I am sharing some excerpts from my letter to our PMS investors. Here I am putting only the parts which are not related to the funds but have more to do with investing discipline.
Time to be cautious
In such euphoric times, we would do well to remind ourselves of what the legendary Benjamin Graham once said and what I have personally noticed multiple times, “Observations over many years has taught us that the chief losses to investors come from the purchase of low quality securities at the time of good business conditions.”
When markets are euphoric, and everyone around us is bullish, it makes sense to remain on high alert. Years of observing the market has taught me that everyone cannot and does not become rich in the markets. So, when the pendulum of consensus swings to one extreme, it tends to autocorrect. The time to be most vigilant is when there are no dark clouds on the horizon. More because everyone around us has thrown caution to the winds.
My first instinct is to protect capital. Always. I want to ensure that the hard-earned money that we invest is not lost permanently. And the easiest way to lose capital is to chase poor companies in cyclical industries by paying very high valuations.
Market buoyancy led by liquidity
Today it is not easy to find very good businesses with some amount of earnings growth and visibility at cheap valuations.
The main reason is the deluge of both foreign and domestic liquidity. Indian investors have become a force to reckon with and in 2023 pumped in Rs 1.85 lakh crs compared to Rs 1.45 lakh crs by FIIs.
The financialisaton of savings is well underway with SIPs in mutual fund becoming a major investment and savings tool for the common person. This is a long-term trend in India and the SIPs are only going to increase as more and more see the benefit of regular savings in equities. I see this as a similar phenomenon as the 401(k) plan in the US in the 1980s which led to huge participation of common Americans in the US markets leading to a two-decade rally. Given Indian demographics, economic development and progress, it would not surprise me to see a similar run in the Indian markets.
That does not mean it will be a straight line up. There will be a lot of ups and downs over the years but our job is to stay invested and keep the faith.
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