To my father, Ashok Kumar Baid

Disclaimer

The views expressed in this book are the personal views of the author, and
do not reflect the views of the author’s organization. Any recommendations,
examples, or other mention of specific investments or investment
opportunities of any kind are strictly provided for informational and
educational purposes, and do not constitute an offering or solicitation, nor
should any material herein be construed as investment advice. Readers
should consult with a professional where appropriate. The views expressed
reflect the current views of the author, as on date, and the author does not
undertake to advise the readers of any changes in the views expressed
herein. In addition, the author assumes no duty to, nor undertakes to, update
forward-looking statements. No representation or warranty, express or
implied, is made or given by or on behalf of the author, the author’s
employer, or any other person as to the accuracy and completeness or
fairness of the information contained herein, and no responsibility or
liability is accepted for any such information. By purchasing this book, the
recipient acknowledges this understanding.
Pain + Reflection = Progress

—Ray Dalio1

The market is a great leveler. A sudden crash puts everything in

perspective, cuts your ego in half, and makes you realize your
shortcomings and blind spots. Most important, the fundamental
lessons on durability of individual business models, quality of
earnings, prudent diversification and management integrity are
reinstated.

—The Joys of Compounding

 Contents

Introduction

The Bear Market

(1 January 2018–24 March 2020)

Notes
Index
Acknowledgements
About the Book
About the Author
Copyright
 Introduction

The genesis of this book lies in the response to a tweet of mine:2

I found the suggestion very helpful and interesting. Shortly thereafter, I

started work on this book.

I spent ten dollars on a journal in late 2014, and I consider it to be

one of the best value investments I ever made. Since that day, I have
been keeping track of my investing decisions and subsequent
developments in a journal. This habit has helped me a lot in learning
about myself and improving as both an investor and an individual. I
receive a lot of valuable feedback and use it to correct my biases. I
 also have maintained a personal archive of the media commentary
and investor behaviour during various episodes of market panic … I
find that it is highly beneficial to refer to this information whenever
the market undergoes its periodic steep corrections. Human
behaviour in the markets has not really changed much over time.
—The Joys of Compounding

My writing frequency in the journal witnessed a sharp rise from 2018. I

experienced a brutal bear market in India from January 2018 to February
2020, followed by a pandemic-induced market crash in March 2020. By the
time the bear market ended, I had evolved from being a highly concentrated
portfolio investor focused on statistically cheap securities, to one focused
on quality and prudent diversification. The entire experience ingrained in
my mind the significance of resilience and longevity—the key to
compounding. This book covers the journey of my evolution as an investor
during a bear market, and my reflections and learnings along the way.

A bear market teaches one the reality of the harsh math behind
compounding in reverse, with fraudulent management teams or
weak business models. This is when we realize the deep wisdom, in
Andy Grove’s words, that ‘bad companies are destroyed by crises;
good companies survive them; great companies are improved by
them’. And this is the catalyst for the transformational phase when
investors can take huge strides and begin to rebuild their portfolios
to include strong high-quality businesses. The key, then, is to not
succumb to greed in future bull markets.
—The Joys of Compounding

My learning curve as an investor began accelerating from June 2018, as the

bear market in India gained steam. I started taking copious notes in my
journal, and there was an important reason for it.

The greatest learnings always come from a bear market, and these
lessons bear fruits for an entire lifetime. Never let a bear market go
 to waste.
—The Joys of Compounding

Readers of The Joys of Compounding will recall the following important

graph from the beginning of that book, along with my message in its
footnote.3 This is compounding in action. This illustrates what I
experienced in 2018, after many years of determined efforts amid repeated
setbacks. Resilience is a superpower.

Having equipped themselves with the fundamental principles of investing

through my previous book, those readers are now about to step on the
exponential part of the J-curve, and experience the power of compounding
knowledge in action, just like I did from mid-2018. While most of the stock
names and case studies are from the Indian market (where my personal
portfolio is primarily invested), the bulk of the learnings and investing
principles are universal, timeless and applicable globally.
I wish all my readers great success in their lives and investing journeys.
 The Bear Market
(1 January 2018–24 March 2020)

After the roaring bull run in mid-caps and small-caps in India between 2014
and 2017, investors were in for a nasty shock. The gut-wrenching bear
market that began in mid-cap and small-cap stocks from January 2018
lasted an agonizing twenty-seven months, and concluded with the COVID-
19 market crash of March 2020 (see Figures 1 and 2).4

Figure 1: Huge price erosion in mid-cap stocks

Figure 2: Decimation of stock prices in small-caps

By the time the bear market ended, there was a widespread sense of utter
hopelessness among most investors as the mid-cap and small-cap indices
had collapsed more than 45 per cent and 55 per cent respectively from their
January 2018 highs. Thousands of listed stocks in India crashed more than
60–80 per cent during this period. Panic in the market started being
witnessed from June 2018. That’s where we begin.

3 June 2018

• As cheap keeps getting cheaper in this market, there is an increasing

perception among investors that a stock that is cheap isn’t ‘quality’.
• I am noticing that the frustration index has shot up everywhere, and
people are becoming very aggressive on social media. We need to stay
calm and keep progressing in this journey, and social media is not
helping many, as I can see.
• Apex Frozen Foods looks interesting. Manufacturing capacity will rise
from 15,000 tonnes to 35,000 tonnes, of which 5,000 tonnes will be in
the higher margin value added (ready to eat) category. This should lead
to profit growth outpacing revenue growth. Shrimp export prices in
India have fallen by about 14 per cent in May. But Indian rupee (INR)
depreciation should support revenues and help the company absorb
some of this realization fall. Unfavourable base effect of high
realizations of last year should last till the end of this month, so Q1 may
 be impacted slightly, but Q2 onwards, it should be back to business as
usual.

Author’s Note
In India, the financial year for most companies is from 1 April to 31
March. Q1 thus refers to the April–June quarter; Q2 refers to July–
September, and so on.

• Initial Public Offerings (IPOs) of some good companies in the shrimp

processing sector are expected in future, so the scarcity premium
enjoyed by the currently listed players like Apex Frozen Foods and
Avanti Feeds should come down over time.
• It’s very difficult for me to understand the financial reporting of
infrastructure companies in India. I have always tried to avoid such
stocks to the maximum extent possible.

Author’s Note
If you do invest in infrastructure stocks in India, try to avoid them
ahead of an upcoming national elections year. In 2018, infrastructure
stocks should have been completely avoided since 2019 was
expected to witness a tightly contested national election. In most
cases, one should avoid politically sensitive stocks as they are not
conducive for long-term investing.

• Read a very informative thread on ValuePickr Forum5 about the current

bear market in mid-cap and small-cap stocks. There are many great
insights in it. Essential reading for all investors.
• Hearing bullish commentary from a textile company which I have
studied in the past. I would be cautious. Their goalposts keep shifting a
 lot. Previously, the company’s 2020 vision got shifted to 2022, and now,
it’s been moved to 2023. It’s very important to be aware of the history
of individual companies. This company just keeps making capex
announcements and piling on debt at a time when competition is
intensifying in its industry.

4 June

• Fall in indices from January highs:

• Nifty—3.9 per cent
• Mid-cap—14 per cent
• Small-cap—20 per cent

• Broader market is in real pain. Sentiment is pretty bearish among most

investors. Many stocks that were retail investor favourites have lost
more than 50 per cent in the past four months, and include HDIL, HCC,
Kwality, Strides, Manpasand Beverages and Punjab National Bank
(PNB), among many others.
• Meanwhile, the expensive blue-chip stocks continue to do well amid a
flight to safety. In the last four months:
• Bajaj Finance—up 21 per cent
• Mahindra & Mahindra (M&M)—up 18 per cent
• Kotak Bank—up 18 per cent
• Tech Mahindra—up 16 per cent
• Hindustan Unilever—up 14 per cent
• Asian Paints—up 12 per cent

• Some analysts are recommending the stock of Munjal Showa by stating

its low trailing price-to-earnings (P/E) ratio of 9x and debt-free balance
sheet without considering the fact that nearly 75 per cent of this
company’s sales come from one single customer (Hero MotoCorp).
Markets don’t give good valuation multiple to single-client companies.
• The fancied micro-cap stocks of 2017 are now being termed by
investors as ‘operated stocks’.
• In this bearish environment, it is best to stay with stocks having
earnings growth visibility. When the market sentiment improves in
future, these stocks will be the ones to recover the fastest.
• During a bear market, even if you buy good stocks cheap, you need to
be mentally prepared for further drawdowns.
• Sudden crash in the broader market. What a bloodbath in small-cap
stocks! So many of them are hitting lower circuits—Rain Industries,
HEG, Graphite India, Himadri Speciality Chemicals, Goa Carbon,
Butterfly Gandhimathi, Venky’s, NELCO, Associated Alcohols, IOL
Chemicals, Future Consumer, JBF Industries, GVK Power, Prakash
Industries, Bhushan Steel, Tinplate, India Glycols and many others. The
list is endless.
• Market ‘experts’ are saying a further 10–15 per cent fall is possible in
mid-cap and small-cap stocks. They have been saying the same since
February with each passing fall. Best to focus on individual stocks and
ignore the noise.

5 June

• There is complete panic going on in small-caps. Bhansali Engineering,

HEG, Graphite India, Prakash Industries, Rain Industries and Goa
Carbon have hit lower circuits.
• Sreeleathers is down from Rs 340 to Rs 240. There is serious damage to
share prices. Even KEI Industries is down sharply today.
• For the first time this year, I am getting a feeling that mindless selling is
taking place, irrespective of valuations. This small-cap carnage has been
triggered by rising US interest rates. It’s sucking liquidity like no
tomorrow. If the US Federal Reserve (Fed) doesn’t slow down, it may
lead to a continued free fall in emerging market stocks.
• Now it’s the turn of mid-caps to crash. Capitulation is happening fast
and furious. I didn’t expect it to occur so quickly. I thought stocks in the
broader market will consolidate after their recent sharp fall until the
 state elections in December are over. But rising crude oil and US
interest rates have hastened the collapse.

Author’s Note
India imports nearly 80 per cent of its crude oil requirements.
History has shown that mid-cap and small-cap companies in India
are highly vulnerable to an oil price shock (and the resultant surge in
interest rates), and their stocks tend to do poorly in such times.

• Many retail investors who entered the markets late are now running for
cover. A painful phase of vicious selling is going on, where people think
any rumour must be true, so they try to exit at any price they can get.
• I am waiting for quality large-caps like Bajaj Finance and DMart to
capitulate. The blue-chip stocks need to crash for a durable market
bottom to take place.
• It was a day of mayhem on Dalal Street with more than 400 stocks
hitting a lower circuit, primarily triggered by the recent Additional
Surveillance Measure (ASM) rules put in place by the stock exchange.
Massive margin selling was witnessed in mid-cap and small-cap stocks.
I had not studied the implications of the ASM before today’s crash. In
hindsight, I should have.
• The stock exchange introduced the ASM mainly for controlling
speculation (intra-day trading) in individual stocks. The ASM has two
key points—a daily circuit filter of 5 per cent and a 100 per cent margin
on open positions of the stock (it is like how trade-to-trade or T2T
stocks6 work in the Indian market). You cannot do intra-day trade in the
stock. The rules mean that you have to pay full amount when you buy
the stock, and you can sell it only if you have it in your demat account.
No speculation is allowed in the stock. Some brokers used to give credit
facilities to their client by keeping 35–40 per cent margin. Now, it is
compulsory to keep 100 per cent margin. If you have paid the full
 amount for your purchase of the stock, then no margin is required. This
100 per cent margin concept is most relevant for speculative traders
who do not pay full amount for the stock, and avail credit facilities from
their brokers. The stock exchange has introduced ASM to control this
speculation. Market participants are confused about the rules because
they are new, and this is leading to the panic sell-off. A big regulatory
change is usually disruptive in the short term. In future, ASM will
become familiar like T2T.
• All major falls (greater than 20 per cent) in the history of Bombay Stock
Exchange (BSE) small-cap index:
• 2005—24.09 per cent
• 2006—43.51 per cent
• 2007—22.59 per cent
• 2008—79.92 per cent
• 2010—55.24 per cent
• 2016—22.13 per cent
• 2018 (till date)—24.5 per cent

Author’s Note
As investors, many of us are hopeful optimists by nature. The period
between 2003 and 2007 saw a big bull market in India, so we
attempt to reassure ourselves by looking at such statistics during a
bear market to give us hope that the fall may just be a routine sharp
small-cap correction within a larger bull market.

• Fall in indices from January highs:

• Nifty—5 per cent
• Mid-cap—17 per cent
• Small-cap—24.5 per cent
• The worrying aspect of the current market is that panic-selling has not
even begun yet among institutions. The Nifty is still only 5 per cent
from its highs. Investors are very nervous about what a 10 per cent cut
in the Nifty from here would do to mid-cap and small-cap stocks.
• One important lesson for me over the last decade is that if you want to
make it big as an investor in the stock market, you need to be detached
from stock price fluctuations. In bad times, it gets extremely tough for
one to endure such severe notional losses. Market cycles will come and
go, but good-quality businesses bought at reasonable prices will
eventually make you money, sooner or later. India will grow at a healthy
rate; Nifty stocks could have earnings growth of low double digits; but
there will be a few mid-cap and small-cap stocks which will grow
earnings at 25–30 per cent compound annual growth rate (CAGR) for
next three to five years. They are bound to create wealth in the longer
run. You just need to have the confidence and the conviction to back
them. In the long run, what ultimately counts are earnings. Sanity will
eventually prevail, like it always does.

6 June

• Some investors are advocating Asian Granito on the basis of its much
lower P/E compared to its peer Kajaria Ceramics. They are overlooking
the higher working capital intensity and high debt levels of the former.

Author’s Note
The P/E ratio in isolation tells us nothing about a business’s capital
intensity, cash flow generation, management quality or balance
sheet strength, or about the expected duration of its competitive
advantage period. There is a lot more to making money in the stock
market than just looking at P/E ratios in isolation.
 The Miglani family, promoters of Uttam Galva Steels, has agreed to
•
repay the entire dues of the company and its subsidiaries to lenders, thus
saving it from going into auction in the National Company Law
Tribunal under the Insolvency and Bankruptcy Code (IBC).7 The IBC
has truly been a huge reform for the banking system in India.

Author’s Note
The ownership structure in Indian companies is characterized by
‘promoters’ and ‘non-promoters’. In principle, promoters refer to
founders or controlling shareholders, while non-promoters refer to
other shareholders, including minority shareholders.

• A micro-cap Non-Banking Financial Company (NBFC), which recently

completed a preferential issue to some marquee investors, is giving
hypergrowth guidance for the next five years. I am wary of such
lenders; they tend to eventually blow up in their pursuit of market cap
maximization.

7 June

• A big learning for me this year—be very conscious of the quality of

companies entering your portfolio during a period of euphoria in small-
cap stocks. It is very difficult to exercise discipline at such times, but
those phases are the most important in our long-term investing journey.
• Ten-year bond yield in India is at the highest level since May 2015, at
7.96 per cent. Many investors thought higher interest rates would sound
the death knell for NBFCs, and today, the stock of Bajaj Finance has hit
a new high. One needs to be cautious, though. Small NBFCs may not do
as well amid rising interest rates as their large established peers with
pricing power.
 Author’s Note
Bajaj Finance is regarded as the gold standard among NBFCs in
India.

• In the long run, markets rise, then fall, then rise again, then fall.
Meanwhile, individual stocks become 10x–100x along the way.

14 June

• Analysts are now applying a 10x P/E multiple to Avanti Feeds in their
research reports, stating that it is a commodity business. Six months
ago, they were justifying multiples of 25x for the same business by
highlighting its negative working capital and sector leadership. Price
drives perception in markets.
• Some red flags to take note of while analysing stocks—low tax payout,
large number of overseas subsidiaries, revenues of Indian entity that has
previously raised money are shrinking rapidly, debt has not reduced,
receivables are up sharply, cash flows are weak, all money is routed to
overseas subsidiaries, and dilution after dilution takes place. One small-
cap information technology (IT) stock that has been catching favour
with investors of late has all the above characteristics.
• One thing has clearly come to light in this bear market—not many
investors understand the difference between accrued net profit and
operating cash flow. If you want to identify ‘inflated sales’, they show
up in debtor days. Whenever you find receivables of more than six
months with negligible creditors, be very careful. Ricoh India is a good
case study. Over the last decade, it had Rs 400 crore cumulative net
profit, but Rs 500 crore negative operating cash flow, and debt
ballooned 3x funding its stretched working capital. Once you
understand the concept of cash conversion cycle, that’s half the battle
won as an investor.
15 June

• Finding an ethical promoter is a necessary but not sufficient condition

for wealth creation. One needs to take opportunity cost into account.
There have been several good companies in India before investing in
whom I waited a long time. The potential was always there, but with
opportunity cost attached. I would rather buy on some development and
materialization than do hope-based investing. The next time you hear
someone saying ‘buy this stock because X is going to happen or Y is
going to happen’, you should simply respond by saying, ‘I will buy it
when X or Y does actually happen’.
• In the market, every stock has its own set of investors who find it
attractive to buy; P/E is not the only measure. A low-quality steel
producer at 10x P/E may be thought of as expensive, while a high-
quality discount retailer (such as DMart) at 100x P/E could be thought
of as reasonable by different categories of investors. There are investors
for every stock. For instance, I am sure most investors will look at Bajaj
Finance’s high P/E and price-to-book (P/B) ratios and say it’s ridiculous
to buy at this price, but I am pretty comfortable with it in this bear
market environment. Similarly, there are investors who think DMart is a
rare retail company in India that has done extremely well in the past,
has had amazing same-store sales growth, healthy return ratios, a great
promoter, among other factors . Additionally, the stock’s low public
float and resultant liquidity premium keeps its valuations high too.
• I have learned to respect the market’s wisdom over the years. There is a
reason everything trades at the level it does. There are multiple
yardsticks of valuation. For example, in India, there are stocks of
consumer franchises, such as Titan, Page Industries and Bajaj Finance,
that have always remained expensive, and still have given good returns
over the last decade. But the P/E parameter will never tell you to buy
them.

21 June
• Read a great article on Morningstar, titled ‘Capitulation of the small-
cap investor’.8 I could relate to many of the points mentioned in it, since
I had personally committed similar mistakes during the 2017 bull
market mania. Bookmarked this article for future rereading.
• P/E is not a good valuation indicator for a services platform company,
as investments are expensed and not capitalized. Amazon is targeting 40
per cent revenue growth on an existing base of 200 billion US dollars. If
you take out the investments for that, the P/E will become very low. The
visionaries don’t want to stop to milk profits; they want to keep
reinvesting—a nuance I didn’t get until recently. This is the reason why
Berkshire Hathaway does not pay dividends—it can reinvest. And
Amazon has a float that’s even better quality than an insurance
company, since there are no black swans in a marketplace. Its
incremental return on capital employed (ROCE) is super high as it’s a
marketplace—someone buys, someone sells, and you make money on
both sides. Many technology companies in the US are in winner-takes-
all businesses; that’s why it’s so important to keep reinvesting. It’s
either an Olympic gold medal or nothing. Tech-enabled low marginal
cost distribution is one of the best business models ever—highly
enduring and underestimated. Very difficult for most to understand a
winner-takes-all business as no conventional metric applies.

24 June

• The market tends to initially discount the best-case scenario in new,

high-growth industries, and their stocks trade at very high valuations.
Once the fundamentals begin deteriorating and growth starts slowing
down, the elevated stock prices fall hard.

25 June

• It is very important to be aware of the history of as many companies as

possible in the stock market you invest in. This helps avoid getting bad
quality into the portfolio. A building materials company which is being
 touted on WhatsApp groups for its cheap valuation has a poor track
record. The promoter just keeps rolling stories. Previously, he did a
qualified institutional placement9 (QIP) while stating he will reduce
debt with the proceeds. Instead, he announced big capex post the QIP.

28 June

• I was reviewing my old trade reports and contract notes today, and I
came across a startling observation. If I had just held on to my shares of
high-quality businesses like Page Industries and Eicher Motors, which I
bought originally in 2013, I would have made almost the same money
that I have made by jumping in and out of so many stocks over the last
five years. In both cases, the results are almost identical in terms of total
portfolio returns. But the hyperactive approach I adopted has meant too
much stress and sacrifice of personal and family life. Stress-adjusted
returns matter a lot. They really do. By the time most of us realize this
as investors, we have already exhausted many years and shortened our
remaining lifespans due to weakened mental health. Old too soon, wise
too late.
• With every further fall in its stock price, Avanti Feeds is now changing
from a fast moving consumer goods (FMCG) company to a generic
commodity business in the eyes of investors. Meanwhile, after a 10x
rise in its stock price, HEG has transformed from a commodity stock to
a strategic materials business in sell-side brokerage reports. Price
changes perception.

29 June

• Lending businesses should be valued on P/B ratio only if there is a

danger of the book value getting eroded. If the lender has an impeccable
track record of low non-performing assets (NPAs) and great execution
across interest rate and economic cycles (like Bajaj Finance and Gruh
Finance), it should be valued on P/E. For instance, P/B is a wrong
valuation measure for Gruh. It has a return on equity (ROE) of over 30
 per cent, grows at 20 per cent along with a high dividend payout, and
doesn’t need capital for growth (since ROE is higher than growth). So,
it never dilutes equity.
• Without growth, high ROE may be a value trap. But a sustainably high
ROE with high growth and low NPAs is simply remarkable. HDFC
Bank, Bajaj Finance and Gruh Finance, all huge wealth creators from
the lending industry in India, had common parameters—high ROE, high
growth and low credit losses. The last one is most important. If a lender
messes up on NPA, its stock will be severely punished. Markets can
tolerate a bit lower ROE or slower growth, but not a sharply rising NPA.

Author’s Note
HDFC Bank and Gruh Finance are regarded as the gold standard
among banks and housing finance companies respectively in India.

• Equity capital raise for lenders is like capex for manufacturing

businesses. After a lender raises equity capital, operating leverage
comes in the form of net interest margin (NIM) expansion.
• Leverage for lending companies is like raw material. It’s not
comparable to a non-financial company raising debt. For lenders, since
debt is a large part of capital employed, the return on assets (ROA) is an
important financial metric. Here, it should be noted that looking at only
the current ROA may lead to the wrong conclusions. What one should
consider is the cross-cycle ROA. For example, microfinance companies
in India are showing great ROAs right now due to lower-than-normal
credit costs, but if you observe their historical credit costs over a seven-
to-eight-year period, their normalized ROAs are a lot lower than what
we currently see in them.

4 July
 Whenever there is a bad business segment and a good business segment
•
within a company, it’s the valuation of the bad business that prevails
over the entire company. For the market, a combination of a good
business and a bad business is considered a below-average business
overall (unless the bad business is a negligible portion of total revenues
and is not a major drag on the overall profitability of the company).
This is the key rationale behind why companies do spinoffs/demergers
—to unlock value and improve their valuations in the market.

12 July

• As of June-end, the median fall in stocks within the Nifty 500 Index
was a steep 35 per cent, so bounces could be strong in individual names.
A lot of that is already evident in the last few days. But this time, it’s
important to be selective in what to buy. Stocks of both good and bad
businesses had fallen, but only the good ones will recover soon. The bad
ones won’t see their 2017 levels for a long time.

13 July

• Investors are suddenly praising large-caps as being the best quality

stocks to invest in. That’s not quality investing, but momentum
investing. That’s where the flow of money is going, so investors are
chasing that. Many of these stocks weren’t touted as high-quality until
six months back, before they started rallying. These are just phases of
the market. People are hiding behind such stocks at 70x–80x P/ E and
saying these are high quality. Things can change quickly with a small
change in sentiment. Perception changes very fast with change in price
momentum. Can Fin Homes, a small-cap housing finance company
(HFC), was widely hailed as being high quality, with all kind of
arguments justifying it’s 5x P/B valuation at the top, and now, it’s
regarded by investors as a very average business at half the price.

18 July
• Analysts are justifying Bandhan Bank’s huge valuation premium by
pointing to its high growth, high ROE and low float. No one is talking
about the geographical concentration risk in it. Also, one should note
that Bandhan’s current ROA and ROE are at peak levels, and will
decrease going forward, as management wants to reduce the proportion
of high margin, unsecured microfinance loans in its lending book, and
increase the share of lower margin, secured loans.

20 July

• Between Bajaj Finance and Bajaj Finserv, I will stick with the former.
Bajaj Finserv will do well too, but its insurance business is average.
What the Bajaj group is really good at is lending, so why should I dilute
my exposure? I want exposure to the best NBFC, and not a mixture of
great and average businesses.

Author’s Note
Bajaj Finance is the lending arm of Bajaj Finserv, which holds a
majority stake in the former and operates in the insurance industry.

• So many people on social media are suddenly talking about Bajaj

Finance. I wonder why they are surprised with the sharp rise in its price.
The stock spent most of last year consolidating between Rs 1,600 to Rs
2,000 while many junk stocks were running up rapidly. Bajaj Finance is
just moving up after the consolidation. If this move had happened in
2017, nobody would have bothered about it. This year, it is moving up
when most mid-caps and small-caps are going down and that is what is
bringing attention to it.

21 July
• In my humble opinion, the days where one could take a five-to-ten-year
view on a stock are gone. I believe two to three years is the maximum
feasible period in today’s fast-changing, highly disruptive environment.
Better to just latch onto ideas with good growth visibility for the next
two to three years, which are available at reasonable valuation. If the
future business prospects continue to look good at the end of that
period, then we can hold on—this is how multibaggers actually happen
for investors.
• Bandhan Bank’s public float data is very interesting—promoter holds
82 per cent, institutions hold 16 per cent and retail holds only 2 per cent.
Even a relatively small amount of delivery-based buying, and the price
could rise very sharply. This stock could soon go to bubble valuations.
• I keep seeing the same cheaply valued, low-quality banking stocks
being recommended on WhatsApp groups and social media. People
need to realize that once a bank reaches 5–6 per cent NPA due to poor
asset quality, it stops getting interest from institutional investors.
• A hard lesson for many (including me) in this bear market—it really
pays to stay with quality in lending businesses. If you are not
comfortable with the high valuation of the best lending franchises, then
don’t invest. But it is not a good idea to go down the quality curve. Not
everyone is capable of good lending, and the adept managements have
to be valued highly here.

22 July

• Bandhan Bank’s cost-to-income (CI) ratio is very low. It has the best CI
among listed peers, but that’s because it was primarily operating in a
single state (West Bengal) till date. The CI will increase post expansion
to other states, diluting ROE.

23 July

• I see investors talking about how they will be absolutely disciplined

during future bull markets, and not go down the quality curve to chase
 quick returns. Easier said than done. When you will see 2x–3x being
made by others in quick time in front of your eyes while you wait on
sidelines, you will almost surely get seduced back into your old ways
and end buying some junk stocks. You just can’t resist it. One way to
minimize the damage is to keep booking profits in such stocks by riding
them with stop losses, and making sure to follow that discipline.
• For a forensic analyst, triangulating data points that are within a
company’s control is pointless. At least one data point has to be an
external source that the company can’t control, like LinkedIn or
Glassdoor, which are harder to fudge.

25 July

• In infrastructure companies, it is the new order wins that drive the stock
price rather than the executed or booked orders.

27 July

• The stock price action of Muthoot Capital is very impressive. Great

rally first, hardly any correction in a big small-cap drawdown, and
promptly made new highs when the market stopped falling. Stock fell
briefly post its quarterly earnings, but that fall was reversed the very
next day, and the stock started moving higher back to its all-time high. It
hardly fell during the sharp market correction, and promptly rallied
whenever the market stabilized or attempted a bounce of the lows. This
indicates very strong hands in the stock.

29 July

• Some colleagues have been asking me whether, in my view, the high

valuation of Bajaj Finance is justified. It’s best to let the market decide.
I have learned this big lesson over time—during the high growth phase
of a company, its valuation goes from cheap to fair to expensive to
insanely expensive. It hardly ever comes down until there is high
 growth. So, I would rather focus on getting growth and longevity right,
and then the valuation. If and when growth guidance is revised down
sharply by the company, valuations will severely contract. One needs to
watch out for that.

31 July

• There is a structural market change taking place in the NBFC lending

space in India. Capital is getting more and more commoditized.
Understanding risk is the key differentiator. The model may move from
interest income to fee income—have sector expertise, understand risk,
underwrite prudently, and parcel the loan and sell down to capital
providers for fee income. Three companies are getting very active in
this space—Indiabulls Housing Finance, L&T Finance and Piramal
Enterprises. Companies like Edelweiss and IIFL will most likely act as
conduit between these entities and capital providers.

2 August

• When you are investing in a newly setup lending company, always

check whether the promoter has experience in how to scale up a loan
book. If the promoter is from a non-credit background and talks about
hypergrowth in the loan book in the initial years, an investor should be
wary of the company. You need to get credit right first. Every good
lender in India went through at least one big, painful cycle. Only an
inexperienced investor will believe otherwise.
• In lending businesses, the jockey is more important than the horse. It’s
all about management, management, management; one that has been
tested across at least a couple of cycles.

3 August

• An important lesson for me in my investing journey—if it is a good-

quality business with high growth prospects for a long period of time,
 then it is okay to pay a high P/E and sacrifice the first-year return. The
returns from the second to fifth years will compensate for the flat return
in the first year.

5 August

• HDFC Asset Management Company (HDFC AMC) is about to come

out with an IPO. Doesn’t look too impressive compared to its peers.
Over the last five years, its profits and revenues both grew at
approximately 20 per cent CAGR, despite assets under management
(AUM) growing at approximately 27 per cent CAGR. ICICI AMC has
been growing at over 35 per cent CAGR, and has much higher return on
equity too. But I have often seen in the Indian markets that if it is a new
listing with the right mix of good-quality promoter, long business-
growth runway and low float, the stock tends to keep surprising you on
the upside.
• Investors who use technical charts shouldn’t give too much weightage
to a single-day price movement in an illiquid stock. The lower the stock
liquidity, the longer the time horizon you should look at in its chart.

6 August

• A sharp improvement in the working capital cycle can signal a positive

change in a company’s trajectory, and vice versa.
• The massive premium accorded to quality stocks is unique to the Indian
markets, given that corporate governance is a big issue in many listed
companies. That’s why comparing the valuation of companies in India
to global valuation standards is a bit pointless.

9 August

• Rather than adding to a portfolio stock after a fall, it is better to average

upwards after seeing management execution. The exception to this is
during a market crash, when all stocks (good and bad) fall.
 There are many ways to analyse a stock while deciding to buy.
• Valuation is not the only metric. The investment opportunity has to be
looked at in the right context. For instance, if a company has done big
capex and is selling its non-core assets for debt reduction, I would
consider investing in it, even though the trailing P/E might look very
high, because the current earnings are temporarily depressed.
• It’s not prudent to dismiss a real estate stock from consideration based
on one quarter of reported numbers. Real estate companies can’t post
great numbers every quarter. Here, the revenues would be lumpy
depending on project handovers. Rather than revenues, look at bookings
and cash flow from operations (CFO) when analysing real estate stocks.

11 August

• For high-growth NBFCs, the reported NPAs can look low. So, one
should look at the NPAs on the seasoned portion of the loan book. For
instance, IndoStar Capital Finance’s reported net NPA for its retail book
is 1.7 per cent in the most recent quarter, but if we calculate it for loans
older than twelve months (current net NPA divided by previous fiscal
year loan book), it comes to almost 5 per cent.
• When good earnings are coming in repeatedly for a stock during a bear
market but the price isn’t going up, such a stock becomes a ‘coiled
spring’ and rises quickly once markets recover.
• If you are willing to pay an expensive valuation for a stock, then invest
only in a high-growth business with great financial metrics. High
valuations with slow growth—these stocks are a strict ‘no’ for me. For
this very reason, I don’t look at the large-cap FMCG stocks in India.
• Since they are so limited in number, the handful of businesses in India
that can demonstrate strong execution and scaling-up capabilities
eventually get sky-high valuations.

14 August
• Today, a big insight dawned on me after many years of investing in the
Indian markets—I missed many multibagger opportunities in the past,
thinking that the stock in question is expensive. The P/E always looked
high enough to make me hesitant to buy those stocks. But what I have
observed is that P/E ‘rerates’ if underlying business offers ‘visibility of
growth for a long period of time’. The market continues to discount
earnings in that case to many years ahead, hence the P/E expands. For
example, Titan always looked expensive based on P/E at any point of
time. I have been tracking Bajaj Finance since its P/E was around 25x,
and it’s now elevated to over 50x. If earnings sustain, then it could
possibly quote an even higher valuation. The key to long-term investing
success is to spot such consistent, secular growth stocks, and rebalance
the portfolio towards them, especially if such businesses are available at
a small-cap or mid-cap size. But the challenge is to do the right analysis,
to arrive at safe conclusion—that the growth trajectory will continue for
a long time. That’s why we only have a select few people getting rich
from the stock market, not everyone.
• Over time, one realizes that in some very special businesses, valuations
are a permanent concern. The market values these stocks very
differently. When the Nifty P/E is 15x, they will trade at 30x P/E. When
the Nifty P/E is 30x, they will trade at 50–60x P/E. It’s all relative. In
the long run, a business’s sustainable growth rate matters most to the
market.
• For a successful long-term investment, you need a trinity of growth,
durability and a healthy ROCE.

