Podcast Summary
The importance of journaling for value investors during bear markets: Documenting and reflecting on investing decisions during bear markets can provide valuable insights and lessons for a lifetime.
Learning from this discussion with Gautam Baid is the importance of journaling for value investors during bear markets. Baid shares that his investment journal, which he started in late 2014, has been one of his best value investments due to the valuable insights he gained during the brutal bear market in India from 2018 to 2020. He believes that the biggest learnings come from bear markets and can benefit investors for a lifetime. The impetus for writing his new book, "The Making of a Value Investor," came from a suggestion on Twitter to publish his biggest learnings and lessons from his investment journal. Some of his biggest learnings from the journaling process include the importance of letting portfolio winners run, the need for liquidity, and the telltale signs that a bear market is complete. He also emphasizes the importance of judging market sentiment and avoiding averaging down on certain companies during a bear market. Overall, Baid stresses the importance of maintaining an investment journal to document and reflect on investing decisions and learn from the experiences of bear markets.
Reflecting on past mistakes and biases through journaling aids personal growth and investment success.: Journaling helps minimize errors, maintain calm during market turbulence, and provides insights into market sentiment through IPOs and investor portfolios.
Maintaining a journal is an effective tool for personal growth and improvement as an investor. By reflecting on past mistakes and biases, investors can minimize errors and learn from experience. Journaling also helps maintain emotional calm during market turbulence and allows for a clear focus on individual businesses and industry development. Additionally, understanding investor sentiment is crucial in determining market dynamics. Two effective ways to judge sentiment are through initial public offerings (IPOs) and the quality of investor portfolios. IPOs can indicate whether good or bad companies are entering the market at reasonable or expensive valuations. The quality of investor portfolios can reveal the shift from high-quality stocks to riskier investments as a bull market matures. Both methods provide valuable insights into market sentiment and can inform investment decisions.
Understanding Market Sentiment and the Importance of Discipline in Investing: Investors should focus on quality, judge market sentiment, and differentiate between price and fundamental value for successful long-term investing.
Successful investing requires discipline and a focus on quality, even when the market is driven by greed and the urge for quick returns. Investors can judge market sentiment by observing trends in investor discussions, stock prices of holding companies, and new metrics of valuation. Price drives market perception, but in the long run, the market corrects its mistakes and value investors can exploit these mispricings. A good quality business with high growth prospects for a long period of time may be worth paying a high PE ratio for, even if it means sacrificing the first year's return. It's important for investors to differentiate between price and fundamental value and to have faith that the market will eventually recognize the true value of a company.
Focusing on a company's competitive advantage and growth potential: Long-term investors should prioritize a company's durable competitive advantage and growth potential over a low P/E ratio. High-quality businesses with long competitive advantage periods can lead to higher compounded returns, despite optically high valuation multiples.
For long-term investors, focusing on the durability of a company's competitive advantage and its ability to grow earnings over a multiyear period is more important than a low price-to-earnings ratio. Optically high valuation multiples for high-quality businesses can lead to higher compounded returns, especially for businesses with long competitive advantage periods. Behavior is a key edge for investors, and holding onto high-quality stocks during market volatility and noise can lead to significant intrinsic value creation. As Microsoft and Google's recent price fluctuations demonstrate, intrinsic value does not always align with short-term market movements. By remaining invested in a well-diversified portfolio of high-quality businesses, investors can benefit from their competitive advantages and compound their wealth over the long term.
Regularly reassess investments and adapt to changing market conditions: Successful long-term investing requires a disciplined approach, focusing on high-quality growth stocks, staying informed, and being adaptable to market changes
Successful long-term investing requires a disciplined approach, including regularly reassessing your investments and being willing to adapt to changing market conditions. High-quality growth stocks may start off cheap but can become overvalued over time, and holding on during the high growth phase is crucial for realizing significant returns. However, the dynamic business environment demands constant vigilance, as companies that fail to adapt to disruptions or technological advancements can see their value erode. Investors should avoid complacency and regularly verify their investment theses, taking action when something materially negative emerges. The focus should be on the terminal value of a business, as that's where the majority of its intrinsic value lies. Ultimately, successful investing is about creating wealth in the long term, and staying informed and adaptable is key.
