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Reflections 2022!


2022 was the year for consolidation and experiments for us. We tried to create a business model for retail investors and launched the beta app to test user behavior and experience. A lot of learnings happened:

  • Most retail investors are looking to outsource their investing process for various reasons like lack of time/commitment/knowledge – which explains the success of mutual funds

  • Given the backdrop of a sharp rise in the equity markets in 2020 and 2021, many investors are looking for tips to make a quick buck. There are a plethora of Twitter/telegram channels catering to this need. Some of the start-ups also focused on this segment later morphing into quasi-gaming apps.

We couldn’t come up with the product-market fit for our initial business model. However, we realized the value of community. Some of our top stocks came from the community which illustrates the value of collective knowledge – the question is how to harness this effectively and engagingly.


What did we do in 2022?


We have studied and written articles on 111 stocks up to December 2022. Nelson number.. Not-so-young people would remember umpire David Shepherd jumping up & down on this number.


We also looked at some sectors in detail and came up with the top stocks using fundamental analysis in July 2022. You can read the article here.


We also started working on the 2023 plan basis the learnings and are excited to see what unfolds.


How was the performance of top stocks in the last 5-6 months?


It is not ideal to measure the performance of the top stock in 5-6 months as the stock prices in the short-term are driven more by liquidity and market sentiment rather than the fundamentals. Additionally, our stock article is a preliminary analysis, and any investors (including us) should do a more detailed analysis before investing in the top stocks.


Still, we do crave quantifiable analysis or numbers. So, we tried to create an equal-weight portfolio of the top 20 stocks - assuming that we were able to invest INR 1 lakh in each stock (with some rounding off) at the closing price of July 20, 2022. Result:


Comparable returns for the key indices over this period were:

  • Nifty 50 – 10%

  • Nifty 500 – 9%

  • Nifty Smallcap 100 – 4%

  • Nifty Midcap 100 – 10%

So, there was outperformance. Isn’t that partly luck?


Yes, it was partly luck for two reasons:

  • As we mentioned in the short term, there are factors other than fundamentals that influence the share price. Additionally, we didn’t do a detailed analysis which could have given a different set of companies

  • Our shortlist process wasn’t perfect. We should remove valuation as one of the parameters for weight. We should use other parameters like business strength, competitive MOAT, financial growth, leverage, and ESG to come up with a list of stocks and use valuation as a gating factor. Example - Some of the companies like IEX, CDSL, Saregama, CAMS, etc. are very good companies at a fundamental level but are not investable at the current valuations, so cannot be part of the portfolio.


More on luck from Charlie Munger


While success takes hard work and persistence, luck also plays a major role, says Warren Buffett’s longtime business partner Charlie Munger.


In a conversation at the University of Michigan Ross School of Business, the 93-year-old billionaire and vice chairman of Berkshire Hathaway advises students on how to become successful.


While you can be the most deserving and intelligent person, “there’s also a factor of luck that comes into this thing,” he says.


“It’s amazing how if you just get up every morning and keep plugging and have some discipline and keep learning,” Munger adds, “it’s incredible how it works out okay.”


However, Munger says that luck isn’t the only factor in achieving success. “The people who get the outcomes that seem extraordinary are the people who have discipline, and intelligence, and good virtue plus a hell of a lot of luck,” he explains.


What was the return on our portfolio? [Practical vs Theory]


I was able to pick some of these stocks in my portfolio and generated 15-20% returns. My returns were lower than the 26% generated by top stocks for three reasons:

  • I didn’t pick the defense stocks like Cochin Shipyard, HAL, or Mazagon Docks as I wasn’t sure about the cash flow for these companies. In the past, cashflows for these PSU companies have been quite erratic and dependent on payments from the government, which never paid on time. A detailed analysis is needed to see if the situation has changed

  • I took a bet on a telecom tower company which hasn’t played out. I would need to see how things evolve in this company (and its key customer) over the next year

  • Avanti Feeds - Expectation of recession in the US & Europe and the COVID situation in China, the demand situation for shrimp is looking weak in 2023. Impacted the share price!

What next in 2023?


Moving forward in 2023, we would focus on:

  • Increasing the number of stock articles (or number of preliminary analyses) – create a shortlist of companies for more detailed analysis

  • Improve knowledge flow from the community in an effective way

  • Work on detailed analysis – primary checks/sector experts

  • Try out other business models – more traditional?

Closing thought


Learning from Bhagavad Gita

कर्मण्येवाधिकारस्ते मा फलेषु कदाचन |

मा कर्मफलहेतुर्भूर्मा ते सङ्गोऽस्त्वकर्मणि


This is an extremely popular verse of the Bhagavad Gita. It offers deep insight into the proper spirit of work and is often quoted whenever the topic of karma yoga is discussed. The verse gives four instructions regarding the science of work: 1) Do your duty, but do not concern yourself with the results. 2) The fruits of your actions are not for your enjoyment. 3) Even while working, give up the pride of doership. 4) Do not be attached to inaction.


One step at a time towards this!


Onward and Upward..


 




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