Author’s Note
A very high ROCE business (>50 per cent) with significant dividend
payouts and little room for reinvestment may be good for preserving
purchasing power of investors, but a reasonably healthy ROCE
business (>20 per cent) with large and prolonged reinvestment
 opportunity is the one that creates significant wealth for
shareholders over the long run and grows their purchasing power.

17 August

• This bear market has proven once again that great companies find a way
out of every crisis. They are relatively superior performers across
business cycles. That’s what separates great companies from average
ones. The strong players keep becoming stronger with each passing
crisis, as their weaker competitors fade away. The resultant market-
share capture by the sector leaders is a source of great value creation for
shareholders over time.

21 August

• Some deep value investors are citing the example of Blue Dart Express,
and how that stock, which was trading at an expensive valuation, has
fallen 60 per cent from its high. For every expensive stock which fell
like that, there are expensive stocks which did very well. The same
applies to cheap stocks. There is no fixed theory. As long as earnings
grow fast and consistently, valuations don’t come down. In fact, they go
up even more.
• Different kinds of stocks in the market need different approaches for
entry, holding and exit. No single rule applies everywhere. I disagree
when people say only buying cheap or only buying price momentum
works. A lot of techniques work in the market, if executed with proper
discipline.

4 September

• A great investment is made when the trade is not crowded, the

fundamentals are changing for the better, and people are in denial, even
 though the stock/sector is hitting a life-time high. In such cases, it’s
usually the majority who are wrong, not the market.
• In this market, which was in its fifth year of a bull run, and where
multiples had expanded well above historical averages, if one was
looking at places most overlooked in search of value, diligence was
required to understand that things were cheap for a reason.

5 September

• Shoppers Stop’s stock did well this year, driven by multiple events—
management change at the top level, deal with Amazon, debt repayment
and closure of loss-making stores in the last six months. But most
importantly, it looked like a bottom in all business parameters.

Author’s Note
In investing, it is all about delta; that is, the rate of change in
earnings growth and its underlying quality. When a business goes
from hopeless to bad to mediocre to good to very good, you get
multibaggers along the way. It’s all about the future trajectory of the
ROCE. It’s also the reason why special situations involving
promoter/management change can deliver very good results for
investors.

6 September

• Most experienced investors will attest to the fact that it’s not about
money after a certain level. It’s about passion and love for stocks and
investing. You can’t really make it big if you are doing this only to get
rich.

10 September
• L&T Finance trades at a cheaper valuation than Muthoot Capital. In
lending businesses, markets prefer a focused retail book than a
combination of retail and wholesale.

11 September

• Many promoters of questionable quality raised huge sums of money via

QIP by using the favourable market conditions during the 2017 bull run.
Earnings per share (EPS) makes money only for shareholders. For these
promoters, QIP money is the real money which they can take out once
the bull market is over and no one is looking at their books of accounts
after the stock has fallen off a cliff.

12 September

• One way to approach market corrections is to look at stocks that didn’t

correct when the broader market fell, and which are the first ones to hit
new highs when the market stabilizes. These stocks usually lead the
next market rally.

Author’s Note
Bear markets bring out relative strength. If you are a techno-funda
investor and you like a stock for fundamental reasons, add it to your
watchlist. And then within this watchlist, monitor stocks’ price falls
from the top during a market correction. The stocks which fall the
least should stay on your radar.

• When any of today’s great startups in India list themselves on the stock
exchanges in the future, they will likely do so at an exorbitant valuation
and at a stage in the company cycle when the best of the supernormal
growth phase is behind. From there on, the stock would be a
 compounding story. Exponential money would be made only for the
angel investors and venture capitalists.
• Some investors are praising the high net-profit growth year-on-year for
Reliance Home Finance in its latest quarter. I beg to differ. It had flat net
interest income (NII) growth. The high net-profit growth showed up due
to low provisions. The company decided not to provide for NPAs,
despite the provision coverage being very low. Such profit growth isn’t
rewarded by the market. In contrast, in the recent quarter, Muthoot
Capital could have shown stellar results, but decided to use their
windfall profits to increase their provision coverage ratio. That’s
prudent and shows a conservative approach. Over the long run,
conservatism is rewarded in lending businesses.

18 September

• Over time, I have learned that expensive valuations for NBFCs or banks
is an advantage. Naysayers of Bajaj Finance have always said that it is
expensive, and hence, shouldn’t be bought. But very high P/B valuation
of a lender can be its biggest strength if it can find buyers to dilute at
that level. Significant shareholder value gets created when a lending
business has high ROE and is able to raise equity at lofty valuations.

21 September

• Sharp fall overnight in the US Dollar Index (DXY). Hope this sustains
today and gives a weak weekly close. That could lead to a further
breakdown, and should bring a much-needed relief rally for emerging
market currencies, equities and commodities. The most important driver
of global risk-on/risk-off sentiment in the short term is the US Dollar
Index.
• Nifty Metal index is up 5 per cent. Its rally is on expected lines after the
fall in the DXY.

22 September
• So many huge stock accidents in the market this year. Yes Bank, which
was once a favourite of Dalal Street, has crashed 32 per cent today! The
Reserve Bank of India (RBI) has curtailed the three-year term that the
bank’s board had sought for its MD and CEO Rana Kapoor, and there is
apprehension among investors that significant NPAs will be uncovered
after the end of Kapoor’s term. We have seen in the past how big bath
accounting10 takes place in such cases after the new leadership takes
charge. Whatever be the final outcome, we will get to know only in the
future. The market is mostly right in these situations. I hope there is not
a run on the bank by its depositors.
• Looks like there is a contagion risk in India’s financial system due to the
IL&FS crisis.11 There is a sudden crash in many finance stocks! PNB
Housing Finance is down 9 per cent; L&T Finance, Shriram Transport
Finance, M&M Financial Services, Edelweiss and Piramal Enterprises
are down nearly 10 per cent each; Indiabulls Housing Finance and LIC
Housing Finance are both down almost 15 per cent; Repco Home
Finance is down 12 per cent; Reliance Home Finance is down 18 per
cent. Even the mighty Bajaj Finance and Gruh Finance are down 19 per
cent and 17 per cent respectively. I cannot remember when these two
stocks ever fell like this. Looks like the rally of the last five years in
NBFCs is over.
• There is panic-selling everywhere. Mid-cap and small-cap indices are
now down 6 per cent each. The stock of CESC is down 15 per cent;
Welspun Enterprises is down 9 per cent. HDFC AMC has hit a low of
Rs 1,250.
• The stock of Dewan Housing Finance Limited (DHFL) has crashed 59
per cent today! There are reports that DHFL bonds have been sold at a
high yield of 11 per cent in the secondary market by DSP Mutual Fund.
This has made equity investors of DHFL very nervous about the
company’s liquidity situation, and they have exited its stock en masse.
Other HFCs have sold off in sympathy with DHFL. Non-HFC NBFCs
too have joined in the fall. This is risk aversion at play after the
unfolding of the IL&FS crisis. Even entities having no direct exposure
 to IL&FS are being sold off. The recent downgrade of IL&FS credit
ratings is creating a crisis of confidence. It could lead to systemic issues
in the broader financial system if money markets freeze up and NBFCs
are unable to roll over their short-term financing instruments like
commercial papers (CPs). This shows how deep interlinkages are in the
financial system in India, just like in the West. It’s similar to how
institutions got directly and indirectly affected due to the Lehman
Brothers crisis in 2008. The resultant forced selling in stocks due to
margin calls created a ripple effect all over. Any experienced investor
will attest to the fact that debt-market-induced pain on equity always
causes bigger pain.
• One should look at the borrowing mix of HFCs and NBFCs to better
understand their liquidity profile. Bank lines, retail non-convertible
debentures (NCDs) and fixed deposits are a stickier source of funding.
But CPs and mutual fund debt instruments are relatively fickle, and
funding depends on how confident the market participants are to hold
the debt of the company. In the current market scenario, one needs to be
wary of lenders having high dependency on CPs and mutual fund debt.
Banks with strong current account savings account (CASA)12 franchises
should outperform in this tight liquidity environment.
• Bajaj Finance and Gruh Finance recovered strongly by the close today.
Apart from Bajaj Finance, Gruh Finance too has been resilient amid the
sell-off in NBFC stocks this year. I am not surprised. It enjoys an
unlimited open line of credit with HDFC Bank. No liquidity issues, nor
any problems with tapping the bond market.

Author’s Note
Gruh’s parent company, HDFC Limited, itself has unlimited line of
credit with foreign institutional investors (FIIs), who love the HDFC
group with all their money.
• My portfolio was down 7 per cent intra-day today, as it was heavily
overweight in financials. It finally closed down 4 per cent. Big lesson
learned. Never be overly concentrated in a highly leveraged sector like
lending, especially in a rising interest rate environment.

25 September

• After the recent sell-off, I think it is an excellent time to book short-term

losses within one’s portfolio in order to book some capital gains later,
tax-free.

Author’s Note
Under India’s income tax laws, short-term capital loss can be
adjusted against long-term capital gains as well as short-term capital
gains. Such loss can be carried forward for eight years, immediately
succeeding the year in which the loss is incurred.

• Rule for investing in a business of average quality—buy when majority

thinks it is a dying business; sell when people think it is the best in its
class.

27 September

• Barring 100–150 stocks of good-quality businesses, the rest of the

stocks in the Indian markets are only worth trading in and out of. You
may occasionally make a sizeable notional profit on paper in the latter
group, but you won’t be able to keep it unless you get out in time.

1 October

• Came across a very insightful observation by André Kostolany. He said

a crisis is the best time to buy, as the government has no option but to
 intervene. ‘You have to buy shares in a recession or crisis, because the
government will manage the situation by lowering interest rates and
injecting liquidity.’13
• Some important tenets on micro-cap investing:
1. One needs to develop a good temperament for micro-cap investing,
as returns are not linear—they tend to be very random and back-
loaded. You need to ask yourself, can you hold such stocks patiently
for one to two years without any returns?
2. When assessing the capital misallocation for any company, look at
the magnitude and absolute amount of the capital deployment. Small
missteps can be pardoned.
3. Some of the best micro-cap investment situations are when you can
find that the capex is complete, but the benefits aren’t yet visible in
revenue or profits.
4. A spinoff/demerger of a micro-cap company from a large-cap
parent, with residual institutional shareholding, is usually followed
by forced selling from large-cap funds (who are not allowed by their
investment mandate to hold a micro-cap stock in their portfolios)
and it can result in a deep-value opportunity.
5. Look for companies that don’t dilute equity. Also check for low
float—when coupled with no dilution, it means a limited number of
shares are available for purchase in the market.
6. The entry of a new generation of the promoter’s family can lead to
increased focus on market cap and newfound agility in marketing
and distribution in an erstwhile lacklustre company.
7. One should prefer unique businesses with no comparable listed
peers.
8. The takeover of a stagnant company by a strong and proven
promoter group or management team can be a precursor to big value
creation.
9. Look for companies with negative working capital or an improving
cash conversion cycle.
 Author’s Note
Most of these principles are universally applicable to stocks,
irrespective of their market cap.

7 October

• Went through a recent interview given by Stanley Druckenmiller. He

has made 30 per cent CAGR for thirty years by just focusing on
liquidity. He says liquidity is the most important thing in the market. I
agree with this, especially for mid-caps and small-caps.

8 October

• The Indian government is not taking any steps to slow down the pain in
the stock market. I think it doesn’t understand that long-drawn capital
market sell-offs have a feeder effect on the real economy as capital-
raising capabilities and the willingness to invest in capacities goes down
dramatically with crashing stock prices. A big enough stock market
correction itself can slow down the economy. The US Federal Reserve
and the European Central Bank understand this very well, and hence, on
every 15–20 per cent sell-off, many of their members come out with
reassuring statements to soothe the markets and let participants know
that they have their backs.

11 October

• Interest rates go through very long cycles. The US’ rates, which were in
a bear market since the 1980s, have bottomed out now and broken out
of a very long downward channel. I think we will see higher rates in
future. And rising interest rates are not necessarily bad for equities. As
long as the rise in rates is in an orderly manner, interest rates and equity
 markets can both go up together. We have multiple instances of this in
history.

15 October

• If anyone had said a couple of months back that DHFL’s growth would
slow down from 35 per cent to 15 per cent, they would have been
mocked. Now, the management itself has come on TV and said this.
Winds change fast in a leveraged business; DHFL was looking to grow
fast earlier because the company wanted to raise capital, and it tried to
show high growth before that. Else, DHFL’s historic growth rates have
been lower at 18–20 per cent. Now that the stock price has crashed and
valuation is depressed, the capital raise has been deferred. So, DHFL
will revert back to its historical growth rates until the market
environment for valuations becomes favourable again. Many banks and
NBFCs in India raised capital when the going was great for them
(perfect timing) over the last eighteen months. Despite DHFL being in
the lending industry for a long time, I don’t understand how it missed
the golden opportunity to raise funds. Now, it’s in a tight spot. As they
say, in the lending business, you should raise capital when the market
wants to give it to you, not when you need it.

17 October

• I have never understood the attraction that investors have for the
perennially disappointing third-tier private sector banks in India. So
much mental bandwidth, time and effort is spent, and high risk is taken,
even though these banks’ operating history is highly volatile.
Sustainable money is made in well-managed banks, albeit at higher
valuations, but with predictability.

18 October
• Learned a new concept today—securitization of assets by NBFCs—and
how it helps them. An NBFC originates a loan, packages it and sells it
to banks. It helps the NBFC earn fee income, and frees up the capital
locked in the asset. It also helps banks meet their priority-sector lending
targets. Usually, loans to small and medium enterprises, loans for used
vehicles and affordable housing loans are securitized by NBFCs and
sold to banks.

19 October

• Henceforth, the very moment any adverse credit-related event takes

place in a lending business, I will exit it immediately, however cheap it
may be at the time. We all have seen what happens to cheaply valued
banks which have bad risk management. Such cheap banks only get
cheaper with the passage of time. The reported NPAs start spiking up
once the loan book growth slows down.
• Since we cannot look into the individual loans of lending companies,
the best possible way to evaluate their lending practices is by leveraging
the collective wisdom of the market. Usually, the market gets it right in
valuing lenders—like valuing Gruh Finance and Bajaj Finance at very
high P/B multiples, and valuing DHFL at a low P/B. That’s not a
coincidence. Of course, there are always exceptions.
• To understand why investors in the Indian market hold Bajaj Finance in
such high regard, one needs to study its history:
• Started as single-product company.
• Diversified into multiple products.
• Diversified geographically and developed a pan-India presence.
• Demonstrated the discipline to get out of a product segment when
most of its peers acted imprudently and chased growth at any cost.
• Achieved good growth across cycles with low NPA.
• The promoter, Sanjiv Bajaj, chose a great CEO (Rajeev Jain), and
was completely hands-off when it came to day-to-day operations.
 Such an approach helps cultivate upper- and middle-level
management.

• We should use the recent sharp market correction (in which both low-
quality and high-quality stocks have fallen) to improve the quality of
our portfolio. Most of us would have made some mistakes which should
be quite apparent now. The broad-based market correction has given us
an opportunity to correct those mistakes at not very high relative costs.
Timely action now could help us survive and also recover over time.
• In hindsight, the big mistake for me and many of my investor colleagues
was to be overly concentrated in one single sector (financials). We
exposed ourselves to huge single-factor risk.

20 October

• APL Apollo Tubes has announced the acquisition of Apollo Tricoat.

There is an expectation among investors that at some point in the future,
the companies will merge. I hope that doesn’t happen. A small market
cap company being merged with a much larger one will lead to returns
getting diluted for the former’s minority shareholders. Imagine someone
taking all the pain to accumulate this illiquid small-cap stock (Apollo
Tricoat), holding it through thick and thin, and then the management
telling them that instead of getting the reward commensurate with the
risk, they will end up holding a small piece of a larger company.

29 October

• I have learned some important lessons in the last ten months:

• Companies with working capital cycle of more than 150 days are
typically bad investments. Some exceptions can be there, depending
on the individual business model. For instance, some business-to-
business (B2B) companies need to stock high inventory or a large
number of stock-keeping units (SKUs) in order to be competitive.
 • B2B companies with supply-side dominance—having predominant
market share in an industry alongside marginal competitors—have
historically created a lot of wealth in the Indian markets.
• It’s difficult to make sustainable money in companies with very high
debt.
• Business-to-government (B2G) is the worst business model to invest
in.
• Growth more than ROCE is not sustainable for more than three to
four years.
• Growth is important, but the quality of growth is 10x more
important. I would rather have a 15–20 per cent grower with 30–40
per cent ROCE, than the other way round.

• Heavily leveraged companies make for great shorting opportunities

during a liquidity crunch.
• One big learning from this bear market is to be wary of aggressive
growth plans in a lending business. There are a million ways to hide
cockroaches, and if promoters want to play to the gallery during a bull
market, they easily can.

1 November

• Heard the Navin Fluorine conference call. This business is

transforming. The proportion of the high-margin contract research and
manufacturing services (CRAMS) business in overall revenue will go
up over time. As the salience of the business changes, the ROE and
margins will pick up further, and management gave some hints around
that. On being asked why they are not expanding more on the
refrigerants side of the business, as their competitor SRF has done,
management said this part of the business is regulated and they don’t
want to risk making huge capex here. In my view, this highlights that
Navin’s management is prudent, and is not after short-term gains. It
 wants to make the business more sustainable and of higher quality over
time.
• Capex backed by pre-signed long-term contracts has much lower risk
compared to those uncertain situations where the company needs to find
buyers for its product in the spot market after the completion of capex.

2 November

• The ongoing NBFC crisis will make the sector’s leaders stronger, while
weak hands will fold due to the challenges. In the last four years, many
financial institutions opened an NBFC business, but they will find it
difficult to continue due to steep headwinds. Leaders have a good
chance to consolidate the market and become bigger.

3 November

• Apollo pipes has reported its quarterly results. Revenue is up 43 per

cent and net profit is up 88 per cent. On the face of it, it would look like
a great set of numbers. In my view, it’s not really that good. There is
gross margin and earnings before interest, taxes, depreciation and
amortization (EBITDA) margin contraction. Net profit is up primarily
because of other income contributions, which are non-operating in
nature. On the positive side, if one looks at employee expenses and
depreciation, it is evident that the company’s expansion is going on in
full swing. Hopefully, once it’s complete and revenues start showing up
at full capacity, true margins would show up. Till then, revenue growth
will be the key metric to watch.

5 November

• Many managements which gave rosy projections of high growth during

the 2017 bull market euphoria are now reporting bad numbers. Coming
frequently on business channels, projecting 40–50 per cent CAGR
growth, and then delivering poorly is not a sign of good management.
 Such stocks get punished very hard during a bear market, and don’t get
good multiples in the long run.

6 November

• Deepak Nitrite looks promising. Good management pedigree. The

phenol and acetone plant has come on stream. Phenol prices are at a 4-
year high. Seed marketing has been done, and customers tied up,
according to the latest conference call. It has no major competition in
India. Rupee depreciation is raising the cost of imports. The company
will meet 80 per cent of import substitute if the plant is utilized as
planned. The fine and specialty chemicals segment is expected to
continue doing well; there is scope for margin improvement. Raw
material supplies have been secured for the phenol business. All these
points make me bullish on this company’s prospects.
• I learned about real estate developer funding today. A developer needs
financing at three stages:
1. Equity funding: To purchase land (mostly provided by private
equity).
2. Structured debt: The funding gap during the time between land
purchase and getting various approvals and launching the project is
met through debt funding from NBFCs. The market rate of interest
is 16–18 per cent.
3. Construction finance: Pre-bookings can only partly fund
construction. Developers need additional debt funding to complete
construction. This is provided by NBFCs at a market rate of around
14 per cent.

In recent times, a few things have happened that have increased

funding needs for developers:

i. Previously, a developer could launch a project without many

approvals, and could fund both approval phase and construction
phase with customer deposits. The Real Estate Regulatory Authority
 (RERA)14 act changed that. Now, one can’t launch a project without
all approvals in place, so a developer is dependent on NBFC
funding (structured debt) during approval phase.
ii. In the last five years, a lot of home buyers lost their entire initial
deposit money in under-construction projects. So, today, buyers
prefer finished projects. Hence, there aren’t many customer deposits
coming in, and developers depend on construction finance from
NBFCs.

7 November

• As the bear market continues, business channels are increasingly

inviting bearish commentators on a daily basis. During the next bull
market, they will be conveniently replaced with bullish voices.

8 November

• Investors are getting increasingly nervous about the possibility of the

BJP government losing the general elections next year, and a subsequent
coalition government which will slow the economic development
agenda. There are media reports of opposition parties joining hands to
challenge the BJP government in India’s most influential voting state,
Uttar Pradesh. Some investors are advising moving to cash ahead of the
state election results on 12 December in Madhya Pradesh, Rajasthan,
Telangana, Chhattisgarh and Mizoram. It is true that elections in India
have historically led to short-term market volatility in the past, but if
you invest in politically sensitive or government-facing businesses, then
you will always need to take such complicated cash calls throughout
your career, which in turn will increase the potential for unforced errors.

9 November

• It is tough being a fund manager during a bear market when so many

people criticize you. Public fund managers make decisions with
 foresight, though they are judged only in hindsight.
• It’s only after becoming a professional fund manager that you realize
how narrow the investable universe becomes when you apply the
‘quality with growth’ filter. Low trading liquidity in small-caps and the
high valuations in quality stocks add to this challenge.
• Key longevity tenets for an emerging manager in the fund management
business:
• Don’t go overboard with concentration in a single sector.
• Minimize operating expenses to the maximum extent possible.
• Avoid short-term minded clients (this is very important since a fund
will occasionally have big drawdowns during its lifetime). Choose
the best cheque, not the biggest cheque.

10 November

• I believe investors should stop commenting on and discussing politics,

and focus on the great investment opportunities in front of us in this
bear market. I am very sure that when we look back at this period in the
future, we will acknowledge how good a time it was to look at and pick
stocks.
• Being a full-time active investor is a tough way to make a living. It
looks easy only during a bull market. Other career options are far more
forgiving, and pay off sooner. Returns from active investing are back-
ended and come after a lot of blood, sweat and tears. Paradoxically,
those who love the process more than the money are the ones who last
long enough to make the money.
• Some important observations from the recent Avanti Feeds conference
call. The company has two business segments: shrimp feed (which is
capital-light, doesn’t need much capex and constitutes the bulk of the
company’s revenues) and shrimp processing. Processing will continue
to scale and become a larger part of total revenues over time. It is a lot
more working capital-intensive, with similar or lower margins than
feed. Since working capital is a part of capital employed, the company’s
 ROCE will come down over time. Quality of earnings (margins, return
ratios and working capital) is deteriorating in this business, and that
may lead to valuation derating.

11 November

• Good investments at a big discount always come with some sort of

discomfort or doubt, else there would be no discount. It could be
anything ranging from an industry headwind to negative perception
about the management due to a capital allocation misstep in the past.
There will always be something to worry about in a stock that’s giving
you a good margin of safety.

12 November

• When investing in cyclicals, one needs to understand behavioural

patterns. The overbought and oversold state in markets continues much
longer than one can fathom. If the sector tailwinds were there for many
years, expect the headwinds to probably stay longer than you can
envisage.

14 November

• The time to buy high-quality, blue-chip stocks in India is when there is a

broad-based market sell-off and these stocks fall along with the overall
market. During less volatile times, they tend to trade at very expensive
valuations. For investors with a lower risk appetite, the key benefit of
investing in such stocks is that they help provide stability to the
portfolio during times of crisis.

15 November

• Many forensic accounting articles published these days do a deep dive

into the shady financials and/or bad corporate governance practices of
some popular stocks from the 2017 bull market. I wish these articles had
 been published ‘before’ the stock prices collapsed 60–70 per cent from
their highs.

16 November

• Today, Rs 10,000 crore capital was raised by corporate India in the

commercial paper market. A total of Rs 28,000 crore has been raised in
the last three days. There are initial signs of liquidity conditions
normalizing. However, the funding rates of a few NBFCs are alarmingly
high. Need to be very cautious in those names.

19 November

• Small finance banks (SFBs) can pose a serious challenge to many

NBFCs and microfinance institutions (MFIs). Their target end-customer
profiles are similar, and SFBs’ cost of funding is lower.
• Distractions are at an all-time high in the digital age. Being able to keep
your head down and focus is becoming a big competitive advantage in
investing.
• For some reason, most investors only want to learn from people that
invest like them. Try doing the opposite: the best nuggets of wisdom
can come from successful investors who invest differently than we do.
• The best investing strategy is one that you can stick with for the longest
period of time across market cycles.

20 November

• Very sharp fall in the US markets recently. Fall in leading stocks from
their fifty-two-week high:
• Facebook—40 per cent
• Apple—20 per cent
• Amazon—26 per cent
• Netflix—36 per cent
• Nvidia—49 per cent
 • Google—20 per cent

• Since there is no issue of high inflation in the US, this sell-off is setting
the stage nicely for the Fed to put a brake on rate hikes in 2019.

Author’s Note
Jerome Powell, chair of the Federal Reserve, pivoted to a dovish
tone in January 2019, and by the middle of the year, he was cutting
rates rather than raising them.

21 November

• Every crisis in an industry consolidates it further, with the sector leader

capturing market share and becoming stronger.
• There are two key sources for ROCE expansion: margin improvement
and improvement in asset turns. Between the two, I prefer the latter
since high margins tend to attract competition.

Author’s Note
There are three forms of expansion capex: debottlenecking (most
accretive for ROCE because of very high asset turns), greenfield
(least accretive with lowest asset turns) and brownfield (more
ROCE accretive than greenfield but less accretive when compared
to debottlenecking).

25 November

• Bitcoin has crashed below $4,000. Looks like we are in the final stages
of capitulation.
 Author’s Note
For risk assets, a huge liquidation event (for example, a prominent
company from the industry going bust) typically signals a durable
bottom for the foreseeable future.

26 November

• For the HFCs that focus only on home loans for salaried people and
lend at 8–8.5 per cent, I don’t understand how the economics work.
Given their cost of funding of approximately 8 per cent, there is hardly
any room for making profits at even zero credit costs. After factoring in
operational costs, such loans would be loss making. That’s why most
HFCs were giving out riskier loans against property (LAP) and builder
loans, as that’s where the margins are. The HFCs that lend only to
salaried people have a broken business model. If they are lending to
non-salaried/self-employed, that’s a different story, as loans in that
category are given out at over 10 per cent. If any HFC investor thought
they are actually exposed to retail housing loans, that was a delusion.
It’s effectively builder loans and LAP that they are exposed to.

27 November

• I don’t understand a particular anomaly. Everyone in the market says the

real estate industry in India is in distress, and there is an ongoing
consolidation as small builders can’t survive. There is clearly huge
stress in the industry, as NBFCs have stopped lending to builders. But
all NBFCs in their conference calls say there is no stress in their builder
loan book, and that it is all being serviced on time and asset quality
remains pristine. Why this disconnect? How are all these builders being
able to pay all their monthly installments to the NBFCs on time, if there
is so much stress and slowdown? And why have NBFCs stopped
 lending to builders if there are no asset quality issues and payments are
happening on time?
• Most investing is cyclical. The duration of individual cycles and their
impact varies.

1 December

• The big challenge in the Indian market this year has been one of growth.
Almost every industry struggled this year. An even bigger issue has
been that in the handful of high-quality stocks with good promoters and
sustainable growth characteristics, valuations hardly corrected.
• It’s hard not to make money in a diversified small-cap/mid-cap portfolio
from these price levels in the next three years. The question is of
patience. When you start from low valuations, returns could be fast and
furious in the future, but the timing will always be unpredictable. So,
one needs to stay in the game.
• Some analysts are praising the relatively safer business model of
diversified NBFCs. I have a different opinion. Bajaj Finance doesn’t
need diversification away from the lending business. You need to
diversify when either the sector you are building a business in is
cyclical, or you are just average in everything.

2 December

• The market tends to give a valuation discount for conglomerate

structure. Intellectually, it is satisfying to do a sum-of-the-parts
valuation. However, the market prefers simple businesses.
• One of the surest signs of future growth slowing down without
management admitting to the fact is when the dividend payout ratio is
increased significantly. During the high-growth phase of a company,
almost all of the earnings tend to be ploughed back into the business.

3 December
 We need to come out of the 2017 bull market mindset and avoid
•
anchoring bias. We were so used to seeing most stocks trade at 40–50x
P/E that 25x P/E started looking cheap to us. Very few stocks in India or
other markets of the world deserve to consistently trade at high
valuations for a long period of time. The business has to be something
very special and rare.
• Not investing in anything when there are no attractive opportunities
available is good capital allocation.
• Until a few years ago, Sun Pharma was widely regarded as a high-
quality blue-chip stock. Today, its shares fell 11 per cent on the news of
India’s stock market regulator Securities and Exchange Board of India
(SEBI) reopening its probe on insider trading and corporate governance
issues in the company. This event just goes to show that nothing in the
stock market is permanent. Rather than ‘buy and hold’, one should ‘buy
and monitor’. Investing is a 24x7 activity, and requires a lot of
dedication and hard work. Only the passionate few can sustain it for a
long time.

4 December

• A key concern with some of the listed multinational companies in India

is that the moment growth starts accelerating and operating leverage
kicks in, the royalty percentage is increased to make sure most of the
upside goes to the overseas parent.
• A big challenge in the Indian markets is the scarcity of good businesses
and lack of investable options. The quality businesses of India wouldn’t
trade at such high valuations in the US, where there are many listed
stocks available with healthy growth and good corporate governance. In
India, growth is available in financials (which are cyclical in nature) and
a few niche mid-caps and small-caps (where investors face the issue of
low trading volume). So, large-cap consumer stocks become the default
place to hide for institutional investors. When growth was broad-based
during the 2003–2007 bull run, and there were many growth stocks
 available, none of the consumer stocks used to trade at their current
insanely high valuations. Today, their valuations carry a huge certainty
premium, since there is a lack of predictable growth elsewhere.
• The strongest test of a brand is working capital reduction. It’s more
difficult to negotiate with channel partners than end consumers.
• No discount for bad promoter-quality is enough in a bear market, and
hardly any is given in a bull market.

Author’s Note
It’s quite unbelievable—given how little minority shareholders can
know about what goes on inside a company—that investors look to
partner with anyone but the most exceptional and trustworthy
management teams.

6 December

• Conventional valuation parameters do not work in stocks which have

cornered float. They overshoot both on the upside and the downside.
• Rather than growth versus value, look for ‘growth in value’.
• Special-situation investing (spinoff/demerger, promoter/management
change, merger arbitrage) is like deep-value investing with a clear
catalyst. It’s a very useful method to generate alpha in range-bound
markets.

Author’s Note
Special situations don’t always work out as expected. Big losses can
also occur. Some notable examples from 2022–23 include Piramal
Enterprises (demerger) and Indiabulls Real Estate
(promoter/management change). Investing is a probabilistic activity.
 Diversification is an acknowledgement of the need to always remain
humble in this profession.

8 December

• The stocks of Nestlé, GlaxoSmithKline, Hindustan Unilever, and

Colgate are near all-time highs. Quality at any price has been the theme
in vogue this year, as people fled to safety.
• Investors are fretting over the possibility of the BJP government not
coming back to power next year. They have forgotten that India had its
biggest bull market of 2003–2007 with a Congress-led coalition
government at the Centre. These political discussions among investors
are good for intellectual debates, but they do not achieve much. Good
companies and their stocks perform despite political parties. Instead of
getting carried away by the noise at times like this, we should be
discussing good stock ideas. One should be an optimistic realist. India is
too strong to be managed or drowned so easily by a group of politicians.
• The best buying opportunities come during ‘unexpected’ macro shocks
when there is chaos and fear all around.

16 December

• Net outflow by foreign portfolio investors in the Indian debt market this
year is Rs 52,700 crore, while in equities it is Rs 35,000 crore. Overall
net outflow of Rs 87,700 crore so far. Even if the figure does not rise
any further, 2018 is the worst year for Indian capital markets in terms of
overseas investment since 2002.
• The sentiment among investors is really bad right now. As is typically
the case during bear markets, there seems to be no end in sight to the
pain.

20 December
• High growth, when accompanied by valuation contraction, may still
give you decent returns over the long run, because growth can bail you
out (provided the company is earning more than its cost of capital). In
such cases, the key is to be reasonably sure that the derating will be
slow and gradual. That, in turn, will be driven by the quality of the
shareholder base, the size of the opportunity, the ability of the
management to exploit that opportunity and the nature of the industry
(competitive dynamics).

23 December

• It has been a very difficult year for investors in India. The negative
events this year that led to the big fall in mid-caps and small-caps from
January onwards include imposition of taxes on long-term capital
gains,15 changes in mutual fund regulations,16 the introduction of ASM,
and interest rate hikes in the US.