Compounding with Positive Asymmetry: Embrace the power of compounding with positive asymmetry in investing, allowing winners to grow while accepting occasional underperformance
The power of compounding in investing is not just about the percentage rate of return, but also about the positive asymmetry, or the increasing returns on the upside and decreasing returns on the downside. This means that even if some investments underperform or go to 0, the overall portfolio can still experience significant growth if the winners are allowed to continue growing. This principle was emphasized by the speakers in the podcast, who shared their personal experiences and insights from their own investing journeys. They emphasized the importance of holding onto winners and not being too quick to sell, even when presented with the opportunity to move on to the next potential winner. This principle can be particularly powerful in probabilistic activities like investing, where being wrong is inevitable. By focusing on the long-term growth of the winners, investors can potentially achieve substantial returns despite the occasional underperforming investments. This concept of compounding with positive asymmetry can be a game-changer for investors who understand and apply it effectively.
Only a small percentage of listed equities create majority of wealth: In US and India markets, just 4% and 1% of equities respectively accounted for all wealth creation, emphasizing the importance of holding onto winning investments.
In both the US and Indian markets, a small percentage of listed equities have been responsible for the majority of wealth creation. In the US market between 1926 and 2018, only 4% of all listed equities accounted for 100% of the wealth creation. Similarly, in India between 1990 and 2018, only 1% of all listed equities accounted for 90% of the wealth creation. This highlights the importance of holding onto winning investments, as the majority are likely to underperform. Additionally, the discussion touched upon the importance of liquidity in the market. Liquidity, though intangible, plays a crucial role in the market, and its availability can impact market trends. In the Indian market context, the trend in monthly domestic and foreign investor flows can provide insight into the direction of liquidity. With domestic investors increasingly controlling the narrative and individual investors driving the current bull market, there has been a significant surge in financialization of savings. As India transitions from a low per capita income country to a middle income country, categories like financialization of savings are expected to continue to grow.
Financialization of Savings Drives Indian Stock Market: Indian stock market's financialization of savings results in abundant liquidity, limiting corrections for good quality stocks. Bear markets can be deceptive, requiring strong market breadth for a new bull market.
The Indian stock market is experiencing increased financialization of savings, leading to significant domestic investor flows that may soon surpass foreign investor flows. This trend, driven by financial inclusion initiatives and the growth of various financial services industries, has resulted in limited stock market corrections for good quality stocks due to the abundant liquidity available. However, bear markets in India can be deceptive and treacherous, with false starts often giving rise to false hopes of an impending end. Instead, a new bull market typically begins with several consecutive months of strong market breadth, which was absent during previous bear market rallies. Investors should remain patient and wait for these signs before declaring the end of a bear market.
Identifying Bull and Bear Markets: Maintain a long-term perspective, focus on high-quality equities, and accept bear markets as normal for successful investing. Bull markets have low starting valuations and loosening liquidity, while bear markets have high valuations and tightening liquidity. Exact peaks and bottoms are only known in hindsight.
Identifying the beginning or end of a bull or bear market can be challenging, and it's generally best to maintain a long-term investment perspective rather than trying to time the market. The signs of a new bull market include low starting valuations based on depressed earnings with strong capacity to recover or grow, and loosening liquidity from tight levels. Conversely, high valuations on peak earnings based on inflated margins and tightening liquidity from very loose levels indicate a bear market. However, it's important to note that the exact peak and bottom are only known in hindsight. Additionally, the best stocks tend to make their biggest moves during flat or range bond markets, so focusing on high-quality equities and maintaining a long-term perspective is crucial for successful investing. It's essential to accept that bear markets are a normal part of the market cycle, and even high-quality portfolios will experience significant losses during these periods. Finally, it's important to avoid averaging down on highly leveraged business models, operationally leveraged models, businesses facing technical or technological obsolescence, and businesses involving fraud during bear markets.
Investing in quality companies empowers investors to view market corrections as buying opportunities: Focusing on high-quality, structurally growing businesses with large opportunities and sector leadership allows investors to stay confident during market downturns and average down on positions
Investing in high-quality, structurally growing businesses with large opportunities and sector leadership empowers investors to view market corrections as buying opportunities. This is a significant advantage of focusing on quality stocks, as it allows investors to stay the course during market downturns with confidence. Furthermore, the consistency and predictability of these high-quality companies make it easier for investors to average down and add to their positions. This was a valuable lesson during the market correction in 2022, where it was more challenging to average down on high-flyer stocks with inconsistent growth. Overall, investing in quality companies enables a long-term perspective and the ability to weather market volatility.
