10 Key Learnings From 2023
"We are just getting started."
“Habits are the compound interest of self-improvement.” – James Clear
As we bid farewell to 2023, I thought I would sit down and write a letter to all our SOIC Tribe Members on the 10 Key Learnings that had a profound impact on our journey this year with multiple case studies, and I would update you regarding our plans for our SOIC Tribe going forward!
1. My life has been profoundly impacted by the teachings of Mr. Charlie Munger.
At the age of 31, Mr. Charlie Munger lost his son to leukaemia and got divorced from his first wife and in the process nearly went bankrupt as his wife got almost everything. Yet, he kept moving on in life.
Be a survivor, not a victim. Envy and self pity are destructive. Be optimistic no matter what.
In spite of being a billionaire and a learning machine, when he was asked what he wanted to be remembered as? Do you know what his response was?
He responded: ' I want to be remembered as a teacher .' A life well lived ends up making you immortal, as the ideas and teachings keep going on for generations after you are gone. You can read the free version of Poor Charlie’s Almanack here. This book could be a life-changing experience for the younger members of your family if they read it early in their lives: https://www.stripe.press/poor-charlies-almanack/cover.
2. Changing your mind when the facts change:
I have changed my opinion about several businesses this year, either for the better or the worse. The following are two case studies on the same:
A. There is a beverage company that looked expensive at the beginning of the year with a PE multiple of almost 60x. Instead of letting my past bias of sticking to companies below 30x PE. I decided to stay put as soon as I saw the company expand into other countries in Africa. Instead of acting to reduce or sell. I changed my mind after new information came to light, and decided to hold onto it.
B. Recently, there was some adverse news about one of the companies that I held for almost 3 years. After conducting the valuation model. I considered that probabilistically it may not perform well from here. Thus, despite my endowment bias towards the business, I had to change my mind.
The only thing that is true for all investors, regardless of their style, is that changing the odds due to new facts is inevitable in investing.
3. Implementing an EXIT Strategy:
Over the past 8 years of my journey, I have been experimenting with various exit strategies. I began developing the core of my current selling strategy in late 2021 and it's now finished. In this year's ferocious bull market, I have fully utilised my selling strategy across businesses.
A. When a stock goes parabolic, the idea is to check the distance between 200 EMA and the stock price. If it is more than 80% usually, a near term peak is made. If valuations are very high, it's possible that it's the climax.
B. Using VSTOPs on monthly charts to exit.
C. If 30 WEMA breaks.
D. Expectations in Reverse DCF show that 25-30% growth rates will be required for the next five years. If this, along with Stage analysis, shows the creation of a Stage 3 top, then it's quite risky to stay put..
4. This has happened before!
This has been one of the profound learnings of 2023. Almost everything under the sun repeats itself. This is particularly true for the markets.
If you are reading this, simply look back at the 2018 market leaders. How many of them haven't done well over this five year period?
The answer is, very few. In short term noise, we sometimes end up losing sight of what can happen over a period of time.
How often have you observed that when markets do well, your part-time investor or friends with different jobs start discussing becoming a full-time investor?
How many times have you seen divergence being created? Sometimes, there is divergence between large caps doing well and small caps underperforming, and vice versa. In 2019, strategies were made around large cap compounding, and today strategies are being made around small and mid caps. Large caps in the USA are doing well, whereas small caps in India are doing well.
Most of the things just repeat over a long period of time.
5. The only way to do well in the markets is to have a framework and stick to it.
“If a man knows not which port he sails, no wind is favourable.”
When we have a purpose and are following our goals, everything is fine. We know where we're going and all the troubles we encounter are obstacles to overcome in order to arrive at the destination, as they're part of the journey. Without a framework for investing, we will feel like a one-legged man in an ass-kicking competition.
A framework that relates to sticking to a buy or sell strategy, valuations matter, supply side dominance, market leaders, higher incremental ROCE, looking for 20%+ growth rates, and not getting swayed by fads around you. One of the fads that I continue to avoid, is to look at 100-150 PE businesses reporting negative cash flows.
Having a framework is the only thing that will remind you how to improve yourself when you have gone wrong and what feedback you can take from a winning investment.
6. There is wisdom in the law of market caps.
This has been extremely clear to me after looking at the following data. Most of the winners over the last 10 years have come from lower starting market caps. As the law of numbers catches up, the smaller the base the bigger the move , when the company starts growing. It's improbable to expect companies like Reliance to be 10-15 baggers over the next 5-7 years. The bigger the base, the slower the move .
7. My final key learning for this year has been to always follow the principle of DCP to benefit from the fruits of compounding:
Discipline to keep doing the actions.
Consistency to keep repeating them.
Patience to see the results.
8. Sectors that can do well going forward:
A. Organised jewellers are gaining market share, not just the market leader but other national players are also doing well.
B. If a good cycle for microfinance persists, these companies will be reporting record ROE and profitability.
C. Bank Nifty is one of the most reasonably valued index today, both on PB and PE levels. One of the reasons I am not bearish on Nifty is because the financials are nearly 35% of the index.
D. Exporters , like chemicals and textiles , should start reporting good earnings on a favourable FY24 base in H2 of FY25. The narrative from destocking will change to restocking.
E. There could be a J-curve of profitability which emerges in the new age companies in insurance or food delivery space . Do keep a look out for them folks!
9. I have always ignored the mining sector for the longest period of time.
This is something I changed at the beginning of the year. Mining companies are cash throwing machines. Volatility exists around the realisations of the products that they are selling. Unsurprisingly, the best wealth creator as per MOSL case study, is a mining company that won rights to produce more iron ore and won new mines. There are miners who will be expanding multifolds over the next 3-4 years. Owning leases of a mine itself is like being the owner of a proprietary asset that cannot be replicated. A key learning for me has been: never write off a sector without understanding the finer details of it.
(Motilal Oswal Wealth creation Study)
10. Study value chains!!
Imagine the growth rate difference between:
A. IT services business vs. IT ER&D companies.
B. IT product companies vs. IT services companies
C. Beverages company vs. soap manufacturer in FMCG.
D. Steel tube maker vs. cement maker in building materials.
E. CNC machines supplier vs. V-Belt maker in capital goods, etc.
Study the value chains well and spot the companies or sub sectors within industries that are growing at a faster pace versus the peers.
On a personal front, this year has been very fruitful because we learned about multiple new industries and finally started our SEBI registered research desk under SOIC Intelligent Research (a separate company from our educational organisation). It's our pledge to add more value in the future to your investing journey by starting the year by covering multiple sectors such as metals and mining, logistics landscape of India, and 100+ proxies for different industries.
We hope you have a great year ahead folks!
Disclaimer: The information provided in this reference is for educational purposes only and should not be considered investment advice or a recommendation. As an educational organisation, our objective is to provide general knowledge and understanding of investment concepts. We are SEBI-registered research analysts. This is only meant for educational purposes, and nothing in it constitutes investment advice.
It is recommended that you conduct your own research and analysis before making any investment decisions. We believe that investment decisions should be based on personal conviction and not borrowed from external sources. Therefore, we do not assume any liability or responsibility for any investment decisions made based on the information provided in this reference.