24 December

• The sell-off in the US markets has been brutal this month. Only a Fed
intervention can stop this free fall. I used to hear about ‘Santa rally’, but
this time, it’s an Xmas sale. Fall in stocks from their 52-week high:
• Facebook—43 per cent
• Apple—35 per cent
• Amazon—33 per cent
• Netflix—42 per cent
• Google—23 per cent

• To add insult to injury, the Nifty is up 1 per cent year-to-date. The rally
this year has been primarily in large-caps, which has masked the
bleeding in mid-caps and small-caps.

25 December
 The S&P 500 has fallen to 2,350 today from 2,630 on 14 December—
• almost 10 per cent down in seven trading sessions. Brent crude is now
below $50 from $86 not too long ago. All asset classes are now pricing
in a recession in the US in 2019.

30 December

• The impact of the tough economic reforms carried out in India over the
last few years has been visible in 2018:
• Thanks to the IBC law, 2,100 companies have settled their dues of
Rs 83,000 crore.
• The government has attached Benami properties17 worth Rs 4,300
crore.
• Public sector banks have reported recovery of Rs 60,713 crore
against NPAs. The figure has doubled since last year.
• Around 410,000 shell companies have been deregistered.

• The 2008 market crash in India was due to foreign institutional

investors exiting and hardly any domestic money coming in. Now that a
constant stream of domestic investor money comes in every month, we
are very unlikely to get rock-bottom valuations like 2008, unless a
catastrophic event of unprecedented magnitude takes place. Just waiting
and hoping for market valuations to get to 2008 levels is not investing.
If you work hard, you will always find stocks that look cheaper than
where they should trade at. In every market, there would be stocks that
will do well. Find them and invest in them.

31 December

• Markets go through cycles—accumulation phase, mark-up phase,

acknowledgement, euphoria and correction. We went through euphoria
in 2017 and correction in 2018; 2019 will be accumulation, where only
select stocks with earnings growth visibility will do well. Basically, the
good old markets as we know them.
• One of my biggest learnings this year took place after seeing some of
my stocks, which went up 2–3x in 2017, fall back to my initial purchase
price. ‘Buy and hold’ doesn’t work for cyclical and commodity stocks.
One can’t afford to be asleep at the wheel when stock prices are soaring.
• Many low-valuation stocks corrected further this year. The reasons for
low valuations in many stocks were evident. They just became de facto
buys as others had reached high valuations. Buying the stocks of good
businesses during corrections (albeit at a slightly higher premium)
rather than the low-valuation stocks of bad businesses is a prudent
strategy for long-term investors.
• The more experience you gain in the stock market, the more your
investable universe shrinks as you learn what to avoid.

3 January 2019

• Steel turned out to be a classical commodity trap. People invested

thinking that earnings are still coming in strong, so stocks should go up
further and, meanwhile, stocks fell 50–60 per cent. In commodities,
investor sentiment and the trajectory of the demand-supply dynamics
play a bigger role than reported numbers. Price action usually precedes
deterioration in reported fundamentals.

5 January

• The legendary investors of Dalal Street got rich buying great companies
either at cheap valuations, or when those companies were of a small
size. None of that happens now. The great companies in the listed space
today are expensive, and the great businesses in the unlisted space will
never get listed at an early stage. Private equity and venture capital
firms get most of the upside, and only leftovers remain for IPO
investors. This problem wasn’t so prevalent a few decades ago, when
the bigwigs of Dalal Street made their fortunes. It’s way tougher these
days. When Radhakishan Damani bought HDFC Bank at 100x P/E
many years ago, the company was available at a low market cap with a
 huge growth runway ahead of it. (For a high-quality small-cap business
with huge runway, you can afford to pay more and still make healthy
returns.) Today, the wonderful startups in India do not list at a stage
where they are small and growing rapidly.

6 January

• Polyplex looks interesting from a valuation perspective. It has shown

very good cash flow generation, and it has been paying down debt
continuously. It is trading at 0.5x sales. It has given forty-five rupees as
dividend in the last six months, which implies a dividend yield of 8 per
cent at its current market price. Company plans to continue to pare
down debt, while also setting up additional capacities in Indonesia. It
has Rs 700 crore cash on its books, and is poised to generate an annual
CFO of Rs 700–800 crore. Market cap is just Rs 1,600 crore.

Author’s Note
In hindsight, I should have pulled the buy trigger on this stock. It
went on to become a big multibagger.

8 January

• When investing in a leveraged business such as lending, one should be

fine with paying up for high-quality leadership. Capable managements
need to be valued highly in this sector.

9 January

• Shareholders of Gruh Finance don’t seem too happy with the news of its
merger with Bandhan Bank. Overnight, they’ve gone from being part of
a secured housing finance business with HDFC parentage to an
 unsecured, microfinance entity. This merger news should lead to some
sharp selling in Gruh’s stock in the near term.

10 January

• Whenever the US markets sell off, people start talking about the end of
the best times for the world’s economic superpower. What most don’t
appreciate is that the US is the global epicenter of innovation. The
prevalent culture of entrepreneurship and creativity gives rise to huge
productivity gains from time to time. America is an engine which will
keep chugging along, with some speedbumps along the way.
• Read a report by India Ratings and Research (Ind-Ra) which states that
the overcapacity in the medium-density fibreboard (MDF) industry in
India will persist till fiscal year 2022 at least. The sector has witnessed
capacity growth of nearly 200 per cent through a mix of greenfield and
brownfield projects in the last couple of years. Given the overcapacities,
the sector has witnessed a price correction of 10–12 per cent in the first
two quarters of the current fiscal year. Ind-Ra expects MDF prices to
remain suppressed for the rest of the year on account of overcapacity.
When investing in cyclical industries, we need to pay very close
attention to the supply side.

Author’s Note
Investors in cyclical industries need to closely track supply
(especially if the total industry size is relatively small). Tracking
supply means monitoring the capex plans of various players, the
resultant capacity addition, and taking a view on industry pricing
over the next few years. Between 2017 and 2019, the total installed
capacity in the MDF industry in India went up significantly (>60%).
Greenpanel’s MDF capacity was increased to 540,000 CBM, Action
Tesa’s MDF capacity increased to 400,000 CBM, and Century Ply’s
MDF capacity was increased to 220,000 CBM. When so much of
 supply comes onstream within a short span of time, companies are
under pressure to increase volumes and improve utilization to break
even on the new capacity. This is why the domestic price of MDF in
India subsequently fell from ~25,000 per CBM to a low of ~19,000
as the market was flooded by increased supply from all the major
players.

11 January

• In the Indian markets, quality with growth is generally available only at

an expensive valuation. There are some important reasons behind this:
• There is a low supply of quality equities available in the market.
• Domestic institutional investors (DIIs) are not comfortable investing
overseas, so their money keeps getting deployed into the same set of
limited good-quality names which are of a decent market cap size
with acceptable levels of trading liquidity.
• Free float in the Indian market is possibly the lowest among global
markets. No other stock market has such high levels of promoter
holding/insider ownership.

13 January

• No crook suddenly becomes a saint; they just pretend to be one for a

while in a bull market. Then comes the bear market, and they go back to
doing what they are good at.

14 January

• Only those stocks are correcting where either there are headwinds for
the foreseeable future, or there are corporate governance issues. The
stocks of quality businesses with long-term earnings visibility are still
standing tall—Marico, Pidilite, Godrej Consumer, Bajaj Finance, Titan,
among others.
• Never waste a bear market crash in which both quality and junk stocks
have fallen. Use it to course-correct your portfolio by selling the bad-
quality stocks and buying those good-quality stocks you always liked,
where unreasonable corrections have taken place.

16 January

• After reading in detail about the real estate industry, I have come to the
conclusion that a residential-only business model will face difficulties in
generating free cash flows on a sustained basis. The business model that
can do well is a combination of commercial real estate (which generates
rental income with high ROE and lowers volatility in difficult times)
and residential (which can do well in a strong-demand scenario only).

17 January

• In bull markets, most investors’ focus is on the income statement and

reported net profit growth. Very few care about the balance sheet, cash
flow, working capital intensity or management quality. The hard lessons
are learned in the subsequent bear market.

19 January

• I learned about how cement stocks are valued in the Indian market.
There are many factors like limestone linkage, plant location and
EBITDA per tonne that drive the valuation. Enterprise value per tonne
is the typical valuation metric used. Valuation range for various
capacities:
• 1-2 MTPA (million tonnes per annum)—$40–50 per tonne
• 3-5 MTPA—$60–80 per tonne
• 5-10 MTPA—$80–$100 per tonne
• >10 MTPA—$100–$140 per tonne
• Yet another poor quarter for South Indian Bank. Higher NPAs and big
losses from its corporate loan book. Cheap can become cheaper for
stocks of lenders. The market rightly pays up for management quality in
this industry.

Author’s Note
Murali Ramakrishnan, former senior general manager with ICICI
Bank, was brought in as MD and CEO by the board of South Indian
Bank in October 2020, to turn around the company’s fortunes. He
went on to do a good job of improving the bank’s collection
efficiencies and boosting its digital capabilities.

21 January

• Bandhan Bank’s stock price has been falling sharply over the last few
weeks. Today, many research reports were published about stress in the
microfinance industry in West Bengal. Stock prices lead, analysts
follow.

23 January

• Inflows into domestic mutual funds have slowed down sharply. People
are very nervous and in wait-and-watch mode ahead of the national
elections in May.
• There are a few things investors need to factor in for Edelweiss (a
diversified NBFC) now. The growth in its NBFC business will slow
down to 15–20 per cent (from 35 per cent previously). The insurance
business has still not broken even. Capital market businesses are now in
a cyclical downturn. Asset management and wealth management
businesses are highly correlated to market sentiment, so growth over
there too will slow down significantly. In summary, it’s a bull market
 stock that will perform well when the markets are doing well. Many
investors (including me) mistook it to be a secular growth business in
2017, when its stock price rose rapidly.

Author’s Note
Big investing losses typically occur when we extrapolate the high
profitability at the peak of an industry cycle and assume that they
are sustainable. Recency and vividness biases driven by stock price
euphoria in such industries further cloud our judgment.

• Right now, the market is extremely narrow and the rally is limited to a
few large-cap Nifty stocks and a handful of names in the broader market
with earnings visibility. Every bull market has stages; small-caps as a
group rally hard only in the last stage. Till then, it’s a grind for most
investors.

24 January

• So many individual stock accidents have taken place in the broader

market in the last one year. Today, it is the turn of Zee Enterprises,
whose stock is down 34 per cent due to the adverse news surrounding
its parent, Essel Group.18 Zee Learn is also a related casualty, down 20
per cent.

25 January

• We tend to lose patience and become despondent in bear markets. But

we need to bide our time here in order to be able to reap the rewards
eventually.
• An investor’s maturity and discipline is revealed near the end of a bull
market. That’s when widespread euphoria is at its peak. An investor’s
 courage and temperament are revealed near the end of a bear market.
That’s when widespread fear is at its peak.

26 January

• There aren’t many trends in this market. However, you can find a few
bottoms-up stock picks where you can expect 20–25 per cent growth for
next three to four years. The key right now is to focus on getting the
earnings growth right. Any negative surprises there, and you can have
an accident. I don’t mind paying a premium for good corporate
governance and able management. After all, slower but more
predictable returns are better than no return of capital.
• In the last ten years, less than 5 per cent of the listed companies in India
(with at least Rs 10 crore net profit) grew earnings at a CAGR of more
than 20 per cent. Against that 55 per cent of the companies had an
earnings decline. Since earnings drive stock price returns in the long
run, this shows how difficult it is to compound wealth by more than 20
per cent over a long period of time. There are very few companies that
can demonstrate true longevity. We confuse sudden spurts of growth
with a secular trend. Permanent loss of capital ensues when cyclical
businesses are assumed to have structural long-term growth, and are
given very high valuations in a bull market.

27 January

• An interesting outcome of this bear market has been that no one talks
about becoming a full-time investor or starting their own stock advisory
business anymore.
• This has been a very tough market for investors; very different from the
bearish phase of 2011–2013. In that period, although the index and the
broader market kept on going down, there were many individual stocks
that did very well because of their strong earnings growth. This time,
except a few large-cap consumer names (with growth visibility of 15–20
 per cent for the next few years, whose stocks have all been bid up to
60–70x P/E), it’s been price destruction across the board.
• Illiquid stocks are double-edged swords. In good times, they go up a lot
due to cornered float, but the same attribute becomes a curse in bad
times.
• One thing this bear market in India has brought to the forefront is
promoter risk. This is the biggest risk in the Indian markets, bigger than
even government or regulatory risk. There are numerous bombs waiting
to explode on you on any given day (macro, government, RBI, SEBI,
stock exchanges, valuations). Dodging them all and still taking risks to
make that alpha has become a tough ask for investors. That’s why most
fund managers go with an HDFC Bank or a TCS. And we keep
wondering why good-quality stocks trade at very expensive valuations
in the Indian market, and not in the developed markets of the West.
• In 2017, investors developed a belief that only small-caps make lots of
money. Since January 2018, we’ve learned that this phenomenon occurs
very rarely, usually near the peak of a bull market.

28 January

• Brutal sell-off in the markets today. The small-cap index is now less
than 2 per cent away from its 52-week low.
• Many big falls have taken place in the broader market today. Lumax
Industries is down 7 per cent, Wockhardt is down 10 per cent, HEG is
down 20 per cent.
• NBFC stocks are under severe pressure. Bajaj Finance is down 5.5 per
cent, DHFL is down 10 per cent, L&T Finance is down 7 per cent,
Piramal Enterprises is down 5 per cent, Shriram Transport Finance is
down 5 per cent.
• When portfolios grow rapidly during a bull market, there are some
investors who mock Warren Buffett’s long-term CAGR. When a
portfolio shrinks by 40–50 per cent in a bear market, reality strikes.
• There is no dearth of gloomy headlines during a bear market
—‘Discounts on automobiles at decade-high level as industry faces
drought of customers. Blockbuster models like Maruti Swift and DZire
see discounts for the first time ever’.19

29 January

• Carnage in the markets today. There is nowhere to hide. There is an

endless list of many popular stocks that have hit 52-week lows today—
HEG, Graphite India, PPAP Automotive, Rushil Decor, Thirumalai
Chemicals, Star Paper Mills, Lumax Industries, Mold-Tek Packaging,
Uniply, Wockhardt, Gufic Biosciences, Bharat Rasayan, Bhansali
Engineering, Avanti Feeds, Vodafone Idea, Indo Count, Reliance
Capital, Kirloskar Brothers, Rane Madras, Tata Elxsi, Jamna Auto,
Jindal Steel & Power, Maithan Alloys, Rain Industries, TVS Motor,
Rane Holdings, NOCIL, Grasim, Tata Sponge Iron, Minda Industries,
Sundaram Brake, Cipla, Alicon Castalloy, Gruh Finance, Cosmo Films,
Cadila Healthcare, Plastiblends India, Hero MotoCorp, India Nippon
Electric, JSW Steel, KEC International, Hi-Tech Gears, Wheels India,
Sagar Cements, Bharat Forge, Lakshmi Machine Works, Balkrishna
Industries, Tata Steel, M&M, Birla Corporation, Nilkamal, Finolex
Cables, Sudarshan Chemicals, GNFC, Igarashi Motors, Harita Seating,
Accelya Kale and Maruti Suzuki, among many others.
• Eicher Motors’ stock is now at Rs 19,000, same level as 2015, when it
was producing 400,000–500,000 bikes against 900,000 today. Profit-
booking in cyclical sectors is very important.
• Very bullish conference call from Bajaj Finance. It gave hints of
growing at over 30 per cent in fiscal year 2020. Bajaj Finance is now
dominating the NBFC industry. No competition for it whatsoever. It’s
net interest margins (NIMs) remarkably expanded this quarter, while all
other NBFCs saw a decline.

30 January
• So much recency bias among investors. Many are saying that it’s going
to be the age of large-caps from now, and that the best times of mid-
caps and small-caps are behind them.
• State of the current markets—certainty of earnings is being valued way
more than what value the underlying business has.

31 January

• The way some of the questionable-quality, cheap-valuation stocks are

collapsing, I am constantly reminded of Benjamin Franklin’s words,
‘the bitterness of poor quality remains long after the sweetness of low
price is forgotten’.20
• Good results from Aavas Financiers—46 per cent AUM growth and 100
per cent net profit growth year-on-year. Only 2.1x levered book. The
ROA is 3.7–3.8 per cent, and capital adequacy is 62 per cent. Hopefully
as this capital is put to work, profits should grow disproportionately.
Due to its secured nature of home loans, Aavas can leverage up to 8–
10x, which would imply over 25 per cent ROE. But one will have to
play the long game here. Current valuations at 3.7x P/B don’t leave any
room for immediate upside. But this stock should continue to trade
expensive as long as growth visibility remains high due to its business
area of affordable housing.
• The P/E multiple of a stock doesn’t derate if corporate governance,
quality of earnings and growth prospects stay intact.
• Pledging of shares is akin to a time bomb waiting to explode in a bear
market.
• A bear market is like a battlefield full of landmines. There are no prizes
for being bold in such times. Prioritize survival above everything else.
• DHFL bonds are trading at a 40 per cent discount. That’s like almost
pricing in a default. No stock falls over 80 per cent without a real, big
problem. That too when the frontline index (Nifty) has hardly corrected
10 per cent.
• In this bear market, a lot of dirty stuff has been revealed in many
companies. The market is reminding participants that you may
sometimes make temporary paper profit in stocks of bad-quality
promoters, but you won’t be able to keep it.

2 February

• Mutual funds didn’t know what was about to take place in Yes Bank.
Private equity funds didn’t know what was about to take place in
Manpasand Beverages (which turned out to be a fraudulent company).
Legendary investor Rakesh Jhunjhunwala didn’t know what was about
to take place in DHFL. Top auditing firms didn’t know what was about
to take place in several companies. The promoter is the biggest risk
factor for investors in India. Always diversify.
• In 2017, the importance of corporate governance was mocked by many
investors. In hindsight, that should have been the biggest
contraindicator.
• Looks like it is game over for DHFL. Its two-year bond is trading at 24
per cent yield. The company will be unable to borrow.

5 February

• The intellectual thrill of trying to find the next big multibagger often
results in us overlooking the obvious compounders in front of us. We
want ‘the next big thing’. Being disciplined is not easy; human
behaviour makes it extremely difficult.
• Edelweiss and Piramal Enterprises are down over 60 per cent and over
40 per cent respectively from their highs. Investing is an exercise in
humility. The promoters of both these businesses were widely hailed as
visionaries during the 2017 NBFC bull run.
• NOCIL continues to sell off ahead of the removal of anti-dumping duty
protection for its key products in June 2019.
• Rain Industries has been a textbook case study on commodity investing.
Meteoric rise and rocket-like crash. It has huge debt on its books and
 that could be a serious concern if its business cycle turns for the worse
amid the global slowdown.
• Generic words, such as patient and long term, are used by many people
in the investing field, as if they give you a right to win. If your thesis is
wrong, then being ‘long term’ will multiply your problems. If you are
right, then it’s very likely that you will win in the long term (high
probability), though you may not win in the short term. Time is your
friend with good stocks and your enemy with bad ones.
• Some investor friends are sharing details of how they got completely
destroyed in this bear market. There has been a 50–60 per cent crash in
their portfolios from the peak.
• I spoke to a few senior investors today, who shared some helpful
guidance and feedback. If one is emotionally disturbed with the big
portfolio erosion in this bear market, then talk to investors who have
experienced and survived 2008. They will give you practical advice on
how to have the necessary mental fortitude to handle severe falls. Do
not ask newbie investors who entered post 2013, and have only seen
bull markets.
• A big lesson for me and many investors in this bear market—don’t go
overboard with concentrating your portfolio in one single sector,
especially during a sectoral bull run.

Author’s Note
Nowadays, sector rotation in the markets occurs at such a fast speed
that no investor or fund manager can afford to be disproportionately
overweight on a single sector. A diversified portfolio helps maintain
patience and avoid FOMO (fear of missing out) by letting one
participate in a variety of tailwinds.

• The market’s tolerance level is non-existent right now for unethical

managements. Investors are scared of touching any stock right now
 where there’s even an iota of the perception of corporate
misgovernance. You don’t know if that stock would be down 20–30 per
cent when you wake up one fine morning. Elasticity to governance is 1
in bear markets and 0 in bull markets.

6 February

• This bear market has taught me a big lesson with regards to investing in
lenders. Expensive is better than cheap. In the lending industry, those
which are expensive are expensive for a reason and those which are
cheap are cheap for a reason.
• A low-cost CASA liability franchise is an enduring moat for a bank and
gives it tremendous cross-selling opportunities within its existing
customer base. A CASA-driven franchise is 2x more valuable than a
mere loan-driven franchise.
• The real boost to profitability and ROEs in banks comes from the fee-
based business.
• Sustained high growth, healthy return ratios and good asset quality is
the ideal combination to look for when investing in lending businesses.
The market may tolerate slip-ups in the first two metrics, but not in the
third one.

7 February

• Investors are trying to bottom fish in stocks that have crashed from their
highs. No good stock falls 70–80 per cent without a valid reason at a
time when the frontline index has hardly fallen. And such a stock
doesn’t come back to its highs anytime soon.
• Almost all of the listed companies continue to report bad quarterly
results. Growth is hardly visible anywhere.

11 February
• Accidents continue in the broader market. Apollo Hospitals is down 12
per cent on share-pledging concerns, while KRBL has opened gap-
down on the news of a big income tax notice from the government
authorities.
• This bear cycle is reminding market participants how difficult it is to
make a long-term CAGR of double-digit returns.
• The only way to survive long-term in the markets is to be adaptive to
change.

12 February

• In the lending industry, there’s a valuation premium given for having

successfully navigated a cycle. The more cycles a lender has
successfully navigated, the larger the premium.
• This bear market has brought a big truth of investing to the forefront—
growth is cyclical for most industries, and we always need to be
proactive and position ourselves on the correct side of the cycle.

13 February

• The cryptocurrency market has been decimated due to the tightening

actions of the Fed. Bitcoin and Ethereum are down 82 per cent and 92
per cent respectively from their all-time highs. Most altcoins are down
over 95 per cent.
• Sentiment is so depressed that investors have lost all hope that stocks
will rise even on good earnings. I don’t blame them. Today, Hindustan
Foods reported good results; stock fell 6.5 per cent.
• Institutional investors are attracted to large-cap consumer stocks in
India for two key reasons:
• Ideal for sizeable fund deployments
• Visibility of over 10 per cent growth for a long period of time
(longevity)
• This bear market has taken a big emotional toll on investors. Many are
losing hope and becoming despondent. One of my colleagues is
contemplating leaving investing forever. I felt sad to see this, but we are
all in the same boat, and we need to grind it out.
• I have made quite a few mistakes in this bear market, but what has
somewhat helped is my shift to a more diversified portfolio. So, even
though the overall drawdown is painful, it is something I can hope to
recover. Extreme concentration is a double-edged sword, and this bear
market experience is a good reminder that psychologically, I am not
suited to it. An advantage of diversification is that one is less emotional
about a position, making it easier to exit on the downside.
• Some of my investor friends are saying that in future, they will switch
to quality large-caps at the fag end of a bull market, and then gradually
switch to emerging growth themes during the next bear market. I wish
investing was so easy.
• To give a sense of the damage to stock prices in the broader markets, 25
per cent of all stocks that are currently traded on National Stock
Exchange (NSE) have hit a point in 2019 that is under their 2014 low.

14 February

• The free fall continues in mid-cap and small-cap stocks. The mid-cap
index has been down in four of the last five trading sessions. The small-
cap index has fallen for the fifth straight session; it is now down 35 per
cent over the last twelve months.
• In most micro-caps/small-caps, the odds of success are low, and the
payoff when they succeed is high. Thus, any micro-cap or small-cap
investor’s portfolio should always be a diversified one.
• Massive redemption is now taking place in small-cap mutual funds.
Looks like the retail investor is finally capitulating. The resultant forced
selling by fund managers should lead to some bargain buying
opportunities.
15 February

• There is no place to hide. Bad news is now starting to occur in the large-
cap space as well. Income tax raids have been conducted at Divis Labs’
offices in Telangana and Andhra Pradesh. The searches are being
conducted in connection with alleged tax evasion.21
• Even stocks of good promoter groups have gotten crushed in this bear
market. Sundaram Clayton is now at 2,385, down 62 per cent from its
highs.
• Every day, a new set of stocks randomly gets clobbered in this market
without any news. Today it is the turn of Glenmark, Page Industries,
Ashok Leyland and Dr Reddy’s Laboratories.

17 February

• Some learnings from this bear market:

• Market cycle is supreme. Be it value or growth, investors need an
upcycle, that is, liquidity, to make big money from mid-caps and
small-caps. That is the time when stocks with strong earnings,
bullish management commentary and improving business
fundamentals are rewarded very handsomely.
• A decent sum of money can be made only with two factors: invested
capital and time. Focus on your personal development to enhance
the former, and focus on your health to enhance the latter.

18 February

• The sell-off in the broader market continues in 2019. Year-to-date

negative returns:
• Mid-cap index—9.3 per cent
• Small-cap index—11 per cent

• Did some number-crunching today. The average fall in stocks having

less than Rs 5,000 crore market cap is 40 per cent since January 2018.
 Pain is an understatement.

19 February

• Promoter-buying is visible in many mid-cap and small-cap stocks.

Owners are using the correction in prices to increase their stakes. Such
stocks should be shortlisted and researched.
• Some relief on the economy front. The NBFC liquidity situation seems
to be finally normalizing. Corporate bond issuances by them rose 30 per
cent in January,22 reflecting renewed confidence among issuers as well
as investors. The biggest issuers of debt in the corporate bond market
are NBFCs, which control nearly 90 per cent of the volume.
• Relying only on screening tools doesn’t work in investing. It’s the
interpretation and analysis that gives one an edge. Everyone today has
access to data, but that hasn’t made everybody rich.

22 February

• Nearly Rs 10,000 crore worth of Kotak Bank shares got absorbed by

buyers in a block deal this morning. There is always demand for good
companies in every phase of the market. Foreign institutions had sold
Rs 40,000 crore of equities in the last twelve months in India, so Rs
10,000 crore is a big number.

24 February

• Yet another instance of corporate governance issues occurring in a listed

company. Today, it is in ADF Foods, whose promoters have been
charged by SEBI with an insider-trading violation.23

25 February

• Mid-cap and small-cap investors have been slaughtered in this bear

market. Fall in stocks listed on the Bombay Stock Exchange from their
52-week highs:
 • 61 per cent of stocks are down over 40 per cent
• 44 per cent of stocks are down over 50 per cent
• 26 per cent of stocks are down over 60 per cent
• 13.5 per cent of stocks are down over 70 per cent
• 6.7 per cent of stocks are down over 80 per cent

26 February

• Markets are rejoicing over the surgical strikes carried out by the Modi
government on terror camps in Pakistan.24 Investors believe this will
fuel the prime minister’s popularity ahead of the national elections in
May and lead to the BJP government getting a firm majority.

1 March

• If someone with a portfolio of poor-quality stocks was up 2x in 2017

and down 30 per cent in 2018, that’s less than 20 per cent return per
annum. Good-quality compounders could have given a better result, and
with far less stress.
• The breadth in the market today was very strong. Haven’t seen that for a
long time. If we see this breadth sustain for a few more weeks, then
mid-caps and small-caps may have finally made a bottom.
• Analysts are recommending to take exposure in infrastructure stocks
ahead of the national elections in May for short-term gains over the next
few months, since the BJP government is considered pro-infrastructure.
In this market where decent-quality businesses are now available at
reasonable valuation, I would avoid bad-quality businesses available at
low valuation, and also avoid government-facing businesses that are
available cheap. Need to avoid the mistakes of the last bull market, and
resist going down the quality curve.

2 March
• The need for adequate diversification is borne out repeatedly, not just in
India, but in every stock market globally. Recently, Kraft Heinz
disclosed it had been subpoenaed by the US Securities and Exchange
Commission in October, in relation with an investigation into its
accounting policies, procedures and internal controls related to
procurement.25 The stock tanked 20 per cent after the news.
• Valuations are cyclical for most stocks and industries. A change in
investor perception is a very important driver of returns. A stock with
no change in earnings can get rerated from 10x to 30x P/E or derated
from 30x to 10x P/E in no time. In India, most stocks are cyclical in
terms of either business or valuation, and don’t qualify for buy and hold
type of investment. You don’t get to keep the money you make in such
stocks unless you exit in time. What makes buy and hold even more
difficult in a market like India is that the few stocks which qualify for
long-term investing tend to become highly overvalued at some point
after the initial purchase. Investors would incur a big opportunity cost if
they don’t exit during such hype and mania.

3 March

• Promoter risk is the biggest risk in the Indian market. Reading a

Moneylife article on how minority shareholders can get shortchanged
by promoters.26
• Valuation discount to a peer or relative valuation is not the right way to
judge a project-based business like a road developer or a construction
company. What matters for investors is what will be the steady state
revenue and profit run rate after a large, lumpsum order gets executed.
• I studied RITES Limited earlier today. It has a high-margin consulting
business and a low-margin turnkey projects business. The company has
an order book of Rs 6,054 crore against Rs 2,000 crore of estimated
revenue for the current fiscal year, which provides growth visibility for
next few years. The core operating ROE is 28 per cent, while net cash is
Rs 3,300 crore. RITES has maintained a dividend payout ratio of 26 per
 cent over last few years, and is trading at reasonable valuation. The
issue is that the higher margin consulting business has a much lower
share (37 per cent) in the order book versus the share in the current
fiscal year revenues (61 per cent), which means that margins will
decline in future. Even though revenues may grow, profits will grow at
a slower rate. The current ROE levels are not sustainable. In investing,
the trajectory of the return ratios drives multiple rerating or derating.
• An important learning from this bear market is to never take
management guidance at face value, unless they have a proven track
record. Poor managements tend to overpromise and underdeliver.

4 March

• The traits of greed, fear and hope are universal. That’s what makes
finance a fascinating study of human behaviour. Read an article in The
New York Times about how Jordan Goodman, who wrote ‘Reading
Between the Lies: How to Detect Fraud and Avoid Becoming a Victim
of Wall Street’s Next Scandal’ was busted for steering investors towards
a Ponzi scheme.27
• The delay in mobilization advance (which is paid by the government)
has increased the working capital outlay for infrastructure companies.
This is not a good sign. It implies higher interest cost, which affects the
rate of return on a project. It’s very tough to make money in a sustained
manner in B2G businesses.
• FIIs bought Rs 13,500 crore of equities in February 2019. This is the
first time since March 2017 that FII buying has crossed Rs 10,000 crore
in a single month.
• WhatsApp groups are getting charged up again. Investors are expecting
the BJP government to get a clear majority. Opinion polls on news
channels are further bolstering the optimism.

5 March

• Some important learnings from this bear market:

 • The stock of a mediocre-quality business tends to take a big beating
if the market cycle (liquidity) is against you. Always take the market
cycle into account if you are investing in an average-quality
business.
• A brutal bear market can take place without the frontline indices
ever reflecting it.
• Majority of the stocks in India are not meant for buy and hold—
rising prices made us very complacent in 2017.
• A bear market can end without the final capitulation phase, which
some astute investors wait for. It’s too early to say if this bear
market has ended, but the last two days have given some hope—the
mid-cap index has risen 3.8 per cent, and the small-cap index is up
6.8 per cent.

• In the initial recovery phase after a bear market, the most beaten-down
names bounce the hardest. In the second phase, the stocks with earnings
visibility do well amid a selective and narrow rally. In the last phase,
junk stocks go berserk and the euphoric market peak is reached.
• We are witnessing signs of the initial recovery phase today as the most
beaten-down stocks are rallying the hardest:
• Suzlon—up 28 per cent
• PC Jeweller—up 11 per cent
• Indiabulls Housing Finance—up 10 per cent
• Infibeam—up 9 per cent
• JP Associates—up 9 per cent

6 March

• I have been trying to learn how to evaluate software-as-a-service (SaaS)

companies from an investing perspective. There’s a lot that goes into it,
but earlier today, I came across what is possibly the best presentation
I’ve seen so far explaining SaaS business models.28 Work hard today to
let good luck find you in future.
 If one analyses the various regulations announced by the RBI over the
• last one year, it is clear that it wants to gradually reduce (and eventually
remove) the regulatory arbitrage between banks and NBFCs. In my
view, many NBFCs will eventually need to merge with banks or apply
for a banking license.
• Some NBFC managements spend too much time in conferences and on
media channels. Maybe they think that it will help them in fundraising. I
beg to differ. Funds will automatically come if you are doing good
business. I hardly ever see Rajeev Jain of Bajaj Finance talking to the
media. If you are an average performer, you need to market yourself. If
you are a top performer, you don’t need to.
• Some of my fund manager colleagues have decided to only invest in
debt-free, free-cash-flow generative, quality companies from now on.
They want to minimize volatility in their client portfolios. The key will
be having the discipline to stick to this strategy in future bull markets,
when junk stocks rally hard.
• The rally in beaten-down names continues. Dilip Buildcon and Reliance
Capital are up 46 per cent and 64 per cent respectively from their 52-
week lows.