Understanding personal investing style and biases: Build diversified portfolios, focus on value, think independently, be patient, and look for strong management teams in long-term investments.
Understanding one's own investing style and biases is crucial for success in the market. The speaker shared his personal experience of being psychologically unable to handle extreme volatility during bear markets, and emphasized the importance of building a diversified portfolio and focusing on finding value rather than trying to time the market. He also highlighted the importance of independent thinking and being able to look beyond prevailing market sentiment, using Warren Buffett's investment in Apple as an example. Additionally, the speaker emphasized the importance of patience, particularly when it comes to investing in companies with strong management teams and significant growth potential. He also noted that the market can provide valuable insights, such as identifying stocks that don't correct with the broader market during downturns and are the first to hit new highs when the market stabilizes. Overall, the speaker emphasized the importance of long-term thinking and focusing on the fundamentals of businesses, rather than being swayed by short-term market fluctuations.
Understanding Market Prices and Signals: Market prices offer insights into a company's health and industry trends. Observe patterns, but confirm signals with additional research. Fed policies can impact markets.
Market prices provide valuable information and signals about a company's underlying health and industry trends. Active investors develop a feel for the market by observing patterns and trends, such as rapid price increases in a single industry, which can indicate an industry turnaround. This is just the beginning of the research process, and it's important to gather additional information from sources like earnings conference calls and industry experts to confirm the signal. Sometimes, the market can get ahead of a company's fundamentals, and a stock at an all-time high may still be undervalued. Value investors focus on the underlying value of a company rather than its stock price and are willing to do the work to uncover hidden opportunities. The Federal Reserve's policies can also have a significant impact on markets, and it's important for investors to stay informed about the current economic environment and the Fed's actions.
End of Low Interest Rates Era: Investors should focus on quality, pay respect to valuations, and be prudent in a market where higher interest rates may lead to financial instability, potentially causing regional bank failures, but active stock pickers could still see substantial rewards.
The era of low interest rates is coming to an end, posing a significant challenge for equity investors. With fixed income now offering competitive returns, the markets may become range-bound, but active stock pickers could still see substantial rewards. The Federal Reserve's hands are tied due to deeply entrenched inflation, and the sharp increase in interest rates in a short period, coupled with the massive global and US debt, may lead to financial instability, potentially causing regional bank failures. While higher interest rates don't necessarily mean lower stock valuations, the pace and timing of the increase are crucial factors. Investors should focus on quality, pay respect to valuations, and be prudent in this environment.
Investing in high-quality stocks during a bear market: Focus on high-quality stocks with strong management teams during a bear market to minimize drawdowns and maximize returns over time.
During a bear market, the focus should be on investing in high-quality stocks with strong management teams. Regional banks, heavily exposed to the commercial real estate market, may face significant challenges in the coming years, making them a potential pain point for the US stock market. Preparing for a bear market involves avoiding highly leveraged companies and maintaining a portfolio of high-quality stocks. This strategy not only provides healthy returns over time but also helps minimize drawdowns. The importance of minimizing drawdowns becomes significant when managing large amounts of capital. Clients prefer funds that underperform slightly less than the benchmark during market sell-offs and outperform during recoveries. In lending businesses, management is crucial, and a proven track record across multiple cycles is essential. The banking sector, as discussed in the book, plays a significant role in managing the fund and investing in companies. In the context of India, the importance of strong management in the banking sector cannot be overstated.
The Importance of Management in Lending Industry Investments: Warren Buffett emphasizes management quality and trust in banks and lenders. Focus on cost of growth and avoid indiscriminate lending. Passion and love for investing bring long-term success and happiness.
In the lending industry, management quality and trust are crucial factors for investors. With the opacity of the business, investors rely heavily on the management's ability to make sound decisions and ensure the quality of the loan book. Warren Buffett, a renowned investor, emphasizes the importance of management when investing in banks and lenders. Additionally, investors should focus on the cost of growth and avoid lenders chasing hyper growth through indiscriminate lending. Passion and love for investing are essential for long-term success, making it a source of great happiness and intellectual delight. Investing is not just about wealth creation but also about staying informed and observant of the world around us. If you're interested in learning more about Stellar Wealth Partners India Fund, visit stellarwealthindia.com. Remember, always consult a professional before making any investment decisions.
