Life update and musings on investment philosoply
The last couple of months have been all about adjusting to this new life in the US. My wife got a job with her employer (PepsiCo) here and we moved. I have put my papers in woth the Tatas after a 9.5 years stint with the Tata Administrative Services, in which I did exciting roles across the Tata Trusts, a long secondment to the Government of India, and the last two years at Tata Consumer Products.
As with most notice periods, work has been slow and a lot of time has been spent reflecting on on what I want to do next in my career, what opportunities I should look for in the US, and networking across the board. From an investing standpoint, one not so intuitive benefit of being here has been that I spend very less time awake when the Indian markets are open, and so I spend less time drooling over the screen and over-trading, and much more reading about businesses and refining my investment philosophy when the markets are closed 
I have made a few changes to my portfolio, which i will post about separately (Hopefully it won’tget flagged like last time. I still can’t believe someone flagged my portfolio update!!). The general principle has been to conventrate into businesses in sectors experiencing tailwinds, with clean balance sheets (net cash is preferable), good management pedigree and reasonable valuations. If there is a trigger coming up, I have raised allocation aggressively. Like most people, my portfolio has done very well this year, with more than 2x of what it was on 1st April, and 85% up from 1st Jan.
Of all the investing content I have consumed in the last two months, I enjoyed the Motilal Oswal Wealth Creation Study 2023 the most.
They key take way for me was that high earnings growth at low RoE is not necessarily value additive, especially if the RoE is lower than the cost of equity. These businesses do not get sustained high valuations, even at high growth, and rightly so. And so, economic profits are more important than accounting profits. In present markets, we are seeing many companies growing fast at low RoEs. That is actually value destructive and the water will find its level.
The best returns are made when good growth comes at high RoE (or ROCE if you please, so long as debt is not too high and destabalizing with risk). If RoEs improve as well while earnings grow, you’re sitting on a hockey stick. Usually happens at the intersection of a trending sector, a business with a competitive edge (call it moat or right to win if you please), and a trigger.
In a way, RoE is a measure of the “quality” of a business, signifying it’s potential to add value. If a business can sustain high RoEs, it means that they are not easy to replace, and signals longevity, which is an anecdotal way to justify high valuations, provided there is growth.
Reminds me of a line that line thay Basant Maheshwari uses often. High RoE is like a Ferrari, high growth is like petrol. If you have both, you can speed with ease.
More details on the portfolio to come soon . . .
| Subscribe To Our Free Newsletter |