7 March

• Change in management control is often an important trigger for a stock

to rerate from a low P/E to a higher P/E, as investors discount the
expected improvement in performance.
• Compounding is convex on the upside and concave on the downside.
Positive asymmetry. Few understand this, but the day you do, it will
change your investing perspective forever.

8 March

• The European Central Bank announces more stimulus as Mario Draghi

reveals slashed growth forecasts for the euro region. In the last ten
years, the template for many investors globally has been—‘anemic
 growth leading to central bank stimulus, further leading to liquidity
finding its way into stock markets and financial assets’.
• This has been a frustrating market for most investors. Not just because
of the fall in share prices, but because there are hardly any stocks
available that have good visibility and longevity of earnings growth.
Such stocks tend to have the following characteristics:
• Large size of opportunity
• Healthy financial ratios
• Consistent double-digit growth rates in revenue
• Simple business models

• Rather than looking for perfection in a stock, I would rather focus on

finding new themes and sectors with good earnings visibility for the
next two or three years, and hold on to them as long as the growth
continues.

10 March

• The reason why most of us are unable to create wealth from the market
is because we want to catch every stock that is moving up, especially if
the underlying business is within our circle of competence. A new idea
always sounds more exciting than an existing stock in the portfolio, but
we need to be disciplined and patient. We buy good stocks initially, but
at some point during a bull market, end up switching to something else
that is looking attractive in the short term. Only the brokers become rich
as a result.
• Things in the market don’t always happen due to rational logic. In the
short run, it is all about sentiments, and demand and supply. Many
times, stocks go up when you expect them to go down and vice versa.
Simply make peace with this fact, because that’s just how it is. Investors
were expecting microfinance stocks to be the worst-hit due to possible
populist announcements by the government ahead of the upcoming
 elections, and today you have CreditAccess Grameen hitting all-time
highs. Always remain humble; the market is supreme.

Author’s Note
The golden rule of investing is that there is no fixed rule. Time and
experience makes you appreciate this fact.

11 March

• FOMO is now kicking in big time, with rocket emojis flying around in
WhatsApp groups. Many investors are again investing in junk stocks
(which are going up rapidly), in order to make a quick buck, even
though there are good stocks available at corrected levels in this market.
The urge to speculate just doesn’t go away for most investors.
• In my view, people should first focus on building their career to get a
good steam of cash flow to invest. Only then should they focus on
portfolio building. Most of them do the reverse.
• Good-quality consumer, IT and private banking stocks in India have
historically done very well, and should continue to do well for the next
many years. But we investors, in search for alpha, are always looking at
new emerging themes, so we ignore the proven wealth creators from the
above sectors, since we presume that the best is behind them.
• As investors, we should not compare our portfolio returns with our
peers and colleagues, and we should be unemotional about this aspect.
The dumb act of comparison literally compelled many of us to go down
the quality ladder in 2017, and ruined our portfolios in 2018.

12 March

• Expensive lenders are expensive for a reason. And this attribute helps
them do even better. Think about the wealth creation that takes place for
 shareholders when a bank or NBFC dilutes equity at 5–6x P/B. The
other way to invest is to play the rerating game by buying cheaply
valued lenders, but there, you need to stay close to the exit. Get out
before the going gets tough, because not all lenders are rerated
permanently. Most do well only during an industry upcycle.

13 March

• Low trading volume when a stock is going down and high trading
volume when it is going up are signs of technical strength and signals
accumulation of the stock by strong hands.
• During periods of high commodity inflation, auto ancillary companies
are trapped between raw material suppliers and original equipment
manufacturers. They get squeezed from both sides. During good times
for the auto industry, this effect is nullified with increased volumes
which brings economics of scale along with operational efficiency.
When volumes are flat or declining amid a downturn, margins get
squeezed badly like 2013 when many auto ancillary companies in India
reported operating losses.

15 March

• Edelweiss has moved to Rs 190 from Rs 116 within a few months.

Levered businesses’ equity value gets magnified in both directions.
• Sterlite Technologies is down 9 per cent, as analysts see high risk of
substantial pricing erosion in the global optical fiber space over the next
one year, due to the build-up of excess supply in the China market.
Investors often mistake cyclical businesses to be non-cyclical during
bull markets. That was the case here.

17 March

• Some learnings on the valuation of a lending business’s stock:

 • If growth is more than ROE, valuations will depend on the ability to
dilute at a given P/B.
• If growth is less than ROE, valuations will depend on the longevity
of growth.
• Analyst reports are often a lagging momentum indicator. A stock price
rise of 30 per cent triggers price targets of a further 30 per cent from
analysts, while a stock price fall of 30 per cent triggers a downgrade of
another 30 per cent. A 50–60 per cent fall in price triggers the removal
of coverage altogether.

Author’s Note
Rating agencies often make the same mistakes as analysts during
good times. When fundamentals deteriorate, stock prices tend to
move first, and rating agencies follow with a lag. Rating agencies
seldom tell the market anything it doesn’t already know.

18 March

• If you want to improve your investment process, learn from the

investors who have actually made it big in the market with good
consistent returns over time. Those practical words of wisdom beat
anything academic you will ever learn.
• Acknowledging that both luck and risk are an ever-present part of the
investing game makes you humbly accept that not everything is in your
control, which is the only way to make you focus on what is in your
control—your research process and your personal behaviour.
• The market participants and I may be looking at the same stocks, but
they are not looking at the same holding period as me. That’s my
biggest edge as an investor—patience.

20 March
• For the past ten years, domestic consumption drove the Indian economy.
But if this trend continues, the country’s imports from China will grow
even bigger, which will have its own grave consequences down the
road. The government needs to give a thrust to indigenous production in
industries like defence and electronics, and replacing oil with alternative
energy sources.

22 March

• Hindsight is always easy. The key is to have foresight. Learnings from a

bear market help you develop foresight.
• The US ten-year yield has now fallen to 2.45 per cent. The US treasury
yield curve has inverted for the first time since 2007.29 Inversions have
historically been a reliable leading indicator of recessions in the US.

23 March

• People tend to underestimate low-probability events when they haven’t

occurred recently, and overestimate them when they have. Anything can
happen at any time in financial markets. And the way smart people get
wiped out is usually because of leverage. Leverage is the one thing that
can prevent you from playing out your hand. You will get great
opportunities periodically in the investment business. But you do have
to survive to be able to participate in them. It’s just unbelievable what
can occur in markets. At a minimum, you want to protect yourself
against that sort of abrupt volatility wiping you out. Better yet, you want
to be prepared to take advantage when it happens.

25 March

• Amid depressed demand in the Indian economy, which has led to a pile-
up of inventory, consumer electronics companies have slashed prices of
appliances like refrigerators and air-conditioners by up to 20 per cent
this month.30
27 March

• The advantage of investing in quality is that it allows you to view

corrections as opportunities.

29 March

• How to identify relative strength—look for stocks that don’t correct

much in a market correction and head higher as soon as the market stops
going down.

30 March

• The sell-off in mid-cap and small-cap stocks had started accelerating

after the US ten-year yield hit 3 per cent. Now, it’s back to 2.4 per cent,
and mid-caps and small-caps are down 25–30 per cent on average. So
now, we have low rates and reasonable valuations—an ideal setup for
good returns ahead.

Author’s Note
The three ingredients for a bull market: low valuations, depressed
corporate earnings with strong capacity to recover/grow, and
loosening liquidity from tight levels. The three ingredients for a bear
market: high valuations, peak corporate earnings (on inflated
margins) starting to weaken, and tightening liquidity from very
loose levels.

1 April

• FIIs bought Rs 32,371 crore of equities in March. This is their highest

investment on a monthly basis in the last twelve years. Falling US
 treasury yields and a weakening dollar often lead to higher investor
flows into emerging markets.
• The NBFC industry’s liquidity situation is slowly normalizing. Debt
markets are concerned about only a few players now (with weak
parentage and wholesale loan book). In the longer term, NBFCs will
have to transition to either a bank platform or to an ‘originate and sell’
model. The liquidity crisis has given a key learning—parentage is
important for scale because once every four to five years, raising money
becomes really difficult amid a crisis. Those with strong parentage face
lesser liability-side challenges.
• Don’t keep any regrets if you miss out on an opportunity in the stock
market. There are always enough opportunities throughout your
investing career. You need just a few big multibaggers in a lifetime to
make it. The key is to stick with them for a long time, and to make them
count by having a decent initial allocation.

2 April

• Over the long run, I don’t think DMart and Reliance Retail will let
FMCG companies make such high EBITDA margins and free cash
flows while they themselves earn low EBITDA margins and employ a
lot of working capital. They will continue to squeeze the FMCG players
more as they build scale and size which, in turn, will give them
negotiating power. It happened in the US too. Revenue growth of
branded consumer packaged goods companies slowed down due to the
introduction of private labels like Kirkland and Great Value by Costco
and Walmart respectively.

3 April

• When analysing IPOs, always check for consistency of growth and

profitability in the prior years. Some companies suddenly start reporting
high growth and profitability in the year immediately preceding the
IPO. One should do a deeper dive and be extra careful in such cases.
• The pecking order of attractiveness for selecting IPOs to invest in:
1. Fresh issue of shares to fund business expansion of a company
which is being run by a first-generation promoter who has a very
high shareholding (>70 per cent).
1. Mix of fresh issue of shares (to fund growth initiatives) and offer for
sale by the existing private equity investors in a company where the
founding promoter has a relatively lower level of shareholding (30–
40 per cent).
1. 100 per cent offer for sale by private equity investors where the
founding promoter has very low level of shareholding (<10 per
cent). Be most wary of such IPOs, especially if they come from a
fancied sector during a bull market.

4 April

• The RBI has cut interest rates by 25 basis points. I don’t think any of
these rate cuts will be passed through by banks to their customers. Due
to the liquidity crisis, NBFCs are unable to lend, so banks are
accelerating their lending. They need to raise deposits to fund this
growth, so deposit rates will remain high. If they have to maintain their
margins, banks can’t cut lending rates.

5 April

• A majority of poll surveys on media channels are predicting a hung

parliament. Investors are worried about a coalition government coming
to power, and are trying to position their portfolios accordingly. There
are already enough things to worry about as an investor. One should not
make it more complicated by investing in politically sensitive stocks.

6 April

• It is not easy to get rich in the stock market. Staying rich is even more
difficult. You can make your life much easier by avoiding leverage,
 derivatives and shorting of stocks.

Author’s Note
Over the years, as I gained more experience in the market, I became
more diligent and prudent as an investor, especially after I achieved
financial independence. At a certain point in our lives, wealth
preservation (in inflation-adjusted terms), longevity and a
comfortable lifestyle takes precedence over chasing very high
growth.

• I have seen many people go bust in this bear market because of

leverage. Avoid borrowing to invest in stocks. You will lose sleep and
unnecessarily bring tension in your family life. Contentment is a very
important attribute to have; otherwise, there is no end to the money-
chasing race.
• The three key rules for peaceful investing as you grow older:
• Keep aside a sum in fixed-income investments that gives you a level
of passive income sufficient to maintain your lifestyle.
• Buy quality stocks of good promoters in growing sectors with high
ROCE and large size of opportunity.
• The third, and most important, rule—there is no point in making big
money if you don’t enjoy its fruits with family and close friends, or
use it to help others. Don’t go overboard with delayed gratification.

14 April

• Investors are discussing potential election outcomes and debating

whether to buy infrastructure stocks or not. Everyone is overlooking the
fact that infrastructure stocks did not make any money from May 2014
till date when the BJP government was in power.
21 April

• I often hear people advising young investors to aim for 40–50 per cent
CAGR returns in their initial years in the market, and to invest only in
micro-cap and small-cap stocks in order to get rich faster. I disagree
with this view. If an overly aggressive portfolio gets eroded by 50–60
per cent, it’s not easy to recover from such losses. At a young age, we
have enough time to multiply our money, thanks to the power of
compounding. It’s preservation of capital that is most important. It’s
better to stay in the market for fifteen to twenty years and try to achieve
a healthy CAGR of 15 per cent rather than getting thrown out midway
while chasing quick money. The problem for most investors is that
during bull market years like 2014 and 2017, greed takes over and
discipline is thrown out of the window. Till a year like 2018 strikes.

22 April

• Portfolio structuring over the course of one’s lifetime is an evergreen

topic among investors. As age, financial requirements, portfolio size
and market cycles change, we need to keep thinking afresh about what
to do.

23 April

• To judge what valuations a lending company should trade at, one should
look at three criteria: (i) cross-cycle normalized ROAs, (ii) perception
among investors about the management, and (iii) ample growth avenues
for capital deployment. Some thoughts on each of these criteria:
• The reason for looking at ROA rather than ROE is that unlike a
manufacturing firm, the asset side of a lender is almost entirely in
financial assets. No plant and equipment, or machinery. Hence ROA
is a better metric than ROE (which ignores the debt portion). ROA
takes into account the leverage of the company. In a nutshell, ROA
 in a lending business is equivalent to ROCE (which includes the
effect of debt) in a non-lending business.
• In banks and NBFCs, the management factor is most important.
Valuations are dependent on a company’s ability to raise capital at
favourable multiples, and the management’s capital allocation skills.
For example, Muthoot Finance (a gold financier) has 25 per cent
ROE, similar to Bajaj Finance. But Muthoot trades at a much lower
valuation. Bajaj Finance has ample growth opportunities, so no
dividend payment is needed, and ROE can still stay high, while
Muthoot has to pay high dividend to maintain the same level of
ROE because it can only grow at 15–16 per cent. In fact, the ROA
of Muthoot Finance is higher than Bajaj Finance, but growth is far
lower. The ability of Bajaj Finance to deploy larger amounts of
capital (growth) for a much longer time (longevity) is valued more
by the market.

30 April

• Some promoters tend to be serial deal makers. Reinvestment risk is high

in such cases. If one keeps on buying and selling businesses, there are
bound to be some mistakes along the way.
• In the lending industry, the companies with risk-averse promoters are
rewarded with a higher P/B multiple in the long run.

1 May

• In the last couple of weeks, many NBFCs’ stocks have fallen hard, but
we have seen stark differences this time. Most NBFC stocks are trading
35–40 per cent below their 52-week highs, but stocks of Bajaj Finance
and Muthoot Finance are trading close to their highs. The debt market is
giving us signals. The storm hit after IL&FS, and most NBFCs’ yields
soared. Today, commercial papers of Bajaj Finance and Muthoot
Finance trade at 8–8.5 per cent yields while the CP yields of other
NBFCs are stubbornly high.
 Author’s Note
Investors should monitor the debt markets to get clues about a crisis
within any given company in the lending industry. In the debt
market, a lender’s loan book is open to high scrutiny. Hence,
checking debt funding rates is a better marker for assessing potential
stress in a lender and the quality of its loan book. In leveraged
businesses, always trust credit markets over equity.

2 May

• If you don’t like the slower growth rates in large-cap businesses and
want to avoid the high mortality risk in small-cap ones, then it’s a good
idea to invest in stocks of quality mid-cap businesses, where you can get
both growth and robustness. By the time a small-cap business graduates
to a mid-cap, a lot of its systems and processes are professionalized and
the company is firmly established in its industry.
• These two years, 2018 and 2019, have made investors realize how
making 20 per cent CAGR over the long term is extremely difficult.
Times like these make you respect the 20 per cent compounders a lot.
Any stock that can give you 20 per cent CAGR over five or more years
with moderate volatility (not more than 30 per cent drawdown at any
point) is sheer gold. Even though value investors do not equate risk with
volatility, the point about drawdowns is relevant when putting large
amounts of capital to work. Drawdowns will always happen, but if the
stock can bounce back quickly to make new highs as soon as the market
recovers, that helps portfolio returns a lot. Investors need to know
whether the drawdown is due to company specific or industry specific
issues, and for this, it is necessary to understand the business well
enough to assess whether it can weather the storm.

3 May
• Today is a very special day in my life. My self-published labour of love,
The Joys of Compounding, was sold-out at a book-signing event at
Creighton University, Omaha. As a first-time author whom hardly
anyone would have heard of before, I never expected such an
overwhelming response for my book. I am thankful to all my readers for
their love and support. What made today even more special was having
my dear father present at the event to witness the developments, as was
being able to sit beside one of my investing idols, Guy Spier, while
signing the copies of the book (Figure 3).31 But the best was saved for
last. Near the end of the event, Myles Thompson from Columbia
University Press came to meet me and offered me a publishing
opportunity. I was speechless for a few minutes, unable to digest the
magnitude of what had just happened. I had sold my self-published
book for zero royalty as part of my sincere attempt to give back to
others, and today’s experience reinforced a very important life principle:
when you help others unconditionally, the universe works to reward you
back multiple times over. This is compounding goodwill in action.

Figure 3: Memories to cherish for a lifetime

10 May

• So much noise on Twitter and WhatsApp groups about the potential

results of the upcoming national elections in India. Some people are
posting detailed scenario analysis, with their expected probabilities
about the various seat combinations, and the optimal investing strategy
based on each scenario.
• There are some HFCs which operate with asset–liability mismatch
(raise short-term liabilities and give long-term loans). Such lenders are
leveraged beta plays to the interest rate cycle, both on the upside and the
downside. During the industry upcycle, investors tend to focus on the
huge opportunity size in India’s housing finance industry, and during the
downcycle, they focus on the asset–liability mismatch.
 Author’s Note
A large gush of liquidity infused by central banks, in the form of
quantitative easing and interest rate cuts after a crisis, is invariably
followed by many lending companies engaging in asset-liability
mismatches to make the most of the easy money environment. The
hard lessons are eventually learned when liquidity conditions tighten
sharply and interest rates increase. It’s a question of when, not if.

11 May

• Almost every sector of the Indian economy has slowed over the last six
months. Stimulating growth and kickstarting the economy will be the
challenge for the next government.
• I am a firm believer that in the long run, the slope of India’s growth
trajectory and its stock market is upwards. We can always debate about
the angle of the slope.

13 May

• Huge sell-off in pharmaceutical stocks today on reports of a major US

lawsuit against drug industry cartelization. Sun Pharma shares crashed
nearly 21 per cent, the biggest intra-day fall since its listing in 1994,
after more than forty US states filed a 500-page lawsuit accusing the
generic drug makers of a massive, systematic conspiracy to manipulate
prices. The Nifty pharma index is down 5 per cent. On days like these,
the importance of sectoral diversification within one’s portfolio is
acknowledged.
• There is carnage taking place by rotation in this market. The Nifty is
being held up by a few stocks, but one by one, every sector is being
taken to the cleaners. A few weeks back, some prominent high net-
worth individual (HNI) investors were reportedly selling out of mid-
caps and small-caps and shifting to pharmaceutical stocks to get into
 defensive mode ahead of the elections. They weren’t aware that bear
markets spare no one.

15 May

• Stock prices often drive investors’ perception about management and

business quality. In 2017, the stock of Edelweiss went up to Rs 340 and
investors were calling it ‘the Goldman Sachs of India’, ‘the toll gate to
India’s financial services industry’, etc. Now, after its stock price has
crashed, they call it a cyclical, market-linked business. The big lesson
for me has been to not get carried away with bullishness during good
times, or with bearishness during bad times.
• In other news, the stock of Ashapura Intimates Fashion (which was
touted as ‘the next Page Industries’ in 2017) is down 97 per cent from
its peak. Most of the time, ‘the next X’ is X itself.

16 May

• Yes Bank is now in a very tricky situation. If it doesn’t raise capital, it

can’t take write-offs. And if it raises capital at its current abysmal low
valuations, that will be hugely value destructive.
• Sentiment is so bad that investors on Twitter and WhatsApp groups are
talking about temporarily going back to gold and fixed deposits to
preserve capital.

17 May

• Whether you make money buying a high P/E stock depends on which
phase the business is in. If it is at an early stage of a long runway for
growth, you can still make good money over time. If it is at a late stage,
you will likely lose money due to P/E derating as growth slows down.
• Experience has taught me a key lesson. As long as high growth
continues, expensive valuation for a quality stock doesn’t come down—
it actually goes from expensive to more expensive.
 As investors, we need to learn to be more tolerant and forgiving of
• entrepreneurs during difficult times. In the real world, a business does
not work as projected in an Excel sheet. Managements can, at best, give
us an indication of what they hope to achieve, but not everything is in
their hands. If someone asks us investors, we would also say that we
would like to double our capital every three to four years, but if the
market environment is not conducive, then despite our best efforts, we
won’t be able to do so. An entrepreneur takes a lot more risks and has a
lot more skin in the game. Unlike us investors, he cannot just bail out
when things aren’t working.

Author’s Note
At times, I feel we investors are too demanding. We want to come in
the ‘growth spurt’ phase and get out when things slow down, but
real businesses have to go through the grind. So much effort goes to
build a company for the long term. Being a stock market participant
is much easier than being a promoter. As investors, we should be
thankful.

20 May

• In the stock market, liquidity chases growth. If growth becomes broad-

based, money then gets distributed across many stocks and sectors. If
only a few companies are showing growth (which often happens during
bear markets, when earnings growth dries up across sectors) amid an
economic slowdown, money will chase them regardless of their high
valuations.
• The importance of investing in sector leaders is realized during a
recession—they grab market share from their weakened competitors
and become stronger. This helps their stock prices recover faster.
23 May

• Investors are rejoicing after a landslide victory for the BJP government
in the national elections. Five years of a stable government means a lot
to the market. After a long time, a single-party government, which had a
majority, is coming back with an even bigger majority. A far cry from
the coalition politics era of 1996 to 2014. Investors are expecting the
bear market to finally end.

24 May

• Old habits die hard. After the victory of the BJP government, investors
are again getting gung ho about infrastructure stocks, in the hopes of
valuation rerating.

27 May

• The mid-cap and small-cap stocks that either remained strong and
consolidated, or didn’t fall much over the last one year, will be the ones
to watch out for, as they have handled all the huge supplies from sellers.
The demand and supply equation is set to tilt towards the former now. A
relatively small amount of buying can result in a sharp uptick for these
stocks.

2 June

• All the leading banks globally aspire to be known as technology

companies rather than brick-and-mortar lenders. I believe Indian banks
will follow the same trend. Technology infrastructure is not cheap,
hence the big banks with deep pockets will lead, as it’s pretty hard for
small banks to compete. Over time, size will become an entry barrier in
banking.
• The valuation multiple an investor is willing to give to a stock depends
on his conviction in the execution capabilities and integrity of the
 management.
• The art of valuation is all about understanding the drivers of:
• Terminal value
• Returns on incremental invested capital

3 June

• If you worry about global macro factors all the time, there will always
be something to worry about. It is much more productive to focus on
portfolio construction and individual stock selection.
• Read a great post on living life according to the inner scorecard.32 Many
nuggets of wisdom in it:
• Do not compare yourself to others. The only person you need to be
better than today is the person you were yesterday. Competing with
others makes you bitter. Competing with yourself makes you better.
• There is one thing that you’re better at than other people: being you.
Be authentic—act in accordance with who you are and what you
believe in. Let your life be guided by internal principles, not
external validation.
• We are not perfect, nor should we pretend to be, but we always
should endeavour to be the best version of ourselves.

5 June

• Markets fall on unexpected bad news, not the expected ones. When the
liquidity crisis broke out in September, everyone was caught off-guard,
and that’s why all lenders’ stocks fell. When issues got worse in
February and March, Bajaj Finance, Muthoot Finance and CreditAccess
Grameen hit new highs, while wholesale lenders were the only ones
whose stocks got punished. Now that everyone knows where the
problem is and where it isn’t, you can’t make the stocks of good NBFCs
fall on the same bad news of liquidity issues. Such stocks may actually
go up more due to the expectation of market-share capture by those
NBFCs.
• A lot of investors keep talking about names like Infosys, Bajaj Finance
and HDFC Bank, which graduated to the big league over time from
their humble beginnings as small-caps. But the percentage of small-cap
companies which eventually become large-caps is minuscule. One can’t
cite exceptions to make a case for investing only in small-cap stocks.
But newbie investors keep doing it all the time.
• The government is making a lot of big announcements about its planned
outlay for the infrastructure sector over the next five years. Investors are
buying into the narrative and loading up on infrastructure stocks in their
pursuit of growth. They should keep the following points in mind:
• Infrastructure is a commodity business.
• The lowest bidding company in tenders is the winner (and long-term
loser).
• The sector is highly competitive, so there is little pricing power.
• It is a politically sensitive sector.
• Sustainable money in investing is made by free cash flow
generation, which most infrastructure companies have not been able
to deliver. Thus, while some companies have reported good revenue
and net-profit growth in the past, their cash flows have been poor.
As a result, there has been no money made for shareholders.

7 June

• IIFL Finance looks cheap at 1.2x book value. However, I don’t like the
fact that 35 per cent of its AUM is in home loans, where the yield is 10
per cent (less than its incremental borrowing cost). This is a negative
ROA business; I wonder why it keeps growing this segment at a rapid
pace.
• In June 2015, the five-year bond yields in Greece and the US were 17
per cent and 1.75 per cent respectively. Today, they are 1.68 per cent
and 1.82 per cent. There is no impossible in markets.
• Quality of management is of paramount importance for sustained
performance of a business over long periods.
8 June

• Came across a stock today that was a bull market favourite in 2017, and
is now down 90 per cent from its peak. Classic signs of business
integrity issues—high reported profits but negative cash flow from
operations, increasing inventories and receivables, and piling up of debt
to fund the bloated working capital. In 2017, investors looked only at
growth and not the balance sheet. Then 2018 and 2019 happened.

9 June

• The auto industry is really bleeding right now. India’s leading

manufacturers of passenger vehicles and two-wheelers have announced
factory shutdowns stretching over several days in the ongoing quarter in
an attempt to help them reduce unsold inventory (which stands at a
massive Rs 35,000 crore today).33

11 June

• Investors are wondering why the market has started correcting even
after the BJP government returned with a big majority. In my view, the
market is just reflecting the ground realities. The Indian economy is in
deep pain, and nothing has been done about it yet. I believe that 2019
won’t be anything like 2014, when Prime Minister Narendra Modi came
to power for the first time. We should not expect anything more than a
slow grind. Only good stocks will do well, and stocks of weak
businesses will have a very tough time. There is no rising tide today to
lift all boats.
• In some sectors, it is very difficult to make sustainable money as
investors—real estate, infrastructure, power, B2G businesses, education,
film production, textiles, aviation, gems and jewellery, heavy capex
industries such as steel and hotels. These industries give transient
multibaggers at best.
12 June

• This is a bear market masquerading as a bull market. The frontline

indices are near all-time highs while most mid-cap and small-cap
portfolios are down 40–50 per cent from their 2017 peaks.
• Liquidity and solvency are two close cousins for a lending business.
Liquidity issues that persist for too long can lead to insolvency for a
highly leveraged business such as lending (especially in the case of
banks, since they operate under a fractional reserve system). Such
companies tend to go bankrupt in two ways—gradually, then suddenly.

Author’s Note
For a lending institution like a bank, perception is more important
than reality. A reflexive feedback loop exists between the market’s
perception of a bank, and the latter’s ability to operate. Adverse
publicity or negative information in the media, posted on social
media, or otherwise, whether or not factually correct, can have a
material adverse impact on the business prospects and financial
results of a bank, and such risk can be magnified by the speed and
pervasiveness with which information is disseminated through those
channels.

13 June

• The more an annual report talks about global, macro and economy the
more you should be careful as an investor. Good promoters talk about
things they can control.
• Lately, small-caps are falling sharply on very little trading volume.
People looking to get out didn’t find any liquidity in all of 2018, and
now, many of them who need money cannot wait any longer and are
trying to get out at any price. Many small-caps are also falling because
 of forced selling by their brokers. In some instances, margin calls are
getting triggered for a trade, and the broker is liquidating the other
holdings of its client. Since there is no buying support, such stocks are
crashing 15–20 per cent in a single trading session on low volume.
• In the auto industry, a slowdown impacts vehicles in the following order
—commercial vehicles, four-wheelers, three-wheelers and two-
wheelers. A recovery happens the other way.

14 June

• An intuitive way to calculate the franchise value of a bank is a dividend

discount model of the fee income (which is a function of the hold a
bank has over its customers).

15 June

• A key benefit of having a long-term compounder is lower reinvestment

risk. One can continue to be invested for a much longer duration. Over
our investing careers, it can make a material difference if we can find
such ideas with longevity of growth, and then hold on to them with
patience and fortitude across market cycles.

Author’s Note
The ability to hold requires a much higher level of qualitative
insight than the initial buying decision. The most important factor to
focus on for holding onto a stock (after it has appreciated
significantly) is the business’s reinvestment potential and the
possibility of growing revenue over a long period of time. The
second one is the margin of safety which comes from customers
loving the product/service and perpetually choosing it over all
alternatives. Once customers leave, there is no valuation that can
provide margin of safety in a business, for example, Yahoo and
BlackBerry. Thus, a good understanding of the product/service and
 customer behaviour is highly critical if you want to be a long-term
investor in a business. If you look at most stock market investors,
they spend all their time analysing everything else.

16 June

• In most cases, the strong prospects of the long-term compounders in

India were pretty clear from the beginning. The major problem for
investors was that these stocks always looked expensive. This is the
typical story of any big wealth creator in India. None of the secular
growth stocks ever trade very cheap. You can hope to get in during a
market correction or bear market, when they are not exorbitantly
expensive (an exception to this rule was 2008, which was a once-in-a-
century event).
• In the last three years, HDFC Bank has gone up 108 per cent and Kotak
Bank has gone up 96 per cent. Sometimes, I wonder if it is really worth
all the risk to go down the quality curve and invest in the cheaply
valued low-quality banks in the hopes of a turnaround. You can
occasionally have a good year or two with such stocks, but you can’t
have consistent long-term returns with them.

18 June

• I have been speaking with my peers and colleagues in the investing

community. Many of them are rushing to exit from small-caps and
migrating to large-caps. Since the frontline indices haven’t fallen in
tandem with mid-caps and small-caps, investors fear that if the large-
cap indices start falling now, there will be another severe cut in their
portfolios even from here.
• So much gloom all around. There is a long list of stocks which hit a 52-
week low today. It looks like a bear attack. There are rumours of
defaults in many companies.
19 June

• Bear markets test your conviction to stick with good businesses when
their stock prices are falling sharply. Buy and hold is simple in theory,
but very difficult in practice. Read a great blog post on this topic
today.34 It is very important to regularly reinforce the good investing
practices in our minds. Timeless wisdom is what helps us stay the
course during difficult times. The important takeaways for me from this
blog post:
• Once you have bought a good-quality business at a reasonable price,
the most important thing you need to focus on is your personal
behaviour. Many of us would have owned good companies at some
time, but few would have held them for a long period of time.
Finding a winning stock isn’t difficult in the internet age. Holding
onto it amid all the noise is.
• There is no quick and easy route to building wealth in the stock
market. It takes time, savings, patience, hard work and discipline.
The principles of good investing are simple but they are not easy to
implement, because most of us succumb to the desire for instant
gratification.
• The way to wealth is to buy right and hold on. To reap genuine
riches, one needs to invest in long-term winners, and hold on for
compounded, tax-free growth. No more effective tax haven exists
than unrealized appreciation in a long-lived, soundly growing
company.
• One should not hurriedly sell a great business if it becomes
temporarily overvalued. In great businesses with capable
managements, one tends to get frequent positive surprises, and they
tend to end up delivering much better performance than we initially
envisaged.
• Compounding, combined with patience, is an incredible force over
time.
 Bear attack in the market today—Indiabulls Housing Finance is down
• 17 per cent, Indiabulls Real Estate is down 20 per cent. Stocks of
DHFL, Yes Bank and Zee Enterprises are also getting hammered.
• There’s a long list of mid-cap and small-cap stocks which are down 5–
10 per cent today, but on very low trading volume. Liquidity has
vanished in this bear market. The full-time investors who primarily
invested in mid-caps and small-caps are feeling a lot of pain.
• Despair is now clearly visible on WhatsApp groups and Twitter.
Investors are questioning which companies to trust in the mid-cap and
small-cap space. This is what a bear market feels like.

20 June

• Another day, another big sell-off in mid-cap and small-cap stocks across
the board. No strategy seems to be working. Need to have the faith that
this too shall pass.

