rent seeking and ensure better price discovery and Lower transmission and distribution losses. However with anything related to Government involvement fine print and execution needs to be doubly verified. I had heard of multiple announcements of Pharma decontrol decades back which still have not been implemented. So my view is to track the progress and take action only once threshold of implementation attained. If prices run up in process so be it as that is the price you pay against uncertainty. This reforms will take time to implement as well while alternates come to fore and hence there will be many opportunities for diligent and patient investors
Valuation of Insurance companies in India is an enigma to me and don’t get the moving parts or handle on same. I like general Insurance business over life at this stage in India, however generally they have limited leeway to manage float money and very sensitive to many assumption on inflation, interest rates, lapsation etc. I am sorry I don’t have much to add here.
Financials are always cyclical ( have been and will be and narratives to contrary are amateurish) and never secular but that has not prevented some of prudent ones to ride out storm and emerge stronger…HDFC bank, Kotak etc. have demonstrated this. They tend to become over owned and overbought in upcycle and pendulum does swing other way and sector may go out of fancy but few -players will emerge stronger to a less competitive environment. So sector will be derated and rightly so given epic proportion of weightage it had reached. Part of it is due to double counting as well as significant portion of HDFC market cap comes via it holding in HDFC bank and so on and so forth for others. Capital adequacy, better asset quality of high granularity, ability to access liquidity, Lower gearing, higher fees based incomes, higher ROA, better disclosures (a sore point ) run by credible management should do well. Every second name in industry doesn’t fit that bill and would see stress. This is again oldest business in world and no rocket science here. Just read about past banking crises and this business is prone to de-rating due to magnification of risk due to embedded leverage. Having said that many investors are now rushing to non levered segments in BFSI like insurance/AMC etc. Safe heaven investments have low yields and hence high implicit cost of safety embedded and more uncertain investment have higher yields and hence high implicit returns potential embedded in. one has to choose what one can sleep well at night. This is cycle and they too shall pass.
I don’t deserve to be in same sentence as the stalwarts you mentioning. I have been clear that there is too much uncertainty in mind and hence choosing to be on sidelines. I am in no hurry to take decision given wide range of outcomes and probabilities and impact potential attached to same and would revisit when much needed clarity on those essential variables emerge. Discovery on Medical front would be one such variable to monitor. Also I am cognizant of fact that what I may deem ridiculously cheap Might still get cheaper as there can be leveraged sellers emerging with each fall and so on.
Sector rotations are always happening based on risk reward considerations. There is always sound reasons why investors feel affinity to a sector at point of time and its very much impossible to predict when pendulum will swing. One has to balance the greed of making more money incrementally to fear of losing capital and hence investing is as much an art as science. What may be investible may not be fashionable at that point of time and whole idea of successful investing is to be proven right…later.
Howard marks books deal with cycles and two books by Edward chancellor are good resources on cycles of business and in capital markets
I have in my limited knowhow tried to answer this in resources given below
India doesn’t have listed platform business of scale yet. We need to invest in products business. However one can invest abroad and be part of the growth of such platform business. Also each nation can not be a winner in such business as one winner takes all. We don’t have that mature ecosystem in place here but its getting much better. At least many business models of abroad are being adopted and refined by local players and that a good business. The returns made in doing so will be recycled ( hopefully) in new innovation ecosystem and this is journey we should be embarking on hopefully going ahead.
I have discussed eloberately on position sizing in my interview with safal niveshak( page four i think) whose link is given below.
At this stage even I am also struggling to come up with new sectors with long tail winds. Do drop me a line if you feel any which deserves serious consideration and would be happy to discuss. I am sorry I am not of much help here. But one must keep looking for such themes. What you saying is obviously right but hence its equally hard to find.
I do not have too much insight in business you have mentioned and I normally cannot own a PSU for long term given divergent needs of owner and minority shareholder like me
Ayush question: Yes I do make changes as I ma not wedded toa style of investing. Developing competency takes time and hence you start small. Also you gain confidence and improve your cognition of business over a period of time so I am in hurry to allocate capital prematurely. Starting early but small helps me avoid anchoring bias and don’t get fixated on a number or price. Put a foot in the door by buying small initial quantity if the business looks appealing. This allows psychological flexibility to average up. Practice the same while selling by averaging down. In absence of the above, one can be anchored to prices which may not be attained for a long period to come. Prices can go from being source of information to a source of influence due to reflexivity present in the equity market and one needs to keep them distinct.
Position sizing and Selling is a dark continent of investing. The discipline to ‘sell’ is as important as the discipline in making the ‘buy’ decisions. A rational criterion for when to sell a stock is vital to the management of a sound portfolio. As a rule, I exit investments based on a few factors including
Adverse changes in long-term sales growth and earnings power, migration of value across the value chain, wrong assessment of longer term competitive intensity and pricing power because of which original
investment thesis that I used to buy the stock is no longer accurate.
Loss of confidence in the management due to adverse capital allocation or corporate governance issue for which I have a low tolerance.
Opportunities to allocate capital to more compelling investments.
Reducing exposure in times of extreme market wide bubble.
Excessive overvaluation of a company due to rerating, without commensurate cash flow/earnings growth that can contract as easily.
