Where do you see the disconnect in terms of valuation and growth, or the combined disconnect between management and business perceptions and the underlying strengths of the business?
Valuations and growth people always balance and build on growth, but over the past two years, when this move came out of the trough of the 2020 pandemic, many companies’ valuations went crazy. , some take three, four, five years to reach that rating again.
These are great companies, growing very large, but it all comes at a price. Each fund manager has its own strategy. These are all very unique strategies, but in good times and bad, being obsessed with valuations is one thing, being obsessed with small caps is another.
In 2018, I went crazy and paid a heavy price for it, the investors who invested in us in 2017 at the peak of small and mid cap strategies have yet to fully recover. can make mistakes in terms of evaluation and growth. It’s very tricky, but that’s why stocks are the most dynamic investment vehicle, no certainty, no risk, no reward.
Some consider stocks to be risk-free for long-term investors if they are looking to research stocks to understand the business and invest long-term in a reasonably diversified portfolio. I’ve made some very focused bets on companies that don’t have a very good track record. That’s why 2018 happened. We have made some very big changes to our investment philosophy, but our basic investment philosophy remains the same. Talking about a little repair here and there, it really helped later. Now we have full confidence and we are doing very well.
It was great to hear that. We have seen a massive revaluation at the value end of the market for bank, defense and rail stocks as interest rates rise and growth stocks are being revalued from a market perspective. Is that over or do you still feel there is room to make money by buying smaller PSU banks, PSU stocks and railroad stocks?
My understanding is that they are all a bit cyclical. PSU Bank has moved around 70% this year. This does not mean that you should buy a PSU bank next year. Looking at the historical price action of the last 10-20 years, it can look very cheap, and the valuations or prices of 10-15 years ago are not the same. Some are still below. So this 70% of his year-long move doesn’t excite anyone. I’m not saying they’re bad or good, but this happens across sectors. A few years ago I came to a railway stock and saw the Titagarh Wagon and all its kinds of stocks and burned my fingers. Owns Bharat Earth Movers Ltd () and may reduce investment. Opportunities can lie in economic cycles, structural shifts and growth stocks. There are risks as well.
Exactly one year ago, management views of some fintech and consumer tech stocks were very different. They were seen as entrepreneurs who understood growth and the new Indian model. They are known as great incubators with great ideas to drive the next phase of India’s economic growth. However, management’s perception and market positioning of some of these stocks has now changed. The market has expressed concerns about their model, cash burn, etc. Is this a good time to buy some of these stocks?
The biggest challenge so far has been this management perception. Indeed, investor concerns about the actions of promoters and management, and whether they would be open to creating and sharing wealth with minority shareholders, were truly acute. But that has changed a lot.
A rogue promoter or management team will have a hard time surviving. Because the system is so transparent, regulators are aware of everything, are doing the right thing and creating regulations. So the whole picture is changing as promoters and management use public companies to create their own wealth by tricking and looting investors.
There are still many small businesses with this problem. There are only a few good big companies. Even large-cap companies can have bad promoters. We have come across poorly run companies that indulge in a variety of unethical practices without caring for minority shareholders. In 2023, I don’t think investors should ignore old economy companies just because their promoters haven’t managed them ethically and honestly.
If all of this is of value only if the business is worthwhile, futuristic, and future-relevant, a paradigm shift is happening in promoter management’s vision and behavior. Otherwise, there is no point in trying to identify those promoter qualities. Improving management quality is therefore one of our ongoing themes. I played it a little earlier in 2016-2017, but I had to pay the price.