23 June

• Listened to a great discussion on value investing which was held at

Creighton University, Omaha, last month, during the Berkshire
Hathaway annual meeting week.35 The best investment during a bear
market is an investment in your knowledge. Some important learnings
from the discussion:
• The margin of safety can be derived from the gap between price and
value, and also from the quality of the business. For example, a
business that can grow intrinsic value at a rate of 18 per cent
annually is worth much more than a business that is growing its
value at 6 per cent annually, all other things being equal. Since the
higher quality compounder is worth a lot more over a long-term
holding period than the lower quality business, the former offers a
larger margin of safety.
• The problem with investing only in statistically cheap securities
(also known as ‘cigar butts’) is that the underlying business’s
 economic value gradually erodes with each passing day, making the
investment a race against time. As investors, our goal should be to
minimize the number of decisions, and to reduce the potential for
unforced errors. It is much more productive to be invested in
businesses with growing intrinsic value over time, because it allows
for a larger margin of error in case we are wrong, and higher returns
in case we are right.
• Cigar butts as a category have the potential to outperform quality
over a short holding period, but over the long term, companies with
increasing intrinsic value over time are the clear winners. On
balance, paying a high price for even a great business may not
always work out well if you have to sell that business in one or two
years. But if you plan to hold your stocks for longer periods of time
—say, five years, ten years or longer—then quality becomes much
more important than cheap initial valuations when assessing margin
of safety.
• Value investing is not about buying bad or damaged businesses
cheap. It is about looking for the greatest amount of value (for the
price paid), with the least amount of risk. Putting in more time and
effort does not guarantee better results in investing. Rather, it is
more beneficial to do less, and make fewer, better choices.
• Over time, the high-quality compounder category likely will have
fewer errors—that is, fewer permanent capital losses—than the
‘statistically cheap’ securities category. This doesn’t mean one will
do better than the other, as a higher winning percentage doesn’t
necessarily mean higher returns. But if you want to reduce ‘unforced
errors’ or losing investments, it is more beneficial to focus on high-
quality businesses.
• Investors should not obsess over high-frequency macro indicators.
Simply focus on individual businesses and their industry
developments. That’s the best one can do. Nothing more. Always
remain humble and be intellectually honest.
 • Never bet the farm on a single investment, no matter how certain
you are of the outcome. Risk often originates from sources you can’t
imagine. Avoid going crazy with concentration. Always diversify
prudently.
• Value traps are like melting ice cubes. What appears to be cheap or
relatively inexpensive can continue becoming cheaper if industry
headwinds intensify. An irrational fall in price makes a stock
cheaper. A rational fall in price makes a stock more expensive. In
today’s digital age, when information is freely available to everyone
in the markets, expensive is expensive for a reason, and so is cheap.

• The game of investing is the game of everlasting learning. Read an

insightful blog post on how businesses and industries are undergoing a
paradigm shift in an era of low interest rates, and its implications for
investors.36 I could relate to this hard-hitting truth from the blog post:
‘There are no asset managers who represent their strategy to clients as
“we buy the most expensive assets, and add to them as they rise in price
and valuation”. That’s unfortunate, because this is the only strategy that
could have possibly enabled an asset manager to outperform in the
modern era. It’s one of those things you could never advertise, but had
you done it, you’d have beaten everyone over the ten-year period since
the market’s generational low.’

24 June

• Many established entrepreneurs in India tend to venture into a low

return on invested capital (ROIC) business after the success of their
initial business, which had a high ROIC. The reason for this big mistake
is that they are not driven by value creation. Most of them have a desire
to build an empire. They can’t find enough good avenues to deploy
capital and end up doing detrimental stuff like this. If the government
removed dividend distribution tax (DDT), we would have much better
capital allocation in corporate India.
 Author’s Note
The finance minister of India, Nirmala Sitharaman, abolished DDT
in the Union Budget of February 2020. The Indian tax law was
amended with effect from 1 April 2020 to introduce dividend
taxation for shareholders receiving dividend income; that is, the
incidence of dividend income taxation was shifted to investors from
the companies.

• When a bear market takes over, no discount is big enough for bad
corporate governance. Sometimes people get lucky with such stocks in a
bull market, and start to believe that if they buy at a low enough price,
anything bad can be discounted. Until reality strikes in 2018 and 2019
—a business with fraudulent promoters has zero intrinsic value over
time. We get inflated values for such stocks temporarily in a bull market
only because corporate governance is ignored amid the euphoria.
• One group that has suffered a lot in this ongoing liquidity crisis is that
of real estate builders, who used to receive funding from NBFCs. It is
difficult for banks to develop NBFC-like last-mile distribution so
quickly. I think a few big defaults among real estate developers are
imminent, and the market is waiting to see what happens to the loan
book of NBFCs with real estate exposure. If some big write-offs do
occur, funding will just freeze for these NBFCs. And in the world of
finance, liquidity risk and solvency risk go hand-in-hand if credit
markets freeze for you.
• The business model of some NBFCs will likely go through a lot of
changes now. The ones with real estate exposure will likely convert to
acting as sourcing and collection agents for banks.

27 June
• As investors, we look for analogies because they make for nice stories
during a bull market. We give titles to stocks, such as ‘the next Page
Industries’, ‘the next L&T’, ‘the next Eicher Motors’ and ‘the next
HDFC Bank’. We don’t realize that real reputation is built only during a
downcycle, not during an upcycle.
• The next HDFC Bank is HDFC Bank itself. But we investors have the
constant itch to find the ‘next’ great thing. As a result, we do not even
bother to check what remarkable things today’s great companies are
doing. I have given into this bad habit too, at times. Writing this
important lesson down so that it registers in my mind.

3 July

• Many big real estate developers are in trouble, but all real estate lenders
are saying their loan books are not stressed at all. Something just
doesn’t add up.
• Market is in an unforgiving mood right now. The slightest bad news in a
company is resulting in a crash in its stock price.
• ICICI Bank and IndoStar Capital have announced a partnership to
finance commercial vehicles. This looks like the start of the expected
financing partnerships NBFCs will build with banks. The NBFCs will
act as sourcing agents, get fees and will bear some part of the credit
risk. The banks will act as financing agents, and will bear the remaining
credit risk. Given that these NBFCs will turn more into sourcing agents
than lenders, their valuations should reset structurally to lower levels.
The NBFCs which can continue to lend from their own balance sheet
will command higher multiples. One can also make a case to be bullish
on banks. They will get the last-mile connectivity of NBFCs, but keep a
larger portion of the interest income.

5 July

• Every day, a new accident occurs in this market. Yesterday, it was Quess
Corporation and L&T Infotech. Today, it is KRBL, which is locked in
 20 per cent lower circuit, after reports that the Enforcement Directorate
has attached company assets worth Rs 15 crore on charges of money
laundering.37
• I have almost stopped the practice of investing in stocks in which I have
low conviction. If I allocate 1–2 per cent to such ideas, even if they
double, they hardly make any difference to my overall portfolio returns.
And I can’t allocate over 2 per cent in such stocks. I now focus on
portfolio returns. Individual multibaggers are irrelevant for me, unless I
can bet with a decent allocation.
• It’s okay to not guide big. Guiding big and not delivering reflects poorly
on the management, and often leads to derating. Many NBFCs and
HFCs used to guide for 30–35 per cent CAGR until infinity, assuming
things will remain rosy until the end of time. The liquidity event has
forced sanity into their minds, and they have toned down their guidance
to 15–20 per cent. Guide low and deliver big is great. Guide big and
deliver big is good. Guide big and deliver low is very bad. There is only
downside in guiding big growth numbers. You deliver, but it’s already
priced. If you don’t deliver, investors hammer down your stock.
• There is polarization taking place within all sectors globally. In almost
every sector, the big or the leader is getting bigger, while the small
players are struggling.
• The first Union Budget of the new term of this government is a
complete howler. The big blow from last year’s Budget was imposition
of long-term capital gains tax on listed equities. This year, it is the tax
on dividends, the tax on buybacks, the plan to lower listed companies’
maximum promoter holding to 65 per cent from the current upper limit
of 75 per cent (which will increase the supply of shares in the market)
over time, and a tax increase of three percentage points for individuals
with an annual income of Rs 2–5 crore, and seven percentage points for
those earning more than Rs 5 crore.
• Many investors will form their opinions about the Budget over the next
few days and weeks depending on how their portfolios behave. For
most market participants, price often shapes perception.
7 July

• Many investors are now acknowledging that narrative-based investing

was in vogue during the previous bull market, without any in-depth
study of the businesses (which is typically the case when investing at
high valuations). Taking shortcuts at lofty valuations eventually causes a
lot of pain and capital loss. In 2017, I also digressed to following
narratives in a few cases instead of doing a deep-dive study for those
stocks. During bull markets, this folly can be temporarily masked, but in
a bear market, it can really hit you hard. Know the type of investor you
are and invest accordingly. If your process involves a basic, high-level
study, then go ahead and diversify. But if you are a concentrated
investor, then deep-dive research is a must.
• As investors, a lot us don’t really have a well-structured process, and it
is difficult to improve unless one keeps a diligent track of the process
and its deviations.
• At different levels of capital, an individual investor needs to switch
gears and move on to a different style appropriate for the size, but the
preparation of the next style has to start well before arriving at that stage
in one’s investing journey. This helps in a smooth transition.

8 July

• Bloodbath in the markets today. There is nowhere to hide as blue-chip

stocks are also selling off amid the market’s biggest fall in 2019—
Mindtree is down 15 per cent, and even the mighty Bajaj Finance is
down 8.5 per cent.
• Markets are becoming really tough. I hope I can remain as rational as
possible in these highly volatile times. I am seeing destruction of
portfolios all around. So far, I have been saved from blowing up
because of my investor friends’ help and regular guidance. We have no
option in this field but to be very humble. Always being paranoid about
blow-up risk helps a lot in business and in investing.
9 July

• Accidents are now spreading to the large-cap space, as the economic

slowdown intensifies. Titan is down 11 per cent—the biggest one-day
fall since 2013—after it cut guidance for its jewellery business segment.

10 July

• Destruction in many stocks across the board today. Auto and auto-
ancillary stocks are leading the fall, while cyclicals and commodities are
also cracking hard. There is a sense of disbelief creeping into the minds
of many investors about equities as an asset class.

11 July

• High-quality blue-chip stocks still haven’t fallen to anywhere close to

attractive levels. The panic is only in stocks where there are severe
cyclical headwinds, or debt is very high, or corporate governance is a
big issue. Hardly anything that is available cheap looks good to me
fundamentally. And the stocks that I deem good are expensive. Every
day, I get very tempted to sell Bajaj Finance and buy the beaten-down
stocks of ordinary quality businesses in cyclical sectors that are
available at cheap valuations. This is where reading annual reports
comes in handy. Literally every promoter is warning of an impending
economic recession. In such a difficult macro backdrop, it is best to
stick with strong businesses. I need to remain disciplined.
• Many investors were getting excited about infrastructure stocks after the
BJP government got re-elected in May. After the recent collapse in their
share prices, investors are now talking about the risks with such
businesses—land acquisition issues, lack of funding from the
government due its growing fiscal deficit, among others etc.

14 July
 There is a feeling of gloom and doom among the investor community.
• Till date, I have never witnessed such widespread pessimism all around.
We need to keep our focus on earnings and on the select few stocks
whose growth prospects are decent, and avoid drowning ourselves in the
negativity.
• DHFL has issued a warning that its financial situation is so grim that it
may not survive as a going concern.38 Events like this make me
introspect. If an astute investor like Rakesh Jhunjhunwala (who had
invested in DHFL) could go wrong in such a big way on a stock, then
the rest of us in this profession should always be humble by default.

15 July

• A famous fund manager tweeted that from now on, he won’t be talking
about any stocks on television channels or social media. Managing
public money is emotionally tough during bear markets.

16 July

• Another accident in a popular mid-cap stock—DCB Bank is down 12

per cent after its quarterly results, in which it had pressure on NIM and
lower loan growth, and it guided for NIM pressure to continue.
• In this highly volatile environment, it’s a matter of time before some
stock blows up in my portfolio too. I should be mentally prepared for it.

18 July

• Trading at a low P/B ratio is a disadvantage for any lending company.

Dilution at such valuations is generally never value accretive.
Fundraising increases book value, but doesn’t add much to book value
per share (BVPS). Book value growth isn’t the key metric to focus on
when evaluating lenders, BVPS growth is. That’s how investors make
money in such businesses. Bajaj Finance has increased its ROE from 20
per cent to 25 per cent over the last three years, and has raised funds at
 8–10x P/B. That adds immensely to BVPS. At 10x P/B, a 10 per cent
dilution increases BVPS by approximately 82 per cent. The same
dilution at 2x P/B increases BVPS by about 8 per cent.

Author’s Note
Let’s understand the math behind this statement. Assume the
number of total shares outstanding to be 100. If BVPS is 10 and P/B
is 10x, then the total book value of equity would be 100*10=1,000;
the stock price would be 10*10=100; and the total market cap would
be 100*100=10,000. If the company dilutes 10 per cent of its equity
at this valuation, it would be able to raise 1,000, so revised book
value of equity is 1,000+1,000=2,000. Since the revised number of
total shares outstanding would become 100+10 per cent of 100=110,
the revised BVPS after equity dilution would be 2000/110=18.18 or
81.8 per cent higher than pre-dilution.

• Barring a few high-quality corporate groups like HDFC, Bajaj, Tata,

and some multinational names, the rest of this market looks like it has
only hope stocks (hoping that they don’t blow up).

19 July

• Theoretically, this is the best time to buy good stocks in mid-caps and
small-caps. Psychologically, it is the toughest time to do so. Right now,
many people think India’s best times are behind it, the government will
never undertake reforms and auto sales will never rise again. There is no
growth premium in 90 per cent of the mid-cap and small-cap stocks, and
they are trading well below their historical average valuation.
• This market is full of ticking time bombs waiting to explode on you any
day. Today, RBL Bank is down 13 per cent, after management warned
of deterioration in the asset quality of its corporate loan book in the next
 two to three quarters. It’s time to call the company Ratnakar Bank
again.

20 July

• The frustration level has crossed all limits for many people now. They
are blaming the government for the current state of the equity markets.
The easy way out is always to blame someone else for your mistakes,
instead of taking ownership and accountability.

22 July

• Solara Active Pharma is down 8 per cent without any news. These days,
you don’t need anything negative to take down the stock price of a
company; the prevailing sentiment will do it for you.
• It feels like the worst period for investing right now, not only because of
the fall in stock prices, but because the future looks very grim in the
medium term. The last time I felt like this was during the 2013 bear
market, which was followed by the 2014 bull market. I hope history
repeats itself.

24 July

• Yet another sharp fall in a popular mid-cap stock—Kajaria Ceramics is

down 9 per cent. Even sector leaders like these in the mid-cap space are
now falling hard. I really don’t know what action to take or what to
advise others. Nothing seems safe now, except a few large-cap stocks.

26 July

• How you behaved in 2017 is either being rewarded or punished now.

• Looking at the recent quarterly results of corporate India, I feel very few
management teams in the country have the capacity to endure an
economic downturn. The vast majority are just floating with the tide.
 This is why the select few companies that can execute well deservedly
get such a high-scarcity premium from investors.

28 July

• The quantum of wealth destruction in this bear market is unlike

anything I have ever seen. Deepak Fertilisers is now down 83 per cent
from its price of November 2017. Over 1,400 stocks have hit new 52-
week lows after the recent Budget.

29 July

• Even the stocks that reported good earnings are now falling in this
market. I never thought that Manappuram Finance (a gold financier)
would fall so much, with gold prices being at multi-year highs. It had a
great techno-funda setup too. The stock had hit a 52-week high post
earnings, but is now down 22 per cent from those levels, even after such
good quarterly numbers. What a bear market this is. If good earnings
cannot save a stock from a falling, I really don’t know what to do.
• This bear market has turned mid-caps into small-caps, and then further
turned them into micro-caps.
• One mistake which many of us made in 2017 was to get excited upon
seeing an ordinary company at a relatively cheap valuation versus the
sector leader. It was cheap for a reason.

30 July

• If you remove a basket of 40–50 companies, for most stocks in India,

2018–19 has been like revisiting 2008. And the bad news is, it looks
like it’s not done yet. I do know that good news and good prices never
come together. Cheap stock prices usually come with a lot of industry
issues and company specific problems attached. Today, many names in
the pharmaceutical, building materials and auto space are available at
 very attractive valuations. But most of us are unable to gather the
courage to buy them. Investing is hard.
• We need to humbly acknowledge the fact that a long-term investment of
five to seven years in any stock is becoming increasingly difficult in
today’s dynamic world. If a company doesn’t adapt to changing
environments or coming disruptions, its business model could become
obsolete before you know it. Don’t get married to your stocks, and don’t
fall in love with managements. Many investors’ portfolios got eroded in
this bear market because of inertia and complacency.
• The small-cap index has hit a new low for this year, and is now down 38
per cent from its peak. Many investors are unable to take the pain
anymore, and are moving to cash after booking a huge loss on their
portfolios. They want to wait for ‘clarity to emerge’ before coming back
to the market. Only the past is clear in markets.

31 July

• Tech Mahindra is down 5 per cent, and has hit a 52-week low after
weak quarterly results. There is no place to hide in this market,
including IT stocks which are generally considered ‘defensive’.
• Tejas Networks is down 67 per cent since its IPO two years ago. This
stock has served as a harsh lesson to many, which we should keep in
mind before investing in an IPO only because of anchor book allotments
to marquee institutional names.

1 August

• People on WhatsApp groups are talking about and criticizing prominent

fund managers whose portfolios are down over 60–70 per cent in this
bear market. I don’t understand what good these sarcastic discussions
achieve. We should focus on personal improvement; the competition is
with your own self.
• Care Ratings has crashed 20 per cent after reporting its lowest quarterly
profit since listing in 2012. This is a very tough environment for both
 corporates and investors.
• Surviving this fall looks tough. Valuations for quality stocks are
nowhere close to bear market levels, which implies there may be more
pain ahead. No business giving positive commentary is available at less
than 20x P/E multiple. That’s what is frustrating investors.
• Shankara Building Products has fallen 88 per cent since December
2017; some prominent investors had invested in this stock. Rupa &
Company and NBCC India are down more than 70 per cent each from
their 2017 highs. Himatsingka Seide has fallen 71 per cent since
January 2018, and Lakshmi Machine Works is down 57 per cent since
May 2018. All these stocks were widely held by many mutual funds. It
just goes to show that a bear market spares no one.
• Bloodbath in the markets again today. Shivalik Bimetal is locked in 20
per cent lower circuit. Zydus Wellness is down 7 per cent. For the first
time, I am getting a sense of self-doubt as an investor. My morale is
low. I could manage myself with reasonable calm when poor-quality
stocks were crashing, but now that good-quality stocks have also started
falling hard, I don’t know what action to take.
• The market cap-to-gross domestic product (GDP) ratio for the Indian
markets is now at 51 per cent. I cannot recall when was this number so
low, except for 2008 and 2013. Huge wealth destruction has taken place
in this bear market.

2 August

• Leaving the theoretical definition aside, it already feels like a recession,

with lower revenues and profits for most businesses in India. I could
never imagine a day when I would see Maruti’s car sales down 35 per
cent year-on-year. The economic slowdown is getting more drastic with
each passing day. It could lead to a hard landing if remedial measures
are not taken by the government very soon. From being the fastest
growing major economy in the world, India today stands on the brink of
a recession.
 As if the local economic news in India was not bad enough, today US
• President Donald Trump said his country will impose 10 per cent tariffs
on $300 billion worth of Chinese goods, starting 1 September. This
news has led to a sharp fall in global markets. Bad news tends to cluster
together in markets.
• The carnage intensifies. Shivalik Bimetal is down another 19 per cent
today, and is now trading at Rs 55. Ashok Leyland and Transpek are
down 10 per cent. Care Ratings is down another 20 per cent after the 20
per cent crash yesterday—that’s down 36 per cent in two days, as
investors are worried that the ongoing credit market crisis poses
business risks to the company. Every week, a new set of stocks gets
bombed in this market. It feels like a World War II bomb drop—no
one’s shelter is safe. So far, I have managed to avoid big blowups within
my portfolio in this bear market. But now I feel that it is just a matter of
time before my luck runs out.
• Most investors are feeling clueless now. We are unable to find stocks
with growing earnings at reasonable valuation, while the stocks that are
reporting bad earnings or have company-specific headwinds are getting
pummelled.
• Distinguishing value from a value trap is a big challenge in this bear
market. Need to keep this investing principle in mind— in a declining
business, it’s hard to buy things cheap enough to compensate for the
decline.
• Sterling Tools and Jamna Auto have hit lows of Rs 161 and Rs 36 today,
down 66 per cent and 65 per cent from their respective highs.
• The sell-off in the market has accelerated post the Budget:
• Nifty—9 per cent
• Mid-cap index—14 per cent
• Small-cap index—15 per cent

• The last bastion in this market—high-quality large-cap stocks—have

also fallen since the Budget:
• Titan—18 per cent
 • Bajaj Finserve—19 per cent
• Bajaj Finance—16 per cent
• HDFC Bank—12 per cent
• HDFC Limited—10 per cent

3 August

• Some of those who invested aggressively in the previous bull market are
now recommending ‘safe stocks’ like Kotak Bank and HDFC Bank for
10–15 per cent returns over the long term. The market humbles many.
In 2017, most of us were talking about return expectations of over 30
per cent CAGR from our portfolios. Anything less was looked down
upon as ‘mediocre’. The irony in the investing field is that people seem
to have 30–35 per cent portfolio CAGR expectations when stocks are
expensive amid a raging bull market, but after a prolonged period of
bearishness, when stocks are cheap, the return expectation tapers. Greed
and fear.

4 August

• We tend to overrate managements with a few good quarterly results. I

find it amusing when a company shows two to three quarters of good
results, and people start comparing it to the legends from its industry,
like ‘this is the next HDFC Bank’. HDFC Bank is what it is because of
its consistent execution for nearly 25 years. It’s a monumental
achievement.
• The leading gold loan companies charge their borrowers the same
interest rates for secured lending as microfinance companies do for
unsecured lending. This can’t sustain for very long. Either the regulator
will crack down here, or competition will lower the lucrative economics
of gold financiers.
• New low for some more of the popular mid-cap stocks—BSE Limited,
Century Plyboards and GNFC are now down 60 per cent, 68 per cent,
and 63 per cent respectively from their highs.
5 August

• Spandana Sphoorty Financial is coming up with an IPO. It is a

microfinance company, with cost of funds at 13.5 per cent.
CreditAccess Grameen (a listed peer of Spandana), which has a lower
cost of funds at 9 per cent owing to its ability to source liabilities
internationally, is available at a lower valuation. In the stock market,
people always like to buy something ‘new’, even if it is inferior to
another listed name from the same sector.
• The selling just doesn’t seem to stop. Long list of stocks in banks,
NBFCs, and HFCs that have hit a 52-week low today. Equitas is down
13 per cent after weak quarterly results, in which disbursements slowed,
margins contracted, cost of funds increased, and NPAs inched higher.
• In this market, people are selling first and thinking later. And wherever
there is even a whiff of doubt about the governance quality in any
company, its stock is being ruthlessly butchered.
• There is mass liquidation taking place across mid-caps and small-caps
now. Stocks are falling without any negative news, as there is no one to
buy them. It is a very scary time as an investor, but this too shall pass.
Just like 2013 did.

6 August

• One of the toughest things to do is to hold cash for long periods of time,
and then deploy it during times like these. Great investors understand
the long-range capital cycle, and get in when there is fear and panic at
the stock level, sector level, country level, and global macro level.
Someone who can layer on all of the above alphas is an investing
genius. Warren Buffett was able to do it during the 2008 global financial
crisis, when he invested in Goldman Sachs.

7 August
• Yes Bank has launched its QIP at Rs 85 per share. This is dilution at a
value-destructive price, but without fund infusion, the bank would not
have survived. History teaches us that when stressed companies are able
to get equity risk capital, it indicates that the worst for the sector is
getting over.
• The steel sector is experiencing a severe downturn due to
macroeconomic headwinds, the US-China trade war, and prolonged
slowdown in the Chinese economy. Debt levels for all major steel
makers in India are ballooning, and their acquisitions are not witnessing
any turnaround. Further, asset monetization plans are not fructifying, as
it looks difficult in the current scenario. Tough times.

8 August

• Investors in auto stocks have got badly bruised in this bear market. Rane
Holdings is down 70 per cent from its peak. Motherson Sumi and M&M
are down 63 per cent and 48 per cent from their highs of December
2017 and August 2018 respectively.
• One more big accident takes place in this market. Endurance
Technologies has crashed 20 per cent after the company announced
plans to enter tyre-manufacturing business. Investors are viewing this
move by the company as bad capital allocation.

9 August

• Another popular mid-cap stock is being taken to the cleaners—NBCC

India is down 13 per cent after reporting poor quarterly results. In a bear
market, good news is sold into, and bad news is hammered.
• Even some of the high-quality names have been selectively punished
hard in this bear market, making it more difficult for investors. The
stock of Page Industries has fallen 6 per cent to a 52-week low, after
poor quarterly numbers.
• Endurance Technologies has withdrawn its plans to enter the tyre-
manufacturing business, after investors expressed concerns to the
 management on the conference call last evening. The stock reacted
positively to the news, rising 17 per cent intra-day.
• From now on, I will avoid stocks of project-based businesses in
infrastructure and EPC (engineering, procurement and construction)
which deal with government tenders. They become worse with
increasing scale of operations as their working capital keeps getting
stretched (receivables collection is a big issue in B2G businesses). I
need to study the modern platform businesses. They get better with size,
and with every passing day, their moat becomes stronger.
• Read an article on a list of stocks which have given more than 1,000 per
cent return during this bear market.39 I wish one of them was in my
portfolio.
• Many of us who invest in India are looking at the historical returns of
the NASDAQ 100, and wondering whether we invested in the wrong
stock market:
• 2009—up 55 per cent
• 2010—up 20 per cent
• 2011—up 4 per cent
• 2012—up 18 per cent
• 2013—up 37 per cent
• 2014—up 19 per cent
• 2015—up 10 per cent
• 2016—up 7 per cent
• 2017—up 33 per cent
• 2018—up 0.04 per cent
• 2019 year-to-date—up 23 per cent

13 August

• The stock of Taj GVK Hotels hit 20 per cent lower circuit today. I didn’t
look for the reason behind the crash; didn’t want to depress myself
further.
14 August

• Poor quarterly results from Edelweiss. A colleague had cautioned me in

2017 that this is a highly cyclical business whose fortunes are linked to
the capital markets, but I had mistakenly assumed it to be a secular
growth business, primarily because of the rising stock price at the time.
During bull markets, we wear rose-tinted glasses, and are blind to risk.

15 August

• I am observing a high level of interest in gold and fixed income among

investors on WhatsApp groups and Twitter. In most cases, such bearish
sentiment towards equities gives a clue that we are close to a bottom,
but I have stopped trying to predict the low in this market.

16 August

• Some investors like to put money in sub-standard businesses at cheap

valuations, and believe that valuations of all players in the sector should
converge over time with that of the sector leader. It doesn’t work like
that. I had committed this mistake in 2017, but this bear market has
taught me many important lessons. Everything trades at the level it does
for a reason.
• Whenever a disruptive regulatory change takes place in an industry, the
biggest players benefit by gaining market share from their smaller,
weakened competitors.
• The severe pain in small-caps continues. Saregama hits a low of Rs 347,
down 64 per cent from its high of Rs 960 in November 2017.

21 August

• Today, it is the turn of real estate and construction stocks to get

punished. Capacite Infraprojects is down 6 per cent. Oberoi Realty has
 dropped 7 per cent, after news that the income tax department has
initiated search-and-seize operations at its premises.40

22 August

• When good news gets sold into during a bear market, the downside is
usually deep.
• Edelweiss and Sterlite Technologies are now down more than 70 per
cent from their highs. Mid-caps have become small-caps in the last
twenty months. Meanwhile, the small-cap index is down over 40 per
cent from its high, and most small-caps have become micro-caps.
• Some of the eternal bulls in my investing circle are contemplating
whether they should stay invested or come into cash. This bear market
has broken the will of many big bulls.
• Nothing seems to be working in this market. Maybe I am really just an
average investor at best. Maybe I just got lucky in the past. Maybe this
is the bear market talking inside me. I am not sure.
• Bloodbath in the markets today, with public sector companies taking a
huge hit. Many of their stocks are now trading at multi-year, and in
some cases, multi-decade lows:
• SAIL is back to 2004 levels
• BHEL is at a 15-year low
• ONGC is at its lowest price since March 2009
• Coal India has hit a lifetime low
• Shipping Corporation of India is at its lowest price since 2002
• Neyveli Lignite is at a 12-year low
• MTNL is back to 1993 levels

• The high-quality stocks from the financial, consumer and retail sectors
have been very resilient in this bear market. They have hardly corrected.
Investors are getting worried looking at their steep valuations that the
really big crash in the market is yet to come:
• HDFC Bank—4x P/B
 • Kotak Bank—4.9x P/B
• Asian Paints—67x P/E
• Berger Paints—65x P/E
• HDFC Life—80x P/E
• SBI Life—60x P/E
• Hindustan Unilever—65x P/E
• Nestlé—71x P/E
• Titan—65x P/E
• DMart—90x P/E

23 August

• Muthoot Capital is down 63 per cent from its high of last year. I
remember being very bullish on this stock in the past. Turned out to be
so wrong. The market is a humbling place.

26 August

• Investors are lamenting the fact that there are no dominant sector
leaders with excellent management available in the mid-cap space today
like Page Industries, Eicher Motors and Gruh Finance were ten years
ago. In my view, this is hindsight bias. Most of these big winners never
seemed like a blind buy at any moment. For instance, I have read annual
reports of the last twenty years for Titan, and I would have never
wanted to buy it at any time for one reason or another. Nor would most
investors have bought Gruh or Page at their high valuations ten years
ago. We are always searching for the next Gruh and the next Page. It’s a
common investor tendency. It is not intuitive or intellectually exciting
for us to invest in the obvious names, so we go down the quality curve
and eventually get burned in bear markets.
• The key to making money in high-quality stocks in India which trade at
expensive valuations is to be right in your judgement that they have the
following characteristics: high growth, high ROCE, large size of
 opportunity and high entry barriers (which enable longevity and
predictability of growth and ROCE).
• I don’t know when this bear market will end, but I do know that
investments made at the prevailing attractive prices in good stocks
should yield very handsome returns over next three to four years.
• The market always finds a reason to beat up stocks in a bear market, just
like it finds a reason to bid them up in a bull market. No stock with clear
growth prospects and good corporate governance will come cheap in
India, even in a bear market. For most stocks, the fundamentals are also
cyclical; they change with change in market sentiments. A lot of stocks
that multiplied in 2017 were available cheap till 2015 for a reason, and
then somehow, the market found a reason for them to multiply in 2017.
Cycles will repeat.

28 August

• As soon as investors try to gather some courage to keep going, this bear
market throws hand grenades to scare them off. RBL Bank has crashed
18 per cent on asset quality concerns in its corporate loan book. Equitas
and Ujjivan Financial are selling off hard as well. I couldn’t find any
negative news for those two names, but now I am used to stocks falling
without any reason.
• Indiabulls Housing Finance will be replaced by Nestlé in the Nifty
index on 27 September. I wonder why market commentators keep
comparing the Nifty’s current P/E to its historical P/E levels. It makes
no logical sense. The index keeps replacing 10–15x P/E cyclical stocks
with over 50x P/E secular growth stocks, and this trend has picked up
pace in the last decade. The primary frontline indices in India, the Nifty
and the BSE Sensex, have been removing infrastructure, energy, power
and public sector stocks, and have been including high-quality
consumer, IT and private banking stocks. As a result, the frontline
indices in India have become much more resilient during bear markets,
and are increasingly a tough benchmark for active fund managers to
 beat. A bottom-up approach to stock picking is now more relevant than
ever for generating alpha.

4 September

• The quantum of wealth destruction in individual small-cap names is

now attaining scary proportions: LT Foods is down more than 80 per
cent from its high in January 2018.
• Last year, investors were ready to pay more than 4x P/B for Muthoot
Capital. Today, the stock has no takers at half of that valuation. This is
yet another cyclical business which was misunderstood to be one with
secular growth.
• Recurring revenues get a higher valuation multiple from the market. A
high multiple is not given for a one-time business/revenue opportunity
even if it is very sizeable.

6 September

• A portfolio should be treated like a sports team. Only the best get to
play. Selling the stocks of weak businesses in one’s portfolio (even at a
loss, if necessary) and deploying the proceeds into the stronger holdings
boosts portfolio returns in the long run. It is akin to watering the flowers
and removing the weeds. The overall portfolio quality is enhanced.
• Rs 35,000 crore of bond repayments come due for the NBFC industry
this month. It will test the sector’s resilience.
• Some investors don’t want the lower return potential of stable large-cap
stocks, nor do they want the very high price volatility of small-cap
stocks. Such investors should choose quality mid-caps with good
growth prospects.
• I am wary of Indian companies making big acquisitions in Europe. They
usually don’t end well.

8 September
 There are very limited opportunities for non-linear growth in India’s
•
public markets. A majority of businesses are into services or
manufacturing. Data-driven platform companies are lacking.
• Culture is a big issue in public sector banks in India. Read an article
which reinforced my dislike for investing in them.41 Investing is a
negative art—knowing what not to do is more important than knowing
what to do.

9 September

• Somany Ceramics is locked in 20 per cent lower circuit after its stock
broker, Mentor Financial Services, defaulted on payment to the
company. If there is one big lesson imprinted into my thinking because
of this bear market, it is to always be diversified, because an adverse
event can take place in any company at any time.

10 September

• Investors tend to give precedence to business cycle over corporate

governance during bull markets. If you overstay your welcome with
such stocks, the hard lessons are learned in the subsequent bear market.

