Usha Martin- Coming out of Chaos

Hey Saurabh,

I can somewhat relate to your concern. While some senior VP members have already added their inputs, I’ll leave you with the following perspectives

1. In the short term, the market is a voting machine. It’s very hard to predict where the prices will move – whether it is a stock, a sector, or broader indexes. There could be a hundred reasons for a sudden drop or surge in prices. If you keep digging into the reasons, you may find some clues. But how does one establish causality, they could be mere noise?

2. Valuation – What is expensive? 20x, 30x, 40x, 50x? There’s no science to this. If you can ASCERTAIN that the underlying business can double its earnings in <2 years, even a 50x isn’t expensive! I didn’t buy Cera for a long period because I found it expensive at 25-30x. An expensive mistake, but one that I have to live with! I follow a certain philosophy, and I’ve made peace with missing out on a few winners. I don’t know if this stock is cheap or expensive at the current valuation. It depends on one’s view on risk, business quality, and earnings potential.

3. Pendulum Swings—Howard Marks has written extensively on asset prices and cycles. His memos or The Most Important Thing are worth the read. Jotting some relevant comments:
   a. An overpriced asset can remain overpriced for uncomfortably long periods. Worse, it may get even more overpriced. During such periods, value/sensible investors may appear foolish. e.g. 1997-2000, 2020-22 tech boom.
   b. It’s not worth one’s to predict the direction of market/stock prices, but one would do well to know where is the pendulum’s arc (towards greed or fear). If the price/valuation looks too hot, it’s sensible for a defensive investor to be defensive.

To summarise, this depends on how you play the game. I know successful growth investors who buy businesses at 50-60x and yet earn handsome returns in 2–3 years if 6/10 of their bets deliver earnings growth.

Happy investing.

Disc. Not invested. Tracking