2021 has been a kind one for me and I believe for all of you too. This has been the first time when many of us who began investing 4-5 years ago have seen some green, like very dark green in our portfolio. Until then, specifically until August 2020, when my portfolio broke even for the first time, it was mostly a journey of being down 10/20% on portfolio level. So here are a few learnings I’ve experienced and some random thoughts thereabouts:
Investing is the art of making money predicting the future. However, since that’s impossible to do, most of us try to drive looking in the rear view mirror. However, this is the biggest mistake one can make believing that the future is more likely to resemble the present in one or the other form. In that ideal state, a stock which goes from 100 to 400 will go back to 80-120 at some stage when you can buy it back and make similar gains. Well, real world doesn’t work that way. I too am guilty of believing if Reliance goes from 800 to 1600, I can buy it back at some stage when it falls to 800, totally ignoring the changes which has happened in the meantime. Many of my friends who were not willing to buy Tata motors at 100 are now staring at the screen at 470 believing it’s going to come back to those levels at some stage, ignoring what has been happening to the company and its business. Its like asking to buy Tesla at 100 when the price is already 1100. It doesn’t work that way.
We need to look at the way a company’s business is going to look in three five years and if that has changed fundamentally, what was possibly cheap at 100 might be cheaper at 300. Let me illustrate this with something which has stopped participating in the bull run for a while.
I picked up ISEC at around 400 and bought it all the way up to 900 and still am buying it at 750 thereabouts. Why? Because I believe two years ago, a company which was making 400 crores in a year is now making almost that much money in a quarter and I sincerely believe it’s going to make almost 1000 crores in a quarter, not too far away in future. The key here is to believe certain things which are most likely to be true than to predict hypothetical stuff using Excel. My case is simple- Indians of my generation are now increasingly going to put money in stocks either directly or through Mutual Funds and ofcourse through NPS. In either case, as more money is going to come in to the markets, more money is going to go to brokers through commission even if the brokerages are going to go down since volumes will be huge. Today we do about 1l crore cash volume daily which I believe in ten years will be atleast 20 times from here as our markets become more mature. So even if the brokerages are going to go down, this incredible increase in volume will more than make up for it.
Now as we’re looking at digital only brokerages, this industry is going to consolidate going forward with incremental market share being accrued to the strongest incumbents. Even if ISEC maintains its 10 odd percent market share or say even if it makes 7/8% of a ten times bigger pie, it’s sales will grow atleast 10 times with profits rising 20-25 times and share price hitting through the roof. Let me explain.
These businesses have a very limited fixed cost in terms of salary and some day to day expenditure and technology related costs. So once they have the systems in place, let’s say their current fixed costs is around 300 crores per quarter, and sales around 800 crores. So they make 500 crores gross profit. Since fixed cost won’t rise to add more clients as all it need is ten additional computers for another 1lakh clients or so, let’s say sales grow 50% to 1200 crores in two years. And let’s say fixed cost rise to 350 crores. So it’s gross profit goes up to 850 crores, which is 70%. But when sales grow to 2500 crores, and even if cost rise to 500 crores, it’s making 4x profits to 2000 crores. And with every additional rupee it makes, it’s profits grow exponentially. This is what scale businesses can do. And once your profits begin to grow that fast, you’re sitting on a very big compounding machine.
My simple bet in these stocks is that they’re all going to go up atleast 10x in ten years if not more. And with dividends, they’re a true multibagger stories we’re going to look back in this decade.
My biggest learning this year has been to a. Bet on India and B. Don’t bet against technology. I missed a lot of good stuff because I was trying to look at the balance sheets a bit too much. Too much of Ben Grahamic Value investing is harmful to your wallet, is a lesson I learnt last year.
So my suggestion to you is to try and find stocks which are on the right side of India story and also on the right side of technology. If they’re not growing when India goes to be a $5trillion economy, is not making efforts to move or grow business using new edge technology and is not betting on a green future, better stay out of them.
It takes a lot of time to buy Reliance at 2500 and not look at Ambuja cements at 250. It’s a mental leap I took this year.
For those of you who are yet to do some hardwork on your own, put this as your new year pledge.
Life is all about Compounding! 