11 September

• In the last three months, when the Nifty fell from 12,000 to 10,650, and
mid-cap and small-cap stocks fell sharply, quality large-cap stocks
continued to shine:
• HDFC AMC— Rs 1,700 to Rs 2,600
• HDFC Life—Rs 450 to Rs 569
• SBI Life—Rs 650 to Rs 850
• ICICI Prudential—Rs 350 to Rs 450
• Infosys—Rs 650 to Rs 847
• TCS—Rs 2,000 to Rs 2,300
• Asian Paints—Rs 1,300 to Rs 1,621
 • Pidilite—Rs 1,000 to Rs 1,200
• Divis Labs—Rs 1,300 to Rs 1,640
• Marico—Rs 325 to Rs 390
• Bajaj Finance—Rs 3,000 to Rs 3,785
• Nestlé—Rs 9,400 to Rs 12,850

• Even global fund houses are now turning negative on India. Credit
Suisse has downgraded India in its model portfolio amid the ongoing
economic slowdown.42
• There are visible signs of pessimism everywhere. India has a history of
self-correcting after every crisis, and this time should be no different. I
hope the government does not wait until next year’s Budget to salvage
the situation.

19 September

• Many small-scale broking houses have gone bust in this bear market.
When choosing your broker, instead of focusing only on minimizing
brokerage, always look at counter-party risks as well.

Author’s Note
All your (calculated) risk taking should be done within the equity
portfolio only. In all other areas, prioritize safety above all else. For
instance, when you are investing in fixed-income instruments, don’t
chase yield by taking on high risk. Rather, be extremely
conservative and focus on ensuring sound sleep at night for yourself.
A very important yet underrated aspect of asset allocation is to take
a risk where it’s explicit and mentally bucketed as risky. The most
harmful risk is one which is hiding in the investment/asset class that
we mentally classify as ‘safe’.
 Astral Poly is down 15 per cent after a block deal in which 3.8 million
• shares got traded. Block deals at a big discount in quality businesses
usually present a good buying opportunity.

20 September

• Just when all hope seemed lost, the finance minister of India has made a
huge announcement—the corporate tax rate has been slashed to 22 per
cent (effective rate of 25.17 per cent after addition of surcharge), and
the tax rate for new manufacturing companies has been cut to 15 per
cent (effective rate of 17 per cent after addition of surcharge). This is a
game changer for India. Now, the economy should bottom. There will
be a massive investment push. With a 15 per cent corporate tax rate for
new manufacturing companies, India can become a preferred
destination for investment at a time of global trade wars.
• It is time to think about the implications of this mega reform for the
stock market:
• Companies that were paying high tax rates will stand to benefit the
most. For a company paying 35 per cent tax earlier and 25.17 per
cent now, the net profit after tax will jump by 15.12 per cent. As this
is an increased cash flow till eternity, the P/E ratio should also
expand.
• For banks, book value gets a boost, and so does ROE. They will be
big beneficiaries, along with NBFCs, which were looking to raise
capital in the near future. The capital raise will now happen at a
higher valuation.
• For growing businesses with high ROE and low dividend payout,
the P/E ratios should rerate, as not only does the base net profit
move higher, but reinvestment returns have received a permanent
boost too.

• What a day this is turning out to be:

• Biggest single-day gain for the Nifty in ten years.
 • Biggest-ever single-day gain for the Nifty bank index.
• Biggest single-day gain for Eicher Motors in twenty years.
• Biggest single-day gain for HDFC Bank in ten years.

• The great thing about the rally today is the tremendous breadth in the
market and the huge number of stocks hitting upper circuit. Bull
markets typically kick off with a few consecutive weeks of hugely
positive breadth thrusts. The stocks and sectors which make fastest all-
time highs when bear markets end usually lead the next bull market.
This is the time to actively work hard on identifying the emerging
leaders.
• The impact of these tax cuts in terms of the longer-term implications on
ROEs will vary across companies and sectors. Not all companies or
sectors will be able to keep the excess profitability over time. Most will
have to pass on this benefit back to their customers due to competitive
pressures. The market will differentiate once sanity sets in.
• In my opinion, this is the biggest economic reform in India since the
historic liberalization measures of 1991. This landmark event should
kick off the bull market we were all waiting for.

25 September

• Research reports on newly listed companies should be taken with a

pinch of salt when they are issued by the same firm which was the lead
manager in the IPO.
• Capital allocation is a key monitorable in businesses that generate a lot
of cash, and have very low capital expenditures. The market rewards
managements that deploy the excess cash in high return opportunities,
instead of just letting cash pile up on the balance sheet.

1 October

• There are media reports that the government is considering rationalizing

personal income tax rates, in a move that will result in the increase of
 disposable incomes, especially among the middle class, and help revive
domestic consumption.43 I really hope this does happen. The recovery
in my portfolio has been sharp and swift after the corporate tax cut
announcement. This additional economic booster could help me fully
recoup the bear market drawdown in the coming days.
• I have made good use of the recent rally to exit the few below-average-
quality businesses in my portfolio, and have deployed the sale proceeds
into the existing higher quality holdings. No more going down the
quality curve ever again in an attempt to get quick short-term returns.
• Bajaj Finance, with a loan book of Rs 1,25,000 crore, overtakes State
Bank of India, with its loan book of Rs 2,240,000 crore, in market cap.
Profitability matters.

3 October

• IndusInd Bank is down 6 per cent today and has fallen 21 per cent in the
last four trading sessions due to concerns about its exposure to stressed
sectors in the economy. The liquidity crisis has now started affecting
even decent-quality banks. I hope there is no incremental bad news
here.

4 October

• The small-cap index has given up almost all of the gains it had made
post the corporate tax cut announcement.44 The joy was shortlived. I
think I had started celebrating prematurely.
• Sharp sell-off in many stocks in the last few days. This is worrying. We
had a big structural reset, and the broader markets have just shrugged it
off in a short while. The market is signalling that the economy is much
worse than understood previously. Looks like we are in for a long grind.

7 October
• Revisit your portfolio holdings from time to time, and as long as there is
comfort on promoter quality, and there is no industry crisis in any of
your stocks, do nothing but keep holding on. If the industry is not
fundamentally broken and is just experiencing a temporary slowdown, it
will regain favour among investors once tailwinds reappear. Patience
with quality stocks, which have growing long-term earnings, is the key
to investing success.
• The market looks very weak today. Many big falls in the broader
market. Edelweiss is down 6 per cent after CRISIL downgraded its
NBFC arm, ECL Finance. Aurobindo Pharma has tanked 14 per cent
after the USFDA issued serious observations about one of its
manufacturing facilities. Lakshmi Machine Works, NCC, Piramal
Enterprises, PNB Housing Finance, Glenmark, and many others names
have hit new fifty-two-week lows. Looks like the bear market has
resumed after the brief rally.

8 October

• The typical template for many successful investors’ journey in the

market is to multiply money in cyclicals and special situations in the
initial years, and compound it in quality in the later years. Some
investors also follow the core-satellite portfolio approach—70–80 per
cent allocation in high-quality secular growth stocks for steady
compounding, and 20–30 per cent allocation in cyclical stocks and
special situations to generate outsized returns.
• In my view, private market valuations of startups should not be used as
a benchmark for public markets. It takes just one overly exuberant
investor to value a startup at an egregious figure, but it needs an
equilibrium of the entire market’s demand and supply in the case of
listed companies.

9 October
• The stock market has become more polarized after the date of the
corporate tax cut—91 per cent of the market cap gains in the BSE 500
index since then have been cornered by a mere thirteen firms.45
• The best returns from stocks typically occur when the government and
the central bank try to kickstart a slowing economy through stimulus
measures.

10 October

• Financials continue to bleed. IndusInd Bank is down 6 per cent after an

increase in bad loans in its quarterly results, while RBL Bank and
Muthoot Capital have hit new fifty-two-week lows today.
• India is facing a credit crisis of unprecedented proportions. It’s a wild
forest fire out there right now with no end in sight. It’s also a massive
crisis of confidence, which needs something big to stop it, or else, a lot
of banking and NBFC firms will go extinct. The threat of systemic risk
in the Indian financial system is very high. I have no idea what these
lenders have in their books right now. They all say in their conference
calls that everything is fine, but the market keeps crushing their stocks
to pulp. Stocks don’t fall 60–70 per cent without reason when the
headline index is barely down.
• When investing in lenders, stick to the strongest franchises. Fear knows
no valuation bottom during a financial crisis.
• There needs to be a speedy resolution from the government to control
this NBFC crisis, which has started percolating into the banking sector.
Many of us cannot imagine the dire consequences of that.
• This is not the time to be adventurous as an investor. The focus right
now has to be solely on survival. If one can make it through this
carnage, one will get enough chances to multiply money in a future bull
market.
• For a durable market bottom, there needs to be a sense of widespread
panic where everybody has lost hope. In the last leg of a bear market,
 the erstwhile strong leaders finally collapse and the bottom is created.
But as of now, only the stocks of weak businesses are falling.

11 October

• For investors in a lending business, it is all about trust. This is the

reason why HDFC Bank commands 4–5x P/B, Gruh Finance used to
command 12x (under HDFC parentage),\ and Bajaj Finance commands
10x. Trust is a vital ingredient of valuations for lending businesses,
because at the end of the day, as an investor, you can’t really look into
each and every loan they give out. In an opaque business such as
lending, your primary bet is trust in the management.
• The biggest moat HDFC Bank has is its cost of funds. With the lowest
cost of funds among banks, it can afford to lend to only good-quality
borrowers and still make decent margins. For banks like RBL Bank and
Yes Bank to show the same margins with their higher cost of funds, they
will have to lend to riskier areas, so the odds are always stacked against
them. The same principle applies to CreditAccess Grameen. With the
lowest cost of funds among the NBFC-MFIs, it can lend to good-quality
MFI borrowers and still make healthy margins, while its weaker peers
with their higher costs of funds will have to cater to riskier borrowers to
get to the same margins.
• Aurobindo Pharma promoters have pledged more shares to cope with
the stock price fall. Pledged shares can lead to a vicious, negative
feedback loop in bear markets.

14 October

• For many years, I primarily invested in micro-caps, small-caps and

cyclicals. I used to take high risks, and was fortunate that I achieved
financial independence through that investing style before the NBFC
crisis began. This bear market has brought about a profound shift in my
thought process as an investor—henceforth, I will focus on return of
capital before return on capital. Capital preservation and a focus on
 quality will take precedence. I have learned one more big lesson for the
rest of my investing career: however well you are prepared, and have
calculated your odds, risk surfaces from places you can never imagine.
Even if you are very careful in crossing the road by looking left and
right, a drone might still kill you from above. Things can go wrong in
ways you never thought of, and your only defense against unknowns is
prudent diversification—a portfolio of 20–25 stocks diversified across
industries and risk factors. This practice insures against a catastrophic
outcome for the portfolio as a whole, and also opens the door to
optionality.

Author’s Note
Ever since the inception of Stellar Wealth Partners India Fund and
Stellar Wealth PMS, I have followed this investment philosophy—
of prudent diversification and an emphasis on quality.

15 October

• Hypergrowth, along with a ROCE significantly less than cost of capital,

is a recipe for eventual disaster. Investors shouldn’t blindly chase hyper-
growth businesses. High growth is not necessarily a positive. It could be
a gruesome business earning below its cost of capital (and consequently
destroying shareholder value in the long run, even though its stock price
may surge temporarily during a raging bull market).
• Read a great interview of Peter Bernstein.46 Many great lessons in it on
risk management:
• Recency bias is all-pervasive. We tend to extrapolate recent trends
into infinity, as we assume they reflect the new normal…until it isn’t
in a cyclical world.
• Risk is what’s left over after you’ve thought of everything possible,
plausible and probable. The biggest risks are those that aren’t in the
 news. People don’t prepare for them because they’re not being
reported.
• Unexpected events of large magnitude and consequences that play a
dominant role in history are the very reason for Lenin’s quote:
‘There are decades where nothing happens; and there are weeks
where decades happen.’
• When we humbly accept that it’s difficult to make predictions,
especially about the future, we will be more inclined to build an
investment strategy that is robust to a wide range of outcomes.
Diversification is a humble expression of self-awareness—that you
can never know with absolute certainty what’s going to happen in
the future.
• Avoid the risk of ruin when making decisions by focusing on
consequences rather than just on raw probabilities in isolation. Some
risks are just not worth taking, whatever the potential upside may
be. Thoughtful investors define risk management as a process of
dealing with the potential consequences of being wrong.
• Good investing is a peculiar balance between the conviction to
follow your ideas and the flexibility to recognize when you have
made a mistake. You need to believe in something but, at the same
time, you need to recognize that you will be wrong a considerable
number of times over the course of your investing career. This fact
holds true for all investors, regardless of their stature.

16 October

• There has been massive wealth destruction in this bear market. Shivalik
Bimetal has crashed 76 per cent from Rs 146 in March this year to Rs
34 today. PNB Housing Finance is down 78 per cent to Rs 375 today
from its high of Rs 1,717 in August 2017. The latter was a bull market
favourite in 2017.
• Even though the Nifty is standing firm, the market breadth has been
negative every day for the last week. I read a startling fact today—the
 Nifty has outperformed the small-cap index since the market bottomed
in March 2009. It just goes to show how difficult active management is.
• Our personal experiences in the market over time eventually lead us to
our individual investing styles.

17 October

• Deep-value investing, with a focus on high dividend yields, doesn’t

always work. Reliance Capital gave a dividend of Rs 11 per share in
September 2018. Today, its stock price is at Rs 12.70.
• When evaluating a lending business, one needs to look at various
aspects, in addition to book value per share growth and asset quality—
granularity of the loan book, liabilities profile/source of funds, cost of
borrowing, quality of lending across cycles, composition of retail versus
wholesale in the loan book, product and geographical diversification,
and smart use of technology.

18 October

• Big rally today in the beaten-down stocks of troubled names. I need to

remain disciplined and ignore the noise. I will not go down the quality
curve.
• Bear markets are a good time to look at IPOs very closely.
• Being publicly positive on a stock often leads to consistency and
commitment bias.
• Read an excellent curation of the most insightful extracts from Howard
Marks’s memos of the last twenty years.47 This deserves to be printed
out and kept on every investor’s desk for lifelong reference. So many
great learnings in it:
• Markets oscillate between extreme optimism and pessimism. Stock
prices sometimes fall to such extremely low levels that the earnings
of the next three to four years alone add up to the current market
cap. Conversely, sometimes stock prices go to such extremely high
levels that even a high earnings growth rate for a decade would not
 produce earnings sufficient to justify a future value large enough to
make a commitment today.
• We should not aim for the highest possible returns in the shortest
period of time, but seek above-average returns over a long period of
time with the lowest possible risk. Risk management should take
higher precedence in the investment process, and risk-adjusted
returns are a far superior indicator of performance than absolute
returns. This is especially true during bull markets, when aggressive
risk-taking often is mistaken for intelligence. What’s important is
the underlying process used by the fund manager or investment
advisory firm, and the amount of risk taken on in client portfolios to
achieve those high returns. That process is the key to long-term
sustainability. High absolute returns in isolation carry little
significance for assessing performance.
• Market cycles are impossible to call with any precision. The best we
can do is use the process of elimination to identify where we are not.
• Typically, a bubble is characterized by some major technological
revolution, cheap liquidity, financial innovation that disguises higher
leverage (in John Kenneth Galbraith’s words, ‘the world of finance
hails the invention of the wheel over and over again, often in a
slightly more unstable version’), amnesia about the last bubble, and
abandonment of time-honoured methods of security valuation. The
fuel is borrowed cash and margin purchases. When these conditions
are present, always remember John Templeton’s warning: ‘The four
most dangerous words in investing are “this time, it’s different”.’
• A study of past manias and crashes should be part of every
investor’s body of historical knowledge. It informs and educates us,
as almost no other subject can, about the psychology of people,
governments and nations. More importantly, it is yet another
demonstration that hardly any events in the markets are
unprecedented. The only thing that’s new in finance is the history
we haven’t read.
• Human nature has not changed in centuries, and the perennial
emotions of greed and fear ensure that speculative follies keep
playing out, leading to endless cycles of booms and busts. In many
of the historical bubbles, investors believed they were taking part in
an adventure that would reinvent the world. When it comes to
investments, the romantic appeal of being party to a technological
revolution or an entirely new industry or invention often dominates
profit considerations in investors’ minds.
• Improving luck requires the humility to acknowledge its presence.
Successful investors appreciate the role of luck. They are
intellectually honest and conscious of alternative histories; that is,
the silent events in their lives. These are the events that could have
happened but didn’t.
• Think probabilistically rather than deterministically, because the
future is never certain; it is really a set of branching probability
streams.
• Expect the unexpected in the field of finance; expect the extreme.
Don’t think in terms of boundaries that limit what the market might
do. One of the single biggest realizations all investors experience in
this field is that the unexpected and seemingly impossible continue
to happen. This is why reading history and studying human
behaviour during past episodes of panic is valuable for an investor.
• The key to successful investing is to explicitly distinguish between
fundamentals (the intrinsic value of the company based on expected
future results) and market expectations (the stock price and the
future results it is currently factoring in). Investing is all about
expectations, and the outcomes are driven by revisions in
expectations, which trigger changes in the stock price. Therefore,
the ability to properly read market expectations and anticipate
revisions of those expectations is the springboard for superior
returns. To do this successfully, an investor needs to have ‘variant
perception’, meaning one must hold a well-founded view that is
meaningfully different from the market consensus.
 • You may get zero ideas in a year during periods of market frenzy,
but it is better to be patient than poor. There are times to make
money, and times to avoid losing money.
• Low- and negative-return years are a routine part of the investing
game. To win this game, you have to be present in it for a long time.
The key is to avoid getting thrown out midway because of reckless
decisions.
• Investing success is challenging over a long time period. A year or
two of a bull market fools many participants into thinking otherwise.
Achieving a CAGR of 100 per cent for a few years is commendable,
but achieving a CAGR of 20 per cent for six decades is what makes
a Warren Buffett. He played the game for the longest time and
became the biggest winner.
• The stock market will always be totally unpredictable, because it is
a complex adaptive system. George Soros’s reflexivity theory
suggests that markets cannot possibly discount the future, because
they do not merely discount the future but also help to shape it.
Reflexivity is, in effect, a two-way feedback mechanism, in which
reality shapes the participants’ thinking, and that in turn shapes
reality, in an unending loop.

22 October

• Infosys’s stock crashed 15 per cent today, its biggest fall in over six
years, after anonymous whistleblowers accused the company’s chief
executive officer and chief financial officer of unethical practices.48
Infosys has long been considered the bellwether of corporate
governance in India. Today’s incident has further reinforced my belief
in the importance of diversification. Successful investing is very
challenging over a long time-frame, because anything can happen at any
time in the markets. You need to survive in the investing game for a
long time to win, so take all necessary steps to avoid blowing up
midway.
 Averaging up in an existing holding at a higher price on strong
• management execution, instead of averaging down in laggard
businesses in the hope that their stock prices recover, minimizes the risk
of unknowns. There is no point in doing hope investing when the
fundamentals are not improving.

23 October

• RBL Bank plunged 20 per cent today after bad quarterly results, in
which it reported a spike in provisions, with asset quality deteriorating
sharply. I really pray this doesn’t become another Yes Bank.

31 October

• Read a startling statistic today—between June 2018 and June 2019, 88

per cent of total foreign investor inflows in India went into only the top-
100 companies by market cap.49 In an environment of high volatility
and uncertainty, investors continue to buy large-cap stocks irrespective
of valuations.

4 November

• Bajaj Finance is about to raise funds via QIP. The very fact that Bajaj
Finance can find takers for its equity at such high valuations is in itself
the company’s biggest moat. Over time, I have learned that a lending
business like a bank or NBFC is worth as much as the valuation it can
raise capital at, however much we may complain about it being
expensive. Fair valuation in a lending business is the valuation where
the company can dilute its book. If a lending business trades at 10x P/B,
and can raise capital whenever it wants at that valuation, then that is the
fair valuation, however expensive your traditional parameters may tell
you it is. If a lending business trades at 1x P/B and can’t dilute its book
there, then even 1x is expensive for it. We are living in very interesting
times. Bajaj Finance finds takers at 10x P/B while Yes Bank and PNB
 Housing Finance don’t find takers at sub-1x P/B. This shows why in
lenders, you have to look at the more expensive ones—an expensive
valuation is in itself a huge advantage. In lending companies, the ability
to dilute at high valuations changes the business fundamentals. You
can’t separate valuations from fundamentals in a lending business. The
more expensive the valuation for a lender, the better it is for its
fundamentals.
• When an individual investor or fund manager does very well in the
market for a few years, check if their investing style was in favour at the
time. Any one focused on mid-cap and small-cap stocks did very well
between 2014 and 2017. Those same set of people would have done
poorly in 2018 and 2019. No strategy works all the time in the market,
though investors keep looking for one. If you ever feel the urge to boast
about your recent performance, check if it’s your strategy which is in
favour. Conversely, if it is out of favour, there is no reason to feel
stupid. The worst thing you can do is to keep switching your investment
approach based on the current hot trend in the market. That’s a surefire
recipe for underperformance in the long run. Find an approach that suits
your temperament; that is the key. The best investment strategy is the
one you can stick with for a long period of time, through all the ups and
downs of the market.
• Instead of investing only in small-caps or mid-caps, my learning from
this bear market is to always have a balance in the portfolio, and follow
a multi-cap approach, with a focus on quality.
• If you invest based on what you read in the newspapers, you will lag by
a mile. Markets move well ahead of a recovery or a slowdown in the
real economy.
• In the last nine years, the earnings growth rates of many FMCG stocks
in India have slowed down, while their P/E ratios have expanded. The
markets have been highly valuing predictability and longevity. In some
cases, the market has been proven right to do so. For instance, Nestlé
India’s P/E multiple was 64x (trailing) in 1994, and is 69x currently.
That means the stock appeared expensive twenty-five years ago, and it
 appears expensive today as well. However, an investment in Nestlé in
1994 at 64x P/E multiple would have returned 17 per cent CAGR from
1994 to 2019, compared to 10 per cent CAGR delivered by the Sensex
during the same period. To put it another way, an investment in Nestlé
India at 290x P/E multiple in 1994 and an exit at today’s price would
have delivered returns to investors in line with the Sensex (10 per cent
CAGR). Hence, in 1994, if an investor wanted returns in line with the
Sensex over the next twenty-five years, Nestlé’s justified P/E multiple
was 290x.

5 November

• News reports say Bajaj Finance’s QIP has concluded successfully. A

total of 113 investors put in bids; demand was approximately 4.8 times
the QIP issue size, and amounted to Rs 40,600 crore. There is no dearth
of appetite from institutional investors for high-quality equities in India.
• Bajaj Finance’s stock has hit a new high today. This is a typical pattern I
have observed after the completion of QIPs for highly valued lenders.
The stock stays in a range until the QIP date, and then takes off as
investors start finding the valuation attractive on P/B (which has
reduced post the equity raise).

10 November

• Patience is the only differentiator left for investors in this age of

information deluge. Easy to say but difficult to implement, especially
when your stocks are falling. That’s why a behavioural edge is the most
durable and sustainable edge for an investor, not the analytical one.
• Allocation is as important (if not more) as stock selection. Investors
tend to acknowledge this fact after their portfolio attains a certain size.

11 November
• Quality stocks will always find favour in India, but return expectations
should be adjusted too, given their expensive valuations.
• Read an insightful blog post on when to average down in your falling
stocks, and when not to.50 A lot of practical points in it from a risk-
management perspective:
• You must not average down (much) on highly levered business
models like banks.
• You can average down on secular growth consumer stocks during
market sell-offs.
• You must not average down (much) on operationally levered
business models like commodities.
• You must not average down on business models facing technical
obsolescence.
• You absolutely must not average down in levered business models
involving fraud.

12 November

• There is no need to restlessly try to figure out what is taking place in

every industry. Find peace with your existing portfolio stocks, and keep
learning to gradually expand your circle of competence.
• It is very difficult for any bank to make over 15 per cent ROEs without
a good fee franchise. Any bank that tries to achieve it through other
means usually does it via subprime lending. That’s why HDFC Bank is
special; a majority of the lending it does is to lowest risk customers,
earning a nominal spread. The entire focus is on building the fee
franchise. If your cost of funding is 4–4.5 per cent, you can lend to the
highest quality borrowers relatively cheaply, and focus on growing the
fee income. HDFC Bank has really finetuned this practice. Bajaj
Finance is also scaling up its fee-based franchise in a significant way.
That’s where the company’s focus is. Fee income is now 40 per cent of
profit before tax, and it’s the secret of Bajaj Finance’s expanding ROE.
• Sometimes, generalizing a business by stating broad attributes such as
‘great promoter’, ‘strong moat’, ‘high ROCE’ and ‘large size of
opportunity’ may lead to blind spots in our analysis. If one listens to
people who are invested, obviously they would say the company is
great. It’s a good practice to consider unbiased views of people who
understand the business better than us.

13 November

• Understanding the deep meaning in this quote from Nick Sleep can help
us discover many investment opportunities: ‘The bond (or not!) between
customers and companies is one of the most important factors in
determining long-term business success. Recognizing this can be very
helpful to the long-term investor.’51 Factors that strengthen the bond
include:
• Brands: Some brands are ubiquitous and widely trusted. Think
Budweiser, Tide and Maggi. They lower search costs for consumers
and offer psychological advantages. Branding has historically served
a few key purposes: to guarantee minimum assured product quality,
and to allow people to express their identity in a social context.
• Switching costs: These come in many forms and may be explicit (in
the form of money and time) or psychological (resulting from deep-
rooted loss aversion or status-quo bias). These costs tend to be
associated with critical products (such as Oracle’s SAP software)
that are so tightly integrated with the customer’s business processes
that it would be too disruptive and costly to switch vendors; or with
products that have high benefit-to-cost ratios (such as Moody’s).
• Network effects: The network-effect advantage comes from
providing a product or service that increases in value as the number
of users expands, as with Airbnb, Visa, Uber or the NSE of India.
This functions as a strong moat, as long as pricing power is not
abused and the user experience does not degrade. Creating a two-
sided network, such as an auction or marketplace business, requires
 both buyers and sellers, and each group is going to show up only if
it believes the other side will be present as well. Once this network
is established, it becomes stronger as more participants from either
side engage. As more buyers show up, more sellers are attracted,
which in turn attracts more buyers. Once this powerful positive
feedback loop is in place, it becomes nearly impossible to convince
either the buyer or the seller to leave and join a new platform. This
kind of business actually becomes stronger as it grows, and displays
accelerating fundamental momentum.
• Low-cost advantages: Low-cost producers can sell their product or
service at a lower margin than competitors, and still operate
profitably, as the company spreads fixed costs over a large base of
customers. The more customers that buy from a low-cost producer,
the more its cost advantage moat widens over time, creating a
‘flywheel’ that accelerates as the business grows.
• Culture: As investors, we look for companies that are fanatically
obsessed with the well-being of their customers, and empathize with
them more than their competitors do. Culture matters to long-term
investors because it empowers the company’s employees to do their
day-to-day tasks slightly better than competitors do theirs. Over
time, these little advantages compound into much larger advantages,
which can persist far longer than conventional wisdom expects.

14 November

• Many times, investors who have seen a bear market are unable to
participate in the subsequent bull market due to price anchoring. Focus
on finding value, not on trying to get the lowest price.
• I don’t understand why market commentators on television and digital
media try to justify every single movement in the market on a daily
basis. Most of the time, stock prices fluctuate simply because of
randomness.
• A bubble is a bull market that most people are not part of. For people
riding that bubble, it’s wealth creation. For most of the people watching
from outside, it’s a painful bubble they wish they were riding.
Eventually, FOMO sets in and there is a euphoric blowoff near the end
of such a bull market. Then, the bubble bursts hard.

Author’s Note
Some indicators of investor exuberance near market tops include a
sharp rise in stocks of holding companies, frenetic IPO activity and
emergence of new metrics for valuation.

• Vodafone Idea has reported the biggest ever quarterly loss in corporate
India’s history—Rs 50,921 crore.52 A concoction of regulatory risk,
high capital intensity, heavy debt and cut-throat competition make for a
deadly cocktail.

16 November

• Quality companies at bubble valuations are the functional equivalent of

a value trap. Such stocks may go into a long period of time correction,
as fundamentals fill into the valuation.
• Selective bull markets which are limited to a few sectors showing strong
earnings growth are where you make the biggest wealth. A euphoric
broad-based bull market like 2017, where everything is going up
rapidly, usually means that the bear market is near.
• If you believe that the true value of a stock is far higher than the current
price, don’t keep on waiting for a cheaper price. Start buying now, and
add more if your desired price comes later.

18 November
• Shares of Pokarna Limited were locked in 20 per cent lower circuit after
the US Department of Commerce amended preliminary countervailing
duty for the company’s subsidiary, Pokarna Engineered Stone, to 83.79
per cent from 4.32 per cent. The majority of Pokarna’s revenue comes
from the US market, and this is a big blow. It’s yet another reminder for
us as investors to be appropriately diversified at all times. No one can
predict what could go wrong in any business.

21 November

• During bear markets, investors focus on cash flow, balance sheet and
working capital. This should be the default practice irrespective of
market conditions. I had a brief look at VA Tech Wabag today. The
company has reported a cumulative net profit after tax of Rs 815 crore
in the last eight years. However, the cumulative operating cash flow is
negative Rs 382 crore in the same period. The company hasn’t been
able to convert reported profits into cash. Negative cash flow stocks are
prone to crashing in a bear market, when liquidity dries up.

22 November

• HDFC AMC hits a new high of Rs 3,844, up 194 per cent from Rs
1,305 in February this year. I have benefitted from having this stock in
my portfolio, but its valuation has become a concern. It is now trading
at 18 per cent of AUM. No asset-management firm in the world has
ever traded at such high valuations. I need to be objective and take a sell
call on this name soon.

23 November

• Many interviews and debates are taking place in the business media
about buying quality at any price versus buying value.53 I believe one
should always try to buy a good (or at least decent-quality) business, but
for this to become a good investment, the price needs to make sense too.
 If I am paying top-dollar valuation for a quality business with strong
competitive advantages and great return ratios, then I necessarily want
high growth for many years. I am not willing to pay high valuation for
businesses of high quality which have low earnings growth prospects.

25 November

• Read an insightful Twitter thread on the wisdom of crowds; that is,

respecting the collective wisdom of the market participants when
making investment decisions.54 Most of the time, a stock is cheap or
expensive for a good reason.

27 November

• Read an excellent article on platform businesses and the enormous

power these entities wield over society and the economy. It is a must-
read for anyone interested in the new economy leaders. As investors, we
need to constantly adapt to changing realities.55 Some important
observations from the article:
• There’s a powerful global trend—the intermediary is becoming
more powerful than the principal, or the actual product/brand owner.
• Any business model that stores the customer’s data and owns it
can’t be disrupted. Data is like having your own mine, except that its
value keeps increasing with more mining. Data is possibly the
biggest moat that a business can have.
• Software is infinitely replicable and, through the internet, can be
delivered at zero marginal cost. When a major input to business—
distribution cost—goes to zero, industries and incumbents get
disrupted rapidly.

• The Nifty has hit a new lifetime high today, but the mid-cap and small-
cap indices are still struggling and remain significantly down from their
respective peaks. My portfolio is within touching distance of its all-time
high, which was last seen in January 2018. This bear market has given
 me a lot of mental pain and anguish, but I am now about to finally come
to the end of this tumultuous period. Many big investing lessons have
been learned for the rest of my life.

28 November

• I am feeling such a huge sense of relief. After nearly two years of no

returns, my portfolio is finally back to its all-time high levels of January
2018.56 This recovery would not have been possible without the
guidance and help of my investor friends and colleagues. I am grateful
to them.
• This was the first full-fledged bear market for me with a sizeable
amount of starting capital. It has given me infinite learnings for the rest
of my investing career.

29 November

• The key to making big money in a bull market stock is to remain

invested throughout the high growth phase of the company. Valuations
become expensive, then excessive and then completely absurd during
the final euphoric blowoff stage. The key to preventing big losses is to
avoid getting in during the parabolic upmove at the end.
• It is not a wise decision to buy grossly overvalued stocks just because
nothing is available at a valuation that makes sense to you. The great
investors are exemplars of discipline and patience.
• High revenue growth with margin expansion makes an expensive stock
look cheap in future.
• Markets reward good capital allocation handsomely over time. It’s all
about the ROCE trajectory.
• You don’t have to try and reconcile everything that happens in markets.
Some things will be beyond your understanding and that’s absolutely
fine. Stick to what you understand well and keep learning.

3 December
• One of the big learnings for me from this bear market was to avoid
investing in project-based businesses dealing with government tenders.
Today’s developments in the state of Maharashtra exemplified the risks
of doing so.57
• The market cap of Arvind Limited pre-demerger was approximately Rs
10,000 crore. Today, the combined market cap of the three Arvind
entities post-demerger is approximately Rs 3,500 crore. Not all spinoffs
create value; each one has to be evaluated on its individual merits.
• The quantum of the fall in mid-cap and small-cap stocks in this bear
market has been the worst in the last two decades—the combined
market cap of Group B shares (mid-caps and small-caps) on the BSE
has fallen 63 per cent from March 2018 levels; it had gone down 62 per
cent post the Lehman crisis in 2008.

4 December

• DFM Foods looks promising under its new owner, Advent International,
a leading private equity firm. When new promoters take charge of a
previously stagnant business with good underlying potential, they work
on removing inefficiencies, streamlining operations, and improving
topline growth and margins. There is high reward potential in such
stocks, if things go right. The base rate of making money in promoter
change events in India is very high. I can hardly recall any name from
the past where there was a promoter change and the stock did poorly
after that. The change-of-promoter thesis has historically worked very
well in the Indian markets.

Author’s Note
The big money in promoter change special situations is not made if
the business being sold was already being run well by the previous
promoter. The real multibagger opportunities arise when the former
promoter was operating the business inefficiently or badly. The
 higher the scope for delta, that is, the rate of change on the positive
side, the better it is for investors. Valuation rerating is a key
ingredient in multibagger stocks.

• To make good returns from deep-value investing, you need one or more
of three things to happen:
• Reversion to mean for earnings and margins.
• Reversion to mean for P/E.
• Improving perception for corporate governance, which helps rerate
the P/E.

5 December

• The upcoming SBI Cards IPO is expected to kickstart a frenzy in the

primary markets. Whenever any big bang IPO hits the Indian market,
CDSL, being a depository, is a big beneficiary because of the large
number of new demat account openings.
• Bear markets don’t decide who’s right. They determine who’s left. And
then stocks return to their rightful owners.
• Some of the recent investor conferences organized by brokerage houses
have witnessed very low attendance. In 2017, they used to be absolutely
packed. The frequency of these conferences has gone down drastically
this year. The degree of investor enthusiasm for such conferences can be
a good market cycle indicator.

9 December

• Investing is a game of patience. Buy good businesses at reasonable

prices and then just wait. Ignore the noise.
• Many people tend to assume that a big investor entering a stock would
have done his due diligence, and that is sufficient information.
Borrowed conviction doesn’t work in investing.
10 December

• The narrative of this bear cycle has been that small-caps are junk, and
should not be bought at any valuation, however cheap. If and when they
go up multifold in future, opinions will change and a new narrative will
come in vogue during the next bull cycle.
• There are four key risks in investing, and the Indian market periodically
forgets one of them:
• Business risk: During the 2003–2007 bull run in infrastructure,
commodities and real estate, the market forgot that these companies
don’t have recurring revenues.
• Regulatory risk: During the 2009–2015 bull run in the
pharmaceutical sector, the market ignored the big regulatory risks
these companies had.
• Promoter risk: During the 2014–2017 bull run in mid-caps and
small-caps, market participants overlooked corporate governance
risk, and paid the price in 2018 and 2019.
• Valuation risk: In today’s bull run in large-caps, the prevailing
narrative is that buy quality large-cap stocks at any price, and you
shall do well. The market is ignoring valuation risk.

11 December

• Yes Bank has crashed 19 per cent in trade while Kotak Bank has hit an
all-time high today. Bottom fishing in stocks of lending business can be
very risky. Better to stick to the high-quality ones.
• You will never find any stock where nothing is negative. In equity
investing, we all have to live with risks we understand.

24 December

• Hardly any small-cap funds are being launched these days, when
valuations in this category are depressed. I had seen a large number of
them being launched during the 2017 small-cap mania.
• Buying 70–80x P/E large-cap stocks with 12–15 per cent earnings
growth is very risky. So many things need to go right for you as an
investor to make money in such stocks. If they don’t, you are leaving
yourself open to big losses.
• Most of the time, adding more to a business that is executing well, and
which you already own, is better than buying something new.

26 December

• All investing is future investing—a probabilistic bet on what lies ahead.

• Be wary of investing in any lending business that’s aiming for
hypergrowth. You will be able to sidestep many landmines. Growth in
lending is easy to achieve. After all, you are giving away money. The
cost of that growth is known only in hindsight. I would stay clear of any
lender that’s targeting very high growth in this bad economic
environment.
• Some important lessons on small-cap investing based on my
experiences since 2017:
• If you look at the history of the Indian markets, one pattern you find
repeatedly is that small-caps outperform large-caps in a big way
only in the last leg of a bull market.
• Small-caps have a much higher level of risk compared to blue-chips,
because of which they tend to be ignored till the time that the bull
market has been in force for a while, and the differential in valuation
is too big to ignore.
• When new investors rush in to get a piece of the bull market action,
they are attracted to small-cap stocks, since they haven’t yet risen as
much as blue-chips and appear relatively cheap.
• Because of their low trading liquidity, even a modest amount of
investor inflows can push up small-cap stocks sharply. From being
undervalued, these stocks become overvalued in a very short time.
• When the sell-off eventually begins and all the speculators rush for
the exit at the same time, there aren’t any buyers to lend support,
 and stocks crash as if the company has gone bust.
• Most small-cap stocks that fall 70 per cent or more never recover.
They were just hyped-up stories with no real numbers to back them
up.
• The remaining few are those that have value, but because of the
negative sentiment against small-caps as a category, they too get hit
hard, and take a very long time to recover. Investing in small-cap
stocks requires a steely resolve and a lot of patience. But if you can
demonstrate discipline and a sound temperament, the end reward is
well worth the effort.

31 December

• HDFC Life hits a new high of Rs 646, up 88 per cent from Rs 344 in
January this year. This was a year when quality large-cap stocks at any
price were the rage among institutional investors.
• After 2018, this was another tough year for most investors. The Nifty
has gained 12 per cent in 2019, but that masks the turbulence most
market participants went through. As of today, I have barely managed to
recoup my losses of the last two years, and have closed slightly above
where I was in January 2018. My portfolio was down quite a bit at its
lowest point during the year, so I feel very fortunate that I managed to
recover from that pretty fast, thanks to the sharp rally post the corporate
tax cut announcement, and my subsequent restructuring of the portfolio
into much better quality stocks. Now, I need to remain disciplined and
avoid going down the quality curve.

Author’s Note
The year 2019 ended on a relatively quiet note, but little did I know
that a big storm was lurking on the horizon—one that was about to
completely change the world forever.
1 January 2020

• Banking system credit growth, a key driver of GDP, is likely to fall to

58-year low in the fiscal year ending 31 March 2020, due to the
economic slowdown and risk aversion among lenders, according to an
ICRA report.58
• The breadth in the market has been good for the last two weeks. Let’s
hope this sustains. The small-cap index has outperformed the Nifty by
almost 5 per cent over the last five trading sessions. What’s
disappointing, though, is the low trading volumes. It’s tough to build
conviction about the sustainability of this recent rally without volumes
support.
• Investors in the recently listed CSB Bank have gotten a wild
rollercoaster ride:
• IPO was oversubscribed almost eighty-six times.
• Listed with a 41 per cent premium at Rs 275.
• Rose further to Rs 307, a 57 per cent gain from its issue price of Rs
195.
• Now it is back to Rs 206, and no one is talking about the stock any
longer.

• Poddar Housing is down 86 per cent from its high of Rs 1,645 in

December 2017. Many stocks from the 2017 bull run will never see
their highs again for years to come.

3 January

• In investing, do what works for you and suits your individual

personality. Don’t get distracted by what others are accomplishing, as
your competition is with yourself alone.
• In our personal portfolios, sometimes we get carried away and indulge
in short-term trading, driven by the urge to do something to get that
extra bit of return. When we analyse the activity at an overall portfolio
level, we realize that it does not add any meaningful impact to returns
 due to the small initial position sizing, since most of us would not put
over 5 per cent allocation to a trading position within an investment
portfolio.

6 January

• Contract manufacturing theme stocks have done well during this bear
market—Hindustan Foods, Dixon Technologies, Amber Enterprises and
Varun Beverages. Contract manufacturing in India has a bright future,
and stocks in this space need to be tracked closely during market
corrections.
• Managing public money is a completely different ball game than
managing one’s personal portfolio. Only a bear market experience can
teach this. No book can teach you about the severe mental pressure and
the stress you go through when you manage other people’s money.

7 January

• Just when the market breadth seemed to be finally recovering after two
long years, the new margin norms imposed by NSE may hit mid-cap
and small-cap stocks with heightened volatility.59 I wonder when will
the constant incoming headwinds stop for mid-caps and small-caps.
• Suven Life Sciences has got the National Company Law Tribunal
(NCLT) nod for demerger of its high-margin CRAMS business into a
separately listed entity, Suven Pharma. This demerger should create
good value for shareholders. Generally, in demergers, the more bipolar
the two businesses, the better the value creation for shareholders.

Author’s Note
A demerger process in India typically involves a sequence of six
steps: board approval, stock exchange approval, secured and
unsecured creditors’ and shareholders’ approval, NCLT final
 approval, record date announcement by the board, and listing of the
demerged entity.

9 January

• Being an active investor is very challenging; one realizes this only after
going through a full bull-to-bear cycle. It’s not that difficult to beat the
Nifty during a bull market, but it’s very difficult over a full bull-to-bear
cycle. And at the end of the day, what really matters is performance
over an entire market cycle.
• Many people in WhatsApp groups or Twitter often talk about having
made 2x or 3x in a stock. No one talks about their initial allocation and
the impact of the winner on their portfolio return. Anyone can pick a
winning stock, but the great investors differentiate themselves through
individual position sizing.
• Unlike corporate lending, the success of retail lending is driven more by
data analytics. In the latter, we are actually betting on who has the best
technology infrastructure.

11 January

• Strong quarterly results from DMart in such a tough economic

environment. Great managements frequently find a way to outperform
and surprise. That’s why such stocks command a high valuation. In the
Indian markets, investors often underestimate the scarcity premium
given to high-quality businesses. At the same time, they overestimate
the valuation potential of mediocre businesses.

12 January

• Investments by domestic mutual funds in India have been largely

restricted to the top-250 stocks by market cap, while retreating from the
rest of the market. Between 2013 and 2020, mutual funds have seen
 their equity assets under management multiply from Rs 200,000 crore to
Rs 11,00,000 crore. Today, Rs 850,000 crore are invested in the top-100
stocks by market cap, and Rs 190,000 crore in next 150. The rest of the
market has got just Rs 60,000 crore.60

13 January

• Aarti Industries has fallen 4 per cent after reports that the investigation
wing of the Income Tax Department is conducting searches at its offices
and manufacturing plants.61 Bad news can occur any time, even in
good-quality businesses, so always have adequate diversification in
your portfolio.
• The Consumer Price Index for December 2019 has come in at 7.35 per
cent, up sharply from 5.5 per cent in November. I hope the RBI does not
start raising interest rates in the midst of a sharply slowing economy.

14 January

• The stocks of GMM Pfaudler and HLE Glasscoat have given very good
returns in this bear market. Oligopolies have historically been a happy
hunting ground for investors. An oligopoly industry structure implies
that the product is not commoditized, so margins are stable. If you can
find growing companies in such an industry, they are potential
compounding machines.
• The recent rally in mid-caps and small-caps is giving investors some
hope that there is light at the end of the tunnel after two long years. We
had a similar feeling after the corporate tax cut announcement in
September, but that rally didn’t last too long. Let’s hope it sustains this
time.

16 January

• Bandhan Bank is experiencing asset-quality issues in its key states of

operations, West Bengal and Assam. Hopefully, it will come out of this
 problematic situation in the next few quarters.

Author’s Note
I eventually sold Bandhan Bank at a big loss, as its asset-quality
issues worsened significantly. I learned a big lesson from this
experience: in investing, consciously separate the stock from the
personality of the individual at the helm of the company, and
concentrate on the merits and economics of the underlying business.
Look at actual facts and assess the situation objectively. This will
save you from making many costly mistakes. I wish I had not read
Tamal Bandyopadhyay’s book, Bandhan: The Making of a Bank,
before I invested in this business. I felt emotionally attached to its
founder, Chandra Shekhar Ghosh, after I read about his life story of
hardship, struggle and perseverance. My strong liking bias for the
promoter in turn drove confirmation bias, and I began to justify my
holding in the stock by focusing only on its positive points from the
past, and ignoring the various negative aspects in its present—
geographic concentration in operations, exposure to local socio-
political risks inherent in the microfinance business and over-
leverage among borrowers in its core markets of eastern India.

17 January

• It’s really humbling to realize that no matter how much research and
diligence you put into your stock-selection efforts, you will still be
wrong plenty of times in your investing journey. And that is perfectly
fine.
• Sometimes, after we sell a stock due to expensive valuation concerns, it
goes much higher than our sale price. That’s okay; our sell decision at
that point of time was the best choice we could have made with all the
information we had. In a probabilistic field like investing, we should
 focus on consistently adhering to a sound process, rather than obsessing
over achieving the best outcome in every trade. Following disciplined
exits keeps us in good stead over the long run. For every five exit
decisions, there can be one or two cases where we miss further upside.
However, we also get saved from large drawdowns and incurring
significant opportunity costs in the other investments.

Author’s Note
Investing is a field of never-ending regret. Bought too much. Bought
too little. Bought too early. Bought too late. Sold too early. Sold too
late. Every day, we get one or more of these feelings with regards to
some stock or the other.

19 January

• America looks like the strongest economy in the world right now:
• S&P 500, Dow, Nasdaq—all-time high
• Home prices—all-time high
• Economic expansion—longest in history (126 months)
• Unemployment—50-year low (3.5 per cent)
• Jobs growth—longest in history (111 months)

• Maize prices in India have fallen 15 per cent in the past month due to
higher imports from Ukraine, Myanmar and Russia. Anticipation of a
higher output from the states of Bihar and West Bengal have also
weakened prices.62 This should benefit maize processing company
Gujarat Ambuja Exports.

22 January

• Came across a news article on some virus causing concern in various

Asian countries.63 Something or the other keeps on happening in the
 world all the time.

23 January

• Asian markets are selling off after Singapore confirmed its first case of
a new strain of coronavirus, which originated in the city of Wuhan in
China. This virus is more serious than I thought; I had just brushed it
aside as a non-event. I didn’t know that it can lead to death and that it
has killed seventeen people in China.64 I hope this virus does not spread
too much.

24 January

• Every bull market has a Pied Piper, whom many consider an investing
genius. This person will vouch for the invincibility of a certain set of
stocks and sectors in his public appearances, and then justify why such
investments will always go up. People will love hearing him, because
his arguments will always sound very logical and persuasive. Then we
have a bear market, after which a new bull run begins with a new Pied
Piper.

Author’s Note
If there is one truth that experience has taught me, it is that there is
nothing like a cinch or sure shot in the stock market. It is all about
trying to get the odds on our side as much as we can. That’s the best
we can do as investors, nothing more. Always remain humble.

• A big mistake many investors make is to sell out of an HDFC Bank or a

Titan in the early stages of a company’s growth phase, when it is of a
small-cap or mid-cap size. In absolute monetary terms, this error turns
out to be bigger than the equivalent sum invested in a business that goes
 bankrupt. Most of us gloss over this fact, perhaps because opportunity
costs are not given their due importance.
• Different stocks require varying degrees of patience. Be very patient
with able management teams operating in secular growth industries,
because they usually find ways to pivot into adjacencies. And if you
find such businesses in the small-cap or mid-cap space with a large size
of opportunity and with sector leadership, then be the most patient with
such investments.

Author’s Note
As investors, many of us have the preconceived notion that ‘the
market knows about the great management teams, so it must have
already priced in the premium for them’. Therein lies the anomaly—
exceptional capital allocators are systematically mispriced by the
markets. An unknown, yet positively skewed future can’t be
predicted or modeled, thus undervaluing and hiding it in plain sight.
There are certain embedded optionalities in a business which the
market can’t price upfront for managements who can scale. Market
and analysts usually think linearly with data at hand rather than what
can be possible. Businesses led by dynamic promoters tend to spring
positive surprises by pivoting into adjacencies and they keep
expanding their terminal value. Exceptional operators have a knack
for pulling rabbits out of their hat, something which is difficult to
model in an excel spreadsheet.

26 January

• Spoke to a friend in Hong Kong. Face masks are out of stock in the
country. This coronavirus appears to be very infectious. It has now been
detected in the US, Europe and Australia.
27 January

• The Dow Jones is down more than 500 points on coronavirus fears.
Stocks related to travel, hospitality, and gaming are getting hit hard,
along with stocks of companies that have a big exposure to China.
• If coronavirus leads to disruption in production of chemicals in China’s
Hubei province (the epicentre of the outbreak), then it may benefit
select Indian chemical manufacturers in the near term.

29 January

• Scientists in Australia have claimed the first recreation of a lab-grown

version of the coronavirus outside China, in a breakthrough that could
help combat the global spread of the illness.65 Hopefully, this virus
situation will settle down now.

30 January

• The virus has arrived in India; Kerala has reported its first confirmed
case of coronavirus.
• Mask prices on Amazon India have gone up 20 per cent on average in
the last twenty-four hours. I hope people don’t do panic-driven
overstocking of masks.

1 February

• The US declares coronavirus a public health emergency. Time for me to

buy a mask.
• Today, the Indian government presented its second Budget since
retaining power in May 2019, and the event highlighted yet again that
when you invest in India, you need to be mentally prepared for
unexpected regulatory shocks when constructing a portfolio. The
finance minister has proposed a ‘simplified’ income tax regime,
wherein individuals can opt in to lower tax-rate slabs, in lieu of giving
 up exemptions and deductions. This is negative for HFCs, mutual funds,
and life insurance companies, as tax benefits related to home loans, life
insurance, and investments in tax-saver mutual funds (equity-linked
savings scheme)66 will have to be foregone if an individual decides to
shift to the lower tax-rate slabs.
• In India, many people purchase life insurance primarily for the tax-
saving benefit. The fear among market participants after today’s Budget
is that the people forgoing exemptions to move to the lower tax regime
may not buy life insurance anymore. The stock price impact is clearly
visible:
• ICICI Prudential Life Insurance—down 8 per cent
• Max Financial Services—down 8 per cent
• SBI Life Insurance—down 6 per cent
• HDFC Life Insurance—down 6 per cent
• Bajaj Finserv—down 6 per cent

• After today’s Budget, it looks like the Indian market will go back to
following the MSCI Emerging Markets Index for daily cues. A broad-
based rally looks to be ruled out now, and a repeat of 2018 and 2019
looks likely—a stock-specific and very narrow market. The companies
where earnings growth is visible will command a high premium.
• Some investors say that only optimists make money in the market. In
my view, only realists make money.

3 February

• The wealth destruction in mid-cap and small-cap stocks in this bear

market has been enormous:
• DHFL is down 98 per cent from its price of Rs 691 in September
2018.
• Gayatri Projects is down 80 per cent from its price of Rs 239 in
January 2018.
 • Khadim India is down 83 per cent from its price of Rs 862 in June
2018.

4 February

• When investing in cyclical businesses, it is very important to focus on

your exit. In most instances, it is fine to sell well before the peak and
leave profits on the table for others to enjoy. But if you overstay your
welcome in such stocks, you may have to endure what many investors
have had to in a stock like Lakshmi Machine Works:
• March 2016: Rs 3,160
• May 2018: Rs 9,383
• February 2020: Rs 3,125

• Read a very interesting observation online, that previous epidemics like

severe acute respiratory syndrome (SARS) and Ebola slowed down
significantly as they transitioned from the winter months to summer. In
a few months’ time, the new coronavirus (known as COVID-19) will
probably be history.

Author’s Note
I went totally wrong in this assessment. COVID-19 would go on to
wreak havoc on global economies for a very long time.

• Some investors in India are staunch proponents of investing in stocks of

multinational companies (MNCs). But many MNCs have significant
related-party transactions—a big red flag. In addition, some MNCs
move the lucrative part of their business from the listed Indian entity to
unlisted private entities, while others engage in slump sales of good
potential businesses to parent companies at a discounted valuation. In
my view, the listed MNCs in India are highly overrated given the poor
 governance track record most of them have shown. A few exceptions
may exist.
• Century Plyboards reported results yesterday. Its MDF segment results
look very good. Hopefully Greenpanel, which is a pureplay MDF
company, will also report strong numbers.

5 February

• As investors, we need to learn to ride bubbles (that is, if any portfolio

stock is exhibiting hyper-strong price momentum) by having a
systematic rule-based selling procedure in place. It is difficult to make
big wealth by betting only on mean-reversion trades, that is, from
undervaluation to fair valuation. If a stock you have initially entered at a
reasonable valuation gets revalued to bubble valuation levels, it is not a
bad idea to ride the momentum with a strict trailing stoploss. One can
use a 15 per cent fall from the most recent peak as an exit trigger in
such cases. Alternatively, it is also fine to make use of a volatility stop
indicator or the downside breach of a stock price’s moving average like
the 21-day, 50-day, or 200-day as your exit trigger in such cases.
Whatever technical criteria you use for your sell decisions, just make
sure to have the discipline to always stick to it.
• A recent global survey based report of 3,000 companies (with USD 22
trillion in market cap) by Bank of America states that a significant
portion of the global supply chain is looking to move out of China into a
‘China Plus’ strategy. India is mentioned as one of the preferred
locations, along with Vietnam. After this coronavirus scare, reducing
supply dependency from China will become a priority for companies
globally as they realize that resilience is equally important as efficiency.
No company wants to be solely dependent on China for critical
components in its supply chain. As investors, we need to start thinking
about which listed companies can benefit from this supply chain shift.
Chemicals look like the most obvious choice, since China has a
dominant 90 per cent market share in the global chemicals industry.
 There is potential for transfer of some market share to India. The Indian
government should come out with pro-investment measures to attract
foreign capital across sectors such as textiles, chemicals and
pharmaceuticals.
• The January-to-March quarter in India (Q4) is typically the strongest for
businesses focused on the rural economy, as cash flows are highest post
the kharif season. It’s why Q4 tends to be the strongest quarter for the
microfinance industry.

6 February

• One of the biggest things Buffett has taught me is that the real game is
the ability to generate more and more cash to fuel your incremental
investments. It’s possible to find winning stocks in the market
periodically, so if you can keep generating cash from various
businesses/other sources, then you are going to make it big because of
compound interest. It’s all about creating multiple sources of cash flow.
There has never been a better time in history to be an intellectually
curious person. The upside potential is literally limitless in today’s
digital age. Build something useful that scales, and does not pay you by
the hour or by the month. Thanks to the internet, there is now a way to
earn without working with anyone face-to-face: create online
businesses. You don’t have any team members to email, no bosses to
meet with, no administrative/HR tasks to get done, and no coworkers to
coordinate with. You are able to make significant progress on your
business with a shorter workday, simply because you spend your time
only doing things that move the needle. You spend no time commuting,
no time in meetings, no time providing project updates to your
superiors, and no time emailing back-and-forth with people. As a result,
your productivity skyrockets.
• The best way to attract money is to create value for a specific group of
people. The more value you provide, and the larger the audience you
provide it for, the higher your income. Identify a potential niche.
 Consider what specific skills or knowledge you have. No matter what
specific skills or knowledge you possess, the odds are good that you can
monetize your skills and your knowledge if it adds value to others.
Build your credibility, network and follower base via a blog, YouTube
channel, or Twitter/Instagram/LinkedIn. Set up a simple-to-use website
where you will sell your product or service. On your website(s), you can
earn in many ways—e-books, advertising placements, affiliate
marketing, online courses or paid subscription plans. If you want to
drive traffic to your website(s), make use of search engine
optimization.67
• The rich have money; the wealthy have control over their time. If you
want to be wealthy, you need to own income-producing assets. You can
buy some of these assets (stocks, bonds, real estate), or you can build
some of these (websites, digital products) from scratch. In either case,
your goal should be to be an owner of assets that work 24x7 to earn
money for you, even when you are not actively working. Once you own
enough of such assets, you don’t have to trade your time for earning
income. Instead, your assets earn for you. You own your time, and the
potential income from your assets has no ceiling. This is the path to a
free and wealthy life.

7 February

• Came across a startling statistic on Twitter.68 A mere 1 per cent of

stocks in India accounted for 83 per cent of the market cap creation in
the country’s stock market between 1990 and 2018. This shows how
difficult active investing is in practice (even more so when you are
managing public money).
• Low public float, high growth, healthy return ratios and large size of
opportunity often result in premium valuations.
• A high public float, which is widely distributed, acts as a headwind
for valuation.
10 February

• A big announcement by the RBI—banks can avail cash reserve ratio

exemption for five years for incremental credit extended to auto,
housing and MSMEs between 31 January and 31 July 2020.69 This is
effectively an interest rate cut by the RBI, and should hopefully give a
boost to the struggling Indian economy.
• In 1997, when Steve Jobs returned to Apple, the company was making
350 products. Jobs reduced it to 10 and focused only on them, as he
believed it’s better to have 10 great products than 350 mediocre ones.
We should apply the same thinking in our portfolios—keep only the
best stocks.

11 February

• In investing, keep the thesis close, but have the anti-thesis even closer.
Even though I am invested in PSP Projects, it’s very important to be
aware of the risks as the company (which used to deal only with private
entities) has begun to enter into bidding for government projects:
• Advances received from government orders have to be paid interest-
versus-nil interest in case of private company orders.
• PSP’s working capital cycle and receivables situation will most
likely deteriorate going forward.

13 February

• Struck treasure online today. Came across an incredible repository of

notes and excerpts from hundreds of the greatest books written in
history.70 I look forward to reading them over the course of the next few
years. The life of a value investor is one dedicated to lifelong learning.
• In investing, I am market-cap agnostic, as long as the stock is meeting
my investment criteria. I have had a small-cap as my biggest portfolio
holding in the past, and now Bajaj Finance, which is a large-cap, is my
portfolio’s biggest holding. Risk-adjusted returns are what ultimately
 matter. An important point to keep in mind is that one’s threshold for
expected risk–reward has to be higher in small-caps versus large-caps,
as the impact cost would be high on both entry and exit.

15 February

• Even if you don’t hold the stock of competitors of the business you are
currently invested in, it is a good practice to hear all conference calls by
the relevant industry players.

17 February

• IOL Chemicals looks attractive at current levels amid the ibuprofen

shortage worldwide due to lockdowns in China. Similarly, Aksharchem
should benefit from the vinyl sulfone shortage, driven by China’s
lockdowns. Commodity chemical stocks often make for good tactical
trades.
• IIFL Wealth Management makes a clean sweep at the Euromoney
Private Banking and Wealth Management Awards 2020. It has been
awarded the prestigious ‘Best Private Banking Services Overall’ award
for India. It has also been ranked number one across all the other fifteen
categories for India, which include catering to ultra-high net worth
(UHNW) individuals to family office services, investment management,
and emerging technology adoption. Over the long term, I am more
bullish on wealth management companies than AMCs in India. The
asset management industry is expected to face intense competitive and
regulatory headwinds this decade, and growth will come with declining
profit margins. Good for the customer, not so good for the industry.

18 February

• It is only with experience that one realizes that allocation is a highly

important factor in wealth creation. It is as important as stock selection.
It’s allocation that eventually decides portfolio return. It doesn’t matter
 if you found a 10x stock; what matters is how much you allocated to it,
and what did it do to your portfolio return. Almost all the investors I
talk to focus on what should they buy. Rarely anyone talks about
allocation. It is one of the most underrated topics in investing. Highly
asymmetric risk-reward bets should be given a bigger allocation in
one’s portfolio.

19 February

• The Indian government has drawn up a list of thirty-eight drug raw

materials that it wants locally produced, in a bid to end the country’s
dependence on Chinese imports for these items.71 Import substitution is
expected to be a big investment theme going forward.

20 February

• The number of COVID-19 cases in China today is much lower than the
last several days. This is heartening news. The strength in the S&P 500
has been telling us for the last many days that this virus is
inconsequential. I don’t know why investors were worrying so much.

Author’s Note
I was about to find out very soon why investors were worrying so
much.

• Investors in mid-cap and small-cap stocks have undergone a carnage in

this bear market:
• Music Broadcast is down 72 per cent from its price of Rs 91 in
January 2018.
• Shemaroo Entertainment is down 88 per cent from its price of Rs
594 in January 2018.
 • Skipper is down 88 per cent from its price of Rs 292 in November
2017.

21 February

• The euphoria around the upcoming SBI Cards IPO is attaining crazy
proportions. I hope this IPO doesn’t mark a peak for the market.
• Read a great blog post by Morgan Housel, titled ‘100 Little Ideas’.72
This is like a mini-masterclass on mental models. Some of my favourite
ones in it:
• False-Consensus Effect: Overestimating how widely held your own
beliefs are, caused by the difficulty of imagining the experiences of
other people.
• McNamara Fallacy: A belief that rational decisions can be made
with quantitative measures alone when, in fact, the things you can’t
measure are often the most consequential.
• Baader-Meinhof Phenomenon: Noticing an idea everywhere you
look as soon as it’s brought to your attention, in a way that makes
you overestimate its prevalence.
• Normalcy Bias: Underestimating the odds of disaster, because it’s
comforting to assume things will keep functioning the way they’ve
always functioned.
• Empathy Gap: Underestimating how you’ll behave when you’re
‘hot’ (angry/aroused/rushed), caused by the inability to accurately
foresee how your body’s physical response to situations (such as
dopamine and adrenaline) will influence decision-making.
• Inversion: Avoiding problems can be more important than scoring
wins.
• Ostrich Effect: Avoiding negative information that might challenge
views that you desperately want to be right.

23 February
• South Korea, Italy and Iran are reporting a rising number of coronavirus
infections. This is not good news. I hope the virus does not spread
further. Investors will become more nervous.

Author’s Note
My hopes were about to get dashed badly very soon.

24 February

• The surge in coronavirus infections outside China triggered a steep fall

in the Indian markets today. Both the frontline indices, Sensex and
Nifty, closed 2 per cent lower. All fifty stocks in the Nifty closed in the
red, as did all thirty stocks in the Sensex. This is rare. In my view, the
fact that that no stock ended positive in the Nifty or the Sensex today,
along with the 24 per cent jump in the India Volatility Index (VIX)
signals a clear change of the primary trend in the frontline indices to
negative.
• There was a sharp fall in the US markets amid fears of a prolonged
global economic slowdown from the virus spreading outside China. The
Dow Jones crashed 1,031 points, or 3.6 per cent, the S&P 500 fell 3.35
per cent, and the Nasdaq closed 3.7 per cent lower. It was the Dow’s
biggest absolute-point and percentage-point drop since February 2018.
The Dow also gave up its year-to-date gain for 2020, and is now down 2
per cent for the year. The S&P 500 also had its worst day in two years,
and wiped out its year-to-date gain as well. Coronavirus-impacted
names led the way downwards. Airline stocks Delta and American were
both down more than 6 per cent, while United closed 5.4 per cent lower.
Shares of casino operators Las Vegas Sands and Wynn Resorts dropped
5.2 per cent each, while MGM Resorts fell 5.4 per cent. Chipmakers,
which are highly leveraged to the global economy, were also down
sharply—Nvidia shares fell 7.1 per cent, while Intel ended the day 4 per
 cent lower, and AMD dipped 7.8 per cent. The VanEck Vectors
Semiconductor ETF was down by 4.5 per cent. Apple (which has a big
presence in China) and its suppliers took a hit as well. Shares of Apple
fell 4.8 per cent. Skyworks Solutions and Qorvo dropped by 1.8 per cent
each. The CBOE VIX—widely regarded as the fear gauge on Wall
Street—jumped more than seven points, or about 46 per cent, to 25.04.
This huge spike in the VIX could be a precursor to big turbulence in the
US markets.

25 February

• Navin Fluorine surged 17 per cent after it announced a $410 million

(approximately Rs 2,900 crore) multi-year contract with a global
company for manufacture and supply of a high-performance product in
the fluorochemicals space. The current annual revenue run rate for
Navin is INR 1,000 crore, so this contract will provide significant
incremental revenue going forward.

Author’s Note
After winning this landmark contract, the P/E ratio of Navin
Fluorine went on to double over the next two years, from 40x to
80x. To understand why this valuation rerating occurred, we need to
understand ‘the art of valuation’ and think like a business analyst.
To do so, we need to revisit the first principles of investing.
The intrinsic value of an asset is the sum of the cash flows expected
to be received from that asset over its remaining useful life,
discounted for the time value of money and the uncertainty of
receiving those cash flows. Predictability of cash flows is an
important factor. Less predictable cash flows need to be discounted
at a higher rate. It is the perception among investors regarding the
trajectory of the riskiness of cash flows of a business that drives the
 discount rate investors use to value the business, and that in turn
drives the valuation multiple.
The market places a heavy weight on certainty. Stocks with the
promise of years of predictable earnings growth tend to go into a
long period of overvaluation, until such time that they are no longer
able to grow earnings in a steady manner. Predictability of long-term
growth matters more to the market than the absolute rate of near-
term growth, so a stock that promises to grow earnings at a high rate
for the next couple of years, with no clarity thereafter, is given a
lower valuation multiple by the market than a stock that has slower
but highly predictable growth for a much longer period. The
longevity of growth is always given a greater weight by the market
than the absolute rate of near-term growth. Markets provide
disproportionate rewards to companies that can promise years of
sustainable earnings growth. Such companies have higher longevity,
higher duration of cash flows and thus, higher intrinsic value.
To be a successful investor, you don’t need a precise discounted
cash flow (DCF) calculation on an Excel spreadsheet. What you
need is a DCF mindset, which focuses on drivers of terminal value,
because that is what ultimately drives valuation multiple rerating or
derating for any stock. Be a business analyst, not a securities
analyst, because at the end of the day, successful investing is
‘common sense—vigorously applied’.

