Saturday, January 3, 2015

2014: Indian Macro and Micro Economic factors and investment scenario

Last year was quite eventful and rewarding for Udyam. Though, the tide had lifted the entire market our portfolio investments did well compared to the market. We ended 2014 on a rousing note and have also started the new year with a bang. However, this is no guarantee of continued success and we would continue to be cautious and conservative. Last year also proved the folly of focusing too much on macro environment. Nobody could have forecasted the steep fall in crude oil prices. India is currently in a sweet spot with tailwinds in the form of lower crude prices and a purposeful government. Though, the ordinances do not speak well of the political class ability to come to consensus they do demonstrate to the wider world that the current government means business.

Making a new investment is always walking into the uncertain. The following subhasitani in Sanskrit illustrates the pitfalls of uncertainty

यो ध्रुवाणि परित्यज्य अध्रुवाणि निषेवते।
ध्रुवाणि तस्य नश्यन्ति अध्रुवाणि नष्टमेव हि
Those who leave the certain and reside in uncertainty their certain is destroyed and the uncertain is anyway destroyed.   It's always a challenge to sell a profitable investment and invest the proceeds in an unknown company with uncertain prospects. We would try not to make any uncertain investments for the sake of activity
 Our investment philosophy is agnostic to industry sector, market size and macro environment. Since, the investment stories are pursued in a limited time frame we tend to spread our risks by increasing the number of companies that we invest in. No single investment has a major bearing on the performance of the fund. However, this approach is not cast in stone and we would be flexible according to our circumstances and behavior of the market. Our investment philosophy would change as we have more time at our disposal and expand our horizons.

Just as the probability of a head or tail on tossing of a coin does not depend upon an earlier toss similarly success or failure of an investment does not depend upon a fund manager's past investments. An investment is a test of nerves and is a war of attrition with Mr. Market. This game of attrition is played in mind as one waits for Mr. Market to realize it's folly in underpricing the stocks that one has invested in. This is a waiting game and one tends to get worried in one's analysis when this process takes a long time. Having our investments in a large number of companies gives us small wins each day and helps in calming the nerves. Also, investing small amount of money in a large number of smaller companies protects us reasonably well on the downside while giving ample scope on the upside.

Investment success is never made on cheery consensus as was evident in the year gone by. At the start of 2014 the picture was quite gloomy for India with everybody having written off India story. But stock market has its own way of surprising everybody and it stealthily kept creeping up while people waited on the sidelines. The rosy consensus now is no guarantee that market would give similar returns in 2015. However, what is certain that it would continue to misprice individual stocks and provide opportunities for individual stock pickers to make money. Investments are as much of a test of behavioral skills as of financial acumen. It's easier to make investments in a despondent market as was the case in early 2014. It's difficult to walk away from making an investment in a company that one has researched thoroughly if the price of the stock is not right. The sunk cost and optimism bias forces one to buy the stock one is researching. Since, one has invested time in studying a company one wants a commensurate return for ones labor and ends up investing in the company. Also, one becomes more optimistic of the company that one is researching. Because of this it is easier to make mistakes in an optimistic environment as is the case now. We would be on guard and try to minimize these mistakes. However, this is no guarantee that we would not make mistakes.
We have avoided cyclical commodity and infrastructure stocks in the past and would try to do the same in future. However, again this is no guarantee that we would not fall prey to tremendous power of the price ticker. Our corpus has grown substantially in 2014 and though it's still very small returns on a larger portfolio would generally be lesser than that on a smaller portfolio.
We had some new members join us in 2014 and we hope to have a long association with them. We wish all of you a very Happy New year and continued success in your endeavors.

Written by: Pankaj Singh.