In current era, role of information/analysis advantage is diminishing but ability to take a longer term view and patience to hold on to your positions in ear of frequent turbulence are big competitive advantages. But later are not possible without having former and hence as skill sets of players increase, beating averages is getting harder to accomplish. Secondly many market participants have imperatives that they will not look at certain opportunities like spin off of smaller business, business having lower scale or liquidity etc. and such inefficiencies are fertile grounds of investments. Mispricing is likely to be more prevalent in such situations.
You always start small and you always average up a company which delivers performance and that ensures that you don’t get frustrated during periods of non performance. Value traps have limited growth and I am basically a growth oriented investor and hence most of value traps get filtered out by design itself. Valuation is not starting or most fundamental point of my choice architecture
Cash in an optionality to find better business then what one owns if crises comes or buying what you own very cheap. Deploying cash just to average down may not be best strategy. Also stability of your temperament and ability to handle the extremes matter a lot. Seth Klarman has written a brilliant article titled On the Painful Decision to Hold Cash in 2005. Please do read same
This has been answered I guess. I am myself trying to find and research such ideas which pass other investment filters as well. Sorry not of much help here.
Hi Kuntal,
Big thanks for engaging and thanks also for a very detailed response. Just one more question, most of us on ValuePickr are individual investors looking into small/micro cap emerging business. How do you think investing differs for a patient small cap investor vs a large institutional investor who is managing other people money? How did your investing style change when you moved from a smaller AUMs to larger AUM? How important is liquidity of a stock for a large fund manager?
As mentioned we were to close questions at 4 pm.
Let’s close this round of Q&A questions to Kuntal at Q25. (many questions cleverly embedded many parts, so Kuntal’s workload is actually much higher 
). But we can keep collating our 2nd-order-effect dissecting type questions (stuff that we keep pondering about, and want to explore ways and means of taking forward…NOT the usual first order effect questions).
We will request Kuntal for a session again at his convenience next month - where we discuss more - on how we have progressed (or not) on some learnings/means to move forward from today’s discussions; perhaps also taking into account new developments as we see more of lockdown lift and economy/business restart issues become more clear.
Pure gratitude to Kuntal from me and on behalf of entire VP Community!!
I don’t know of anyone (of similar stature) who can be this generous in answering so many questions - writing in the answers himself - (how cool is that)
, and at such length and attention to detail, putting in that many reference links for further exploration!! Too good to be true.
Will be a hard act to follow! on VP
Let’s hear more from folks who’s questions have been answered.
Q22-Q25 we will try and get them answered in the interim. (Else, goes on to Q&A with Kuntal Shah, June 2020)
PS: Apologies to members whose questions may have been pushed down the queue. Meatier chunks were accommodated first, in a bid to extract more from Kuntal. Moderators had a tough job today 
Institutional investing has its own imperatives and restriction in terms of preference and need for certain threshold of size, liquidity etc which Individual investor do not have and one big advantage an individual investor has is there is no pressure of redemption. in fact individual investors have many advantage in terms of a very wide range of options including taking cash calls, concentration etc. Two are very different mandates.
Investing style changes over time and so does AUM but both are not linked in my case. I am more or less agnostic to market capitalization and have embraced liquidity at time in lieu of cheap pricing
Leo Tolstoy has said that all Happy families are alike, each unhappy family is unhappy in its own way. So while history never repeats itself in same manner it definitely rhymes. read more on same atr https://cfainstitute.org/research/multimedia/2019/practitioners-insights-investing-wisdom-from-a-library-of-mistakes
War leads to big demand stimulus later on and economy recovers post war as a result of peace divided.
Some element of regulation on emergency supplies, stocking of essential and rejig of supply chain to remove dependency would kick in for sure in most advanced economies.
Human ingenuity has prevailed on far deadlier diseases and I am hopeful we shall find a meaningful resolution soon but in interim discretionary spend likely to take a backseat for time being for issues ranging form inability to access public spaces to damaged P&L. This too shall pass but recovery looks like gradual and we shall need much more time to come back to pre-covid level output at aggregate level though some industries will bounce much faster than others.
The two tables attached in PDF accompanying CFA webinar gave a glimpse of framework and
we commented that anything which doesn’t kill/impair or severely damage companies, makes it resilient. Anti fragile are rare companies and they stem that from the business model and host of factors and would require a deep dive but hints given in answer to a question on same topic earlier. I will see what one can come up with and revert. May be it should be part of a new detailed discussion on VP?
normally sector leadership changes but that does not prevent a small number of company from previous sector to do well post sector getting out of favor. As mentioned earlier I am on lookout for next leaders. In pharma i ma not sure how regulation will impact global supply chains and need of local presence might become norm to access local markets. I have given my views on chemical sector in sense it definitely holds tremendous potential. Insurance should do well once Indian GDP per capita crosses 5000 dollar
Hi Kuntal,
Thanks a ton for very generous knowledge sharing through detailed responses. Appreciate timeless wisdom nuggets.
VP tribe is a sponge - tirelessly driven to seek and absorb new learnings. 
We believe this is just the beginning of a wonderful journey. Look forward to more.
Thanks again.