• The Dow Jones has posted its worst two-day point drop on record, after
the Center for Disease Control and Prevention warned Americans to
prepare for a coronavirus outbreak, and investors attempted to assess the
impact of the epidemic in China on global trade. There is a great deal of
concern regarding disruptions to manufacturing supply lines, with
factories in China still struggling to reopen after quarantines were
imposed on several cities in an attempt to contain the virus. The Dow
 fell 879 points, or 3.2 per cent, to 27,081; the S&P 500 fell 3 per cent to
3,128; while the Nasdaq dropped 2.8 per cent, to close at 8,965.
• Investors fear supply chain disruptions may hit technology companies
dependent on Chinese and South Korean factories for manufacturing.
Apple and Facebook have fallen more than 10 per cent from their record
highs seen last month. The number of worldwide cases of COVID-19
continues to rise. There are now 80,238 cases in thirty-four countries,
and at least 2,700 deaths, according to the World Health Organization.
South Korea raised its coronavirus alert to the highest level, with the
latest spike in numbers bringing the total number of infected persons to
more than 800. Meanwhile, Italy has been the worst-affected country
outside of Asia, with more than 130 reported cases and seven deaths.
Iran also confirmed twelve deaths.

26 February

• A thousand guests and workers at Costa Adeje Palace hotel in Tenerife,

Spain, have been quarantined after an Italian doctor and his wife tested
positive for coronavirus. A few more similar episodes like this could
possibly create a chain reaction, and cripple travel and tourism globally,
due to fear of quarantine.
• The coronavirus will most adversely impact the airlines and hotel
industry. Event management, theme parks and cruise industries will also
be badly hit.
• COVID-19 continues to spread worldwide at an alarming pace. First
cases of the virus have been detected in Austria, Croatia and
Switzerland.
• Fears of a global economic slowdown are weighing on crude, which is
now below $50 a barrel. While this is good news for India’s macro
situation, sharp sell-offs in crude have historically coincided with risk-
off sentiments in global markets in the short term.
• The way even decent-quality stocks have been butchered in this mid-
cap and small-cap bear market in India, most investors have been left
 clueless as to what could they have done differently to avoid the pain.
Rane Holdings is down 77 per cent from its price of Rs 2,799 in March
2018.

27 February

• Public sector companies have long been a consensus contra buy call for
many deep-value investors in India. Many of these stocks have turned
out to be classic value traps:
• BHEL is at a 16-year low
• GAIL and NTPC are at 3.5-year lows
• Coal India and Oil India have hit lifetime lows
• NALCO and Indian Oil Corporation are at 4-year lows

• If you mistake a cyclical to be a secular growth business, you eventually

pay the price, as many investors did in GMDC:
• February 2016: Rs 52.30
• October 2017: Rs 180.90
• February 2020: Rs 51.75

• The auto industry in India has experienced a severe downturn post the
NBFC crisis. Hero MotoCorp has hit a 52-week low of Rs 2,101, down
49 per cent from its price of Rs 4,092 in September 2017.
• Stocks in the US fell sharply amid fears of the virus spreading
domestically. Investors took fright amid the first coronavirus case in the
US involving a person who didn’t travel to an infected country, and
didn’t knowingly interact with someone who did. The virus continues to
spread globally, with more than 82,000 cases and more than 2,800
deaths. The Dow Jones plummeted 1,190 points, or 4.4 per cent, to
25,766; the S&P 500 fell 4.4 per cent to 2,978, while the Nasdaq
dropped 4.6 per cent to 8,566. The Dow had its worst day in percentage
terms since February 2018, while the Nasdaq and S&P 500 posted their
biggest one-day loss since August 2011. It was also the Dow’s biggest
one-day point decline in history. Apple, Intel and Exxon Mobil were
 among the worst-performing Dow stocks, dropping more than 6 per cent
each, while AMD and Nvidia fell 7.3 per cent and 5.6 per cent
respectively. American Airlines dropped 7.7 per cent, while United
Airlines slid 2.4 per cent. Las Vegas Sands and MGM Resorts fell 1.3
per cent and 4.5 per cent respectively.
• The last six trading sessions have seen the S&P 500 drop 10 per cent
from its all-time high. This has been the fastest correction in the history
of the S&P 500 since the Great Depression (Figure 4).73 On a closer
look, this doesn’t look like just a correction any more. The S&P 500 has
effortlessly broken very important support levels like a hot knife going
through butter, and more concerningly, on increasing volumes.

Figure 4: Fastest correction in the S&P 500 since the Great

Depression

• The US’ 10-year Treasury yield, a key marker in global finance, has
broken the 1.30 per cent barrier, and fallen to a record low of 1.25 per
cent. The benchmark rate has fallen 20 basis points since the start of this
week, in a reflection of the huge global demand for the relative safety
US debt offers. The sharp move downwards in yields also reflects the
 market’s expectations that the Federal Reserve will step in very soon
and cut rates.
• Crude is down another 5 per cent to $46. Derivatives of crude are used
as raw materials across a vast number of industries. Over the medium to
long term, this will be a positive for corporate margins.

28 February

• The Indian markets are selling off hard today following the cues from
the US markets. The Nifty metal index has crashed 7 per cent, with Tata
Steel down nearly 8 per cent and Vedanta down 10 per cent. Auto stocks
have also been badly hit, with Tata Motors down 8 per cent. The Nifty
IT index is down nearly 5 per cent, with Tech Mahindra down 8 per
cent, Infosys 4.8 per cent and TCS 4.1 per cent.
• The leader of the large-cap bull market in India since 2018 cracks—
Bajaj Finance is down 9 per cent.
• Panic-selling in the last hour of trade. Many stock prices are collapsing
due to lack of buying support. Sequent Scientific is down 10 per cent,
Affle India 16 per cent and Birlasoft 13 per cent.
• Mayhem on Dalal Street today. After crashing over 1,000 points at
open, Sensex extended losses to close 1,448 points lower, recording its
biggest one-day decline since 24 August 2015. Fears that the
coronavirus may cripple the global economy triggered a massive sell-
off.
• Public sector stocks in India are good as a trade during a sectoral
upcycle, but not as long-term investments. Investors who put money in
Engineers India learnt this the hard way:
• August 2013: Rs 60.85
• December 2017: Rs 206.40
• February 2020: Rs 69.75

• There is a long list of stocks which hit a 52-week low today. Prominent
names include Finolex Cables which is down 58 per cent from its
 February 2018 high, and M&M which is down 54 per cent from its
August 2018 high.
• A highly volatile day on Wall Street, with the Dow Jones crashing over
1,000 points in the morning, and swinging widely throughout the
trading session. It finally closed down 357 points, or 1.4 per cent. The
CBOE VIX surged to its highest level since 2008. The speed with which
the US markets fell this week is unprecedented. If this sell-off continues
for one more week, this could become version 2.0 of 2008. I am
expecting a coordinated action from global central banks and
governments very soon to put a short-term bottom in, so that panic
subsides. What happens post that will depend on the magnitude of the
action. But if we go another week like this without any intervention,
then there will be no limit to the downside in store for the markets.
• There is panic-selling across all asset classes today:
• Silver—down 6 per cent
• Crude—down 6 per cent
• Palladium—down 11 per cent
• Gold—down 3.5 per cent

• Investors and traders usually turn to gold as a safe haven during times of
risk-off sentiment in other markets. That’s exactly what happened on
Monday this week (24 February) when gold prices soared to a 7-year
high. Today’s price decline in gold can be characterized as ‘forced
selling’. Investors and traders are using gold like an ATM as the week
winds down, selling to generate cash as they need to raise money to
meet margin calls and offset losses in other markets and asset classes. It
has been observed in previous episodes of market turmoil that gold will
often be sold to generate liquidity and cover margins. When market
volatility erupts and tensions are high, you don’t sell what you want;
you sell what you can. Gold was likely a victim of this scenario today.
• The US’ 10-year Treasury yield hit a record low of 1.13 per cent, a clear
sign that investors are fleeing risk assets for the safety of US
 government bonds. For some context, the yield lows during 2008, the
worst recession since the Great Depression, were 2.08 per cent.

29 February

• Weekends are a good time for contemplating important things beyond

markets.
• As investors, many of us focus excessively all the time on making
money from stocks, while ignoring various other important aspects of
our life. Having all the money in the world is pointless if you don’t have
the health to enjoy it. And for good health, adequate sleep is a must.
One needs to realize its importance. I used to sleep less during the bull
market cycle of 2014 to 2017, when I was frenetically working long
hours every day to make the most of the roaring market conditions.
During this bear cycle, I have felt relatively more relaxed and better.
Approaching investing with a calm mindset greatly helps in better
decision-making.
• Sleep deprivation is one of the reasons behind the rising incidence of
serious illnesses—diabetes, heart attack and cancer, among others—in
young and middle-aged people. This is an age group whose sleep hours
are often given over to late nights at work or binge-watching web series
on OTT platforms. Sleeping for less than seven hours a day is
associated with increased risk of cardiovascular diseases, hypertension,
diabetes, anxiety and depression, and also certain cancers such as breast
cancer in women and prostate cancer in men. When it comes to sleep,
we can’t compensate for it later; that would be like depriving plants of
water during the weekdays, and then pouring excess water on the
weekend to compensate. One should treat good sleep as an everyday
health habit. Some practices that can help one sleep better:
• Avoid stimulants such as caffeine and nicotine close to bedtime.
• Exercise promotes quality sleep. A mere ten minutes of walking or
cycling can drastically improve night-time sleep quality.
 • Steer clear of heavy food just before sleep. Rich, fatty or fried
meals, spicy dishes, citrus fruits and carbonated drinks can trigger
indigestion in some people. When this occurs close to bedtime, it
can lead to painful heartburn that disrupts sleep.
• Ensure adequate exposure to natural light. Exposure to sunlight
during the day, along with darkness at night, helps maintain a
healthy sleep–wake cycle.
• Establish a regular relaxing bedtime routine. A regular nightly
routine helps the body recognize that it is bedtime. This could
include taking a warm shower or a bath, reading a book, or doing
light stretches. If possible, avoid emotionally upsetting
conversations and activities before attempting to sleep.
• Make sure the sleep environment is pleasant. The mattress and
pillows should be comfortable. The bedroom should be cool for
optimal sleep. Bright light from lamps, cell phones and TV screens
can hamper sleep.

1 March

• Value investing wisdom from Howard Marks: ‘The discipline which is

most important in investing is not accounting or economics, but
psychology. The key is who likes the investment now and who doesn’t.
Future prices changes will be determined by whether it comes to be
liked by more people or fewer people in the future. Investing is a
popularity contest, and the most dangerous thing is to buy something at
the peak of its popularity. At that point, all favorable facts and opinions
are already factored into its price, and no new buyers are left to emerge.
The safest and most potentially profitable thing is to buy something
when no one likes it. Given time, its popularity, and thus its price can
only go one way: up. Watch which asset classes they’re holding
conferences for, and how many people are attending. Sold-out
conferences are a danger sign. You want to participate in auctions where
there are only one or two buyers, not hundreds or thousands. You want
 to buy things either before they’ve been discovered, or after there’s been
a shake-out.’74
• Fundamentals don’t decide the price for a stock at a given point of time.
Demand and supply do. Therein lies the opportunity for us as investors
to use Mr Market to our advantage.

2 March

• Multiplex stocks in India got hammered today due to COVID-19

concerns—INOX Leisure and PVR were down 14 per cent and 8 per
cent respectively.
• The Dow Jones surged more than 1,200 points, or 5 per cent, on hopes
that central banks will take action to shelter the global economy from
the effects of the coronavirus outbreak. The Dow jumped 1,293 points
to 26,703; the biggest ever single-day point gain for the Dow, and the
biggest percentage gain since March 2009. The S&P 500 rose 135
points, or 4.6 per cent, to 3,089. The Nasdaq added 384 points, or 4.5
per cent, to close at 8,952. Shoppers are stocking up on everyday goods
as fear over the coronavirus’ spread hits consumers, and this helped lift
shares in household goods companies—Costco jumped 8.1 per cent,
Walmart rose 6 per cent, while Procter & Gamble gained 3.5 per cent.
Stocks of travel-related companies have been among the hardest hit, as
the virus outbreak has led to cancelled flights and disrupted vacation
plans. Cruise operators continued their decline—Royal Caribbean
Cruises fell 2.5 per cent, Norwegian Cruise Line dropped 8 per cent,
and Carnival slid 4.7 per cent.
• I believe the odds of a big globally coordinated action by central
bankers, led by the Fed, are increasing very fast. An announcement
could come as soon as this week. We need some coordinated
intervention soon from central banks, otherwise every single rally will
be sold into, and this could quickly turn from a mere correction into a
full-fledged bear market before we know it.
• A full-time investor should never be dependent on the market for
meeting their daily living expenses. At times like these, one observes
the benefits of being a salaried employee-cum-investor, rather than a
full-time investor:
• Not forced to sell in a down market for meeting expenses
• New cash comes in every month to deploy in markets
• Less prone to overreaction

3 March

• Pharmaceutical stocks in India are showing resilience amid the sell-off.

This sector had been underperforming for a long time, and valuations of
stocks in it are attractive. I should begin researching potential
opportunities.
• The Indian rupee has fallen to a 16-month low of 73.30 versus the US
dollar. This should benefit exporters.
• The Federal Reserve, in a surprise move, cut its benchmark interest rate
by 50 basis points. The decision to cut rates by half a percentage point
came two weeks before the Fed’s scheduled meeting as the central bank
felt it was necessary to act quickly to combat the effect of the
coronavirus outbreak. It’s the first such emergency action coming in
between scheduled meetings since the financial crisis. Investors, in turn,
loaded up on US Treasuries, pushing the benchmark 10-year yield
below 1 per cent for the first time ever. The 10-year rate hit a low of
0.906 per cent. I was expecting a sharp rally after this rate cut
announcement, but the market’s reaction is concerning. The Dow Jones
closed 785 points lower, or nearly 3 per cent, at 25,917, after being up
more than 300 points earlier in the day. The S&P 500 fell 2.8 per cent to
3,003, while the Nasdaq pulled back 3 per cent to 8,684. The initial rally
post the Fed intervention has been sold into. We should now likely
retest the lows and potentially break them as well.

4 March
• The broader markets in India continue to experience selling pressure.
The mid-cap and small-cap indices closed down 2 per cent and 2.5 per
cent respectively. Microfinance and travel-related stocks were the
biggest losers in trade today, while pharmaceutical stocks continued to
perform well.
• The Dow Jones surged 1,173 points to close with gains of 4.5 per cent.
This kind of volatility hasn’t been witnessed in the US markets for
years. Daily moves of nearly 1,000 points up or down have become the
norm of late, the highest level of volatility in the US markets since
2008. The S&P 500 index’s moves in six of the last eight trading
sessions have looked like this:
• Down 3.4 per cent
• Down 3.0 per cent
• Down 4.4 per cent
• Up 4.6 per cent
• Down 2.8 per cent
• Up 4.2 per cent

5 March

• The Indian government has reportedly asked SBI to form a consortium

and buy a stake in Yes Bank. An SBI-led consortium may buy a 10 per
cent stake in the private lender, according to Bloomberg.75 This is
India’s Bear Stearns moment.
• The biggest risk for India’s financial system was a sudden collapse of
Yes Bank and the subsequent freezing of liquidity, which has been
averted for the time being by the RBI and the government. Even if the
restructured Yes Bank lowers near-term market concerns, broader
financial system stability risks remain. India is in the midst of a triple
balance sheet crisis, spread across banks, corporates and shadow banks.

Author’s Note
 History teaches us that after every financial crisis, governments and
monetary authorities impose stricter regulation and supervision
norms. Unfortunately, it is in the nature of regulation that it
addresses the last crisis, and it is the nature of risk that it emerges
where no one is looking.

• Another 1,000-plus point movement in the US markets. This is

unbelievable volatility. I have never seen anything like this before
(Figure 5).76 Fear seems to be more contagious than the virus.

Figure 5: An explosion in market volatility

• The Dow Jones ended the day 969 points, or 3.5 per cent, down at
26,121, after falling nearly 1,150 points at its session low. The S&P 500
dropped 3.3 per cent to 3,023 and the Nasdaq fell 3.1 per cent to 8,738.
All eleven S&P sectors finished the day in the red. Stocks turned
sharply lower as the 10-year Treasury yield fell to an all-time low, under
0.90 per cent. Airline stocks took a huge beating, leading the declines in
the Dow Jones Transportation Average, which dipped into bear market
 territory. United Airlines crashed 13.4 per cent, while American
Airlines tanked 13.2 per cent, suffering its worst day since 2016.

6 March

• The stock of Yes Bank has crashed 84 per cent today! This is wealth
destruction on an epic scale.
• The Yes Bank episode has opened up possibilities of a contagion risk in
financials. Max Financial is locked in 20 per cent lower circuit, after it
disclosed a loan exposure of Rs 2,000 crore to Yes Bank.
• The widespread shock from the Yes Bank fiasco may trigger a shift in
deposits from smaller private sector banks to the perceived safety of
public sector banks and large private sector banks, which may constrain
the ability of smaller private banks to grow their loan books. The impact
on stock prices is clearly visible. Ujjivan Small Finance Bank is down 9
per cent, RBL Bank is down 18 per cent. There will likely be a flight to
safety to HDFC Bank and Kotak Bank now, both from depositors and
investors.
• Over the years, I have observed that within the lending industry,
promoters who speak about risk all the time (HDFC Bank, Kotak Bank,
Bajaj Finance) do better than promoters who speak primarily about
growth (such as RBL Bank, Bandhan Bank, Spandana Sphoorty). An
investor in India is better off with promoters who focus on prudence
first and growth later.
• In financials, it is helpful to look at price action. If, in a very weak
market, a lender’s stock shows strength, you are likely going to be right
in going long there with high probability. The market’s collective
wisdom is most useful in lenders, given we can’t really assess
everything in their loan books.
• A majority of the listed Indian companies are mediocre in terms of
innovation, execution and governance. That’s why the few exceptional
managements and companies are given very high valuations. If one
thinks from the viewpoint of a minority shareholder, there are hardly
 100–150 companies in India where you can make wealth and get to
keep it over time. This leads to a majority of the long-term institutional
money chasing these select group of stocks, resulting in their lofty
valuations. Some of these stocks may well deserve it. Such a skewed
situation doesn’t exist in the US investing arena. That’s one of the
reasons why reasonable valuations exist for even frontline companies in
that market. There are different demand–supply dynamics at play, and
that’s why valuations in the public markets of the US and other parts of
the developed world are not comparable to India.
• The bond markets in the US are rapidly pricing in a hard landing for the
economy. The 10-year Treasury yield has fallen to a record low of 0.72
per cent.
• Since 2008, the US has been the gold standard in communication during
a financial crisis. There is a lot to learn from them for global central
banks and governments.

7 March

• After Max Financial, another casualty from the Yes Bank crisis—
IndusInd Bank has deferred its board meet, which was scheduled next
week for fundraising, citing adverse market conditions.

8 March

• Brent crude has crashed 30 per cent after Saudi Arabia announced
unexpected price discounts of $6–8 per barrel to customers in Europe,
Asia and the US. A few days ago, the crucial OPEC and Russia meeting
ended without a deal to cut production. Now, Saudi Arabia and Russia,
the two biggest exporters, are saying they’re going to maximize
production and flood the market with supplies. This move is a response
to years of frustration: as OPEC and Russia have cut, they’ve lost
market share to US shale, which has won a big piece of the market and
turned the US into a major oil exporter for the first time in decades.
Saudi Arabia had previously led the charge to cut production. But this
 time, Russia wasn’t having it. It’s essentially a declaration of war on US
producers. Expect gas prices to plummet. Gas prices had been trading
between $50 and $60 last year. Most companies can turn a profit at that
level. But now prices are in the forties, with the Saudi surge likely to
send them into the thirties. The impact will be very severe. This seems
to be a decision made to push the overleveraged US shale producers to
bankruptcy by unleashing a supply glut amid a falling demand
environment. A large portion of the US junk bond market was funding
shale producers. At $55 levels, the producers were profitable. At $35
levels, it will be difficult. The Saudi and Russian aim is to cripple this
supply, and then raise prices once bankruptcies have removed some of
it. This was tried in 2014 and did not work. In 2020, given the demand
pressures and the amount of debt in the US shale industry, this price war
will hurt. The Russians have built sizeable financial reserves over the
last six years, and can withstand the heightened fiscal deficit that low oil
prices and continued economic sanctions will lead to. They claim they
can hold out for multiple years. Uncertainty in the market, declining
demand, high competition and low profitability is going to hit the
domestic US industry hard and depress investment. Economically, this
could get very bad for Texas and North Dakota, where the oil and gas
industry carries a lot of weight. Many oil analysts are anticipating barrel
prices as low as $20 before the end of this year. Some market
commentators are of the opinion that Russia’s move is intended to
counter US shale producers and hit back against the US for targeting the
Nord Stream 2 gas pipeline connecting Russia and Germany.
• The US 10-year Treasury yield is now at 0.47 per cent, signalling
extreme panic.
• Massive liquidation across asset classes is now a distinct possibility
because of the potential contagion caused by the oil price crash. Many
leveraged traders could get wiped out in the ensuing heightened
volatility.

9 March
• Gold, which is supposed to be a safe haven during times of fear, has
fallen hard today. Traders are selling their gold positions to meet margin
calls, and to cushion losses in other holdings. Gold initially reacted in a
similar manner during the 2008 crisis. When panic takes over, no asset
goes up, except US treasuries.
• Bloodbath in the Indian markets today, with the indices witnessing their
biggest one-day fall ever in absolute terms. The Sensex crashed 1,942
points, or over 5 per cent, to close at 35,635. Reliance Industries
cratered 14 per cent to a 52-week low. The Nifty fell 538 points, or 5
per cent, to end at 10,451. The broader markets continued to bleed, with
the mid-cap and small-cap indices down 4.8 per cent and 4 per cent
respectively. The India VIX surged over 21 per cent to 31.05. My
portfolio got hit very hard today, down 5 per cent.
• Today’s fall in the Indian market is one for the record books. Biggest
single-day point falls in the Nifty:
• 538 points: 9 March 2020
• 497 points: 21 January 2008
• 491 points: 24 August 2015
• 432 points: 28 February 2020

• FIIs sold a record amount of equities in the cash market today—Rs

6,595 crore. This is the biggest sell figure by FIIs I have ever seen in a
single session in the last fifteen years.
• Sheer carnage in global stock markets today:
• Italy—down 10 per cent
• Norway—down 8.9 per cent
• Spain—down 7.5 per cent
• France—down 7.2 per cent
• Germany—down 7.1 per cent
• Netherlands—down 7.1 per cent
• Saudi Arabia—down 7.2 per cent
• United Kingdom—down 6.8 per cent
• Australia—down 6.6 per cent
 • Indonesia—down 6.6 per cent
• Sweden—down 6 per cent
• South Africa—down 5.5 per cent
• India—down 5.4 per cent
• Japan—down 5 per cent
• Turkey—down 4.2 per cent
• South Korea—down 4.2 per cent
• China—down 3 per cent

• There is panic across the board in the US markets. The S&P 500 has
plunged 7 per cent, triggering a market-wide stock trading halt for
fifteen minutes. The last time this happened was on 27 October 1997.
• The Dow Jones crashed 2,000 points in the worst day for US markets
since the 2008 financial crisis, as the full-blown oil price war rattled
financial markets already on edge over the spreading coronavirus.
Exxon Mobil and Chevron were both down more than 12 per cent. An
exchange-traded fund (ETF) that tracks regional banks had its worst day
since 2009. Apple sank 7.9 per cent, and Dow Chemical plunged 22 per
cent. The 10-year Treasury yield fell below 0.5 per cent, and the 30-year
yield dropped under 0.9 per cent, taking the whole US yield curve
below 1 per cent for the first time in history.
• At times like these, it is good to keep this saying from Morgan Housel
in mind: ‘The peaks and bottoms of market cycles always look irrational
in hindsight, like they went too far. But in real time, markets are just
trying to find the limits of what people can endure. And they have to do
that because any gap between an asset’s potential and what investors are
willing to endure creates opportunities that will be exploited.’77
• The exponential rate of increase in this coronavirus is scary, especially
in Italy, where it is nearly doubling every three days:
• 20 February: 3 cases
• 23 February: 152 cases
• 26 February: 424 cases
• 29 February: 1,128 cases
 • 3 March: 2,502 cases
• 6 March: 4,636 cases
• 9 March: 9,172 cases

• First cases of coronavirus confirmed in Cyprus. All 27 EU states are

now reporting cases.
• In 2008, one could have gone on a vacation to take one’s mind off the
market. Now, even that is dangerous.

10 March

• Growth is overrated; quality of growth is underrated. Read an excellent

blog post on this topic.78 Reading good rational content helps bring
sanity to the mind at times like these.
• Investors in mid-cap and small-cap stocks in India won’t forget this bear
market for a long time:
• DB Corp. is down 78 per cent from its price of Rs 447 in October
2016.
• IFB Industries is down 75 per cent from its price of Rs 1,546 in
January 2018.
• Kaya Limited is down 86 per cent from its price of Rs 1,498 in
August 2015.
• Sterling Wilson Solar is down 82 per cent since its listing in August
2019.

11 March

• The recent monetary policy action by the Fed is not helping the markets
stabilize. It seems that had been priced in already. Everybody expects
the Fed to cut all the way to zero, and do quantitative easing. That
hasn’t stopped the market from falling. What we need to see are
coordinated fiscal measures that can put a durable bottom in. I am yet to
hear anything big on that front from governments globally.
• We are back to June 2014 levels on the small-cap index in India. If there
is one index that requires the highest degree of active management and
cash calls, this is it.
• German Chancellor Angela Merkel has warned that up to 70 per cent of
the country’s population—around 58 million people—could contract the
coronavirus.79
• World Health Organization has declared the coronavirus outbreak a
global pandemic.80
• India seals its borders! All foreign travel banned to and from India from
tomorrow midnight. India has suspended all visas, barring select
categories, till 15 April, effectively closing its borders for a month.81
• US markets continued to fall as volatility showed no signs of abating.
The Dow collapsed 1,464 points, or 5.9 per cent, sending it more than
20 per cent below its high from February, and into bear market territory.
Boeing was the biggest loser in the Dow, sinking 18.2 per cent after
announcing plans for a full drawdown of an existing $13.8 billion loan
facility. The plane-maker suffered its biggest-ever three-day fall,
surpassing the aftermath of the 11 September 2001 terror attacks.
Expectations of a sharp reduction in travel demand due to rising
coronavirus cases pressured airline and cruise line stocks. American,
Delta, United and JetBlue fell more than 4 per cent each. Norwegian
Cruise Line and Carnival tanked 26.7 per cent and 9.5 per cent
respectively. Bank shares also fell amid a fall in US Treasury yields.
Bank of America and JPMorgan Chase fell 4 per cent and 4.7 per cent
respectively. Citigroup slid 8.6 per cent while Morgan Stanley and
Goldman Sachs dropped more than 6.5 per cent each.

12 March

• Global stock markets are reeling. Japan’s Nikkei fell 4.4 per cent to a
level last seen almost three years ago, while MSCI’s broadest index of
Asia-Pacific shares outside Japan fell 4.7 per cent. Australia’s ASX 200
 crashed 7.4 per cent to its lowest level in more than three years, while
South Korea’s Kospi fell 4.8 per cent to 4.5-year lows.
• In India, there was mayhem on Dalal Street today. The Sensex and Nifty
posted their biggest one-day fall in absolute terms. The Sensex ended
the session 2,919 points lower at a 2-year low of 32,778. Index
heavyweights HDFC Bank (down 9 per cent) and HDFC Limited (down
7 per cent) contributed the most to the Sensex’s fall. State Bank of
India, Axis Bank, ITC and ONGC all slid over 13 per cent. The Nifty
opened below the psychological level of 10,000 for the first time since
26 March 2018, and closed the day at a 32-month low of 9,633, down
825 points, or 7.89 per cent. The index has now entered bear market
territory after falling over 20 per cent from its high. All the Nifty
sectoral indices hit their 52-week lows during the session. The Nifty
PSU Bank index, down over 13 per cent, bled the most. The India VIX
surged 35 per cent to hit a 12-year high of 42.32. The broader markets
were pummelled out of shape today. The mid-cap index slumped over
1,100 points intra-day, ending the session 7.7 per cent lower, while the
small-cap index crashed 9 per cent.
• Markets these days are very different from what they were a decade
ago. Information travels very fast. A large part of the volumes globally
is now controlled by algorithms, which take swift action based on
triggers, and most of the money is managed by passive strategies, such
as momentum and risk parity, which work on set rules. When they get
into liquidation mode, no level is sacrosanct, like we humans think. On
the flipside, the good part is that the same principle works during
recovery. One major trigger, and markets can go up very sharply.
• The small-cap index is down over 20 per cent in the last one month. The
speed of the collapse in share prices is just unreal.
• Pledged shares by promoters are like ticking time bombs waiting to
explode in a bear market. The stocks of Future Group have crashed in
trade today:
• Future Retail is locked in 20 per cent lower circuit (57 per cent of
promoter shares are pledged).
 • Future Supply Chain is down 19.6 per cent (97 per cent of promoter
shares are pledged).
• Future Enterprises is down 19 per cent (92 per cent of promoter
shares are pledged).
• Future Consumer is locked in 5 per cent lower circuit (92 per cent of
promoter shares are pledged).

• My portfolio got decimated today, down 10.5 per cent. I never thought I
would ever witness such a day in my investing journey. Now, I can
relate to how investors who were fully invested in 2008 must have felt.
• A few friends and colleagues are asking me if they should sell
everything in their portfolios. This is not the time to sell. It is too late
for that. The time to panic was two weeks back. Now, it’s a time to
think with a clear head about the plan of action to make the most of this
once-in-a-generation bear market. This is the time to work very hard at
preparing ourselves for the coming opportunity—but with a calm mind.
You can do that only if you are at peace, having purged your portfolio of
all non-core holdings. That’s the only way to sleep well at night, and to
wake up every day with renewed energy, dedicated to doing a good job
for the next phase of the market. In order to figure out what constitutes
non-core in our portfolio, we need to have a clear understanding of
which stocks qualify to be core bets, and I define them as follows:
• They are businesses I have a very good grip on;
• Where I trust the management to do what is necessary to survive the
current situation;
• They have the financial strength to emerge much stronger than
competition after this crisis is over;
• Where the industry is stable and the durability of competitive
advantage is reasonably certain (extending to five years at least), so
I can stay invested in the business for the next few years without
losing any sleep.
• There is complete panic everywhere. European markets are down 10 per
cent. The CAC, DAX and FTSE indices have hit lower circuit. An even
bigger pain is being felt in many other markets:
• Italy—down 17 per cent
• Brazil—down 15 per cent
• Spain—down 14 per cent
• Russia—down 11 per cent

• Gold is also seeing liquidation now. It seems there is huge margin

selling, which is triggering a big fall across asset classes.
• Stocks fell off a cliff in the US markets, as bold actions by the Federal
Reserve failed to quell concerns over the economic slowdown stemming
from the coronavirus. The Fed announced it will ramp up its overnight
funding operations to more than $500 billion immediately. It will then
offer more repo operations, totalling $1 trillion, from tomorrow. The
Fed also expanded the types of securities it would purchase with
reserves. Under the new regime, the Fed will extend its purchases
‘across a range of maturities’ to include bills, notes, treasury inflation-
protected securities and other instruments. The central bank will begin
purchasing coupon-bearing securities, something market participants
have been clamouring for since late 2019. I never thought I would
witness such a huge fall in the US markets on a day when the Fed
announced a $1.5 trillion dollar bazooka. The Dow Jones plummeted
2,352 points, or 9.99 per cent, to close at 21,200. The index had its
worst drop since the 1987 ‘Black Monday’ market crash, when it fell by
more than 22 per cent. The S&P 500 collapsed 9.5 per cent to 2,480,
joining the Dow in a bear market. The Nasdaq tanked 9.4 per cent to
close at 7,201. Cruise line shares dropped sharply—Royal Caribbean
crashed 31.8 per cent, while Carnival and Norwegian Cruise Line fell
15 per cent and 21 per cent respectively. Airline shares such as United,
Delta, and American all fell more than 20 per cent. Nothing was
immune to the market sell-off. The Russell 2000 index cratered 11 per
cent. Gold fell. Oil fell. Credit market spreads widened significantly.
 Even US Treasuries ended the day lower. There is immense fear
everywhere. The VIX jumped to more than 76 intra-day, and hit its
highest level since 2008. Now I understand why it is also known as ‘the
fear index’. The VIX closed at 75.47, its fourth-highest close ever. The
top-three VIX closings in history were:
• 80.86: 20 November 2008
• 80.06: 27 October 2008
• 79.13: 24 October 2008

• Read an excellent compilation of panic articles from March 2009.82 In

the Great Recession, the US market bottomed on 9 March 2009. Then, it
never looked back, starting on one of the biggest bull markets ever. It is
always darkest before dawn. You get great buying prices only during a
crisis. If you wait for clarity to emerