You win by not losing
To succeed in sports, you must understand the rules of engagement. Investing is the same.
If you lose 50% on an investment, it is not sufficient for it to go up 50% to offset what you lost. In fact, it will have to go up 100%. If Rs 100 declines to Rs 50, it needs to now double to break even. Imagine how hard it is to come up with 100%+ idea and that too, only to break even.
Let’s say, instead of losing 50%, you only lost 20%; Rs 100 declines to Rs 80. Now if you put that 100%+ idea to work on Rs 80, you will end up with Rs 160, which is 60% capital appreciation. The 100%+ idea got more play because you lost less money. That is why, avoiding losers is more important than picking winners.
Attention to risk management does not come at the expense of return management. You deliver better capital appreciation even as you deliver better capital preservation.
All investing is value investing
Growth is the single largest component of value. When we invest, we buy businesses that over time will have an advantage over their competitors, sustain and increase their advantage, and earn a reasonable growing rate of return on the capital they deploy in their business.
The single most important consideration is the quality of the business, and if your interests are aligned with the people who manage it. Once you are sanguine about the prospects of the company, then you look at what you are paying for it. This is when you look at valuation.
To say that value investing is low PE stocks is the farthest thing from the truth. Quantitative metrics such as PE and PB and dividend yield are statistical measures to test hypothesis; they do not define what is value.
Lessons in survival: Evolutionary Biology and Investing
Over 5 billion species that ever lived on earth have gone extinct. Survival is the exception. Extinction is the norm. Adaptation is a must.
When Black Swan events occur, there will be death and destruction and extinction. The pandemic has caused massive job and revenue losses in the travel and tourism industry. But there will also be new life and emergence of new species. Zoom has witnessed explosive growth as the most accessible video conferencing service.
In destruction there is creation. Companies will need to adapt to the environment. There will be cost cutting, retrenchments, letting go of office space, curbing travel - basically doing the same amount of business with less. Frugality is of essence. Costs that were created during good times but deemed unnecessary during a slowdown.
Just like nature, capitalism ruthlessly eliminates those who are no longer fit for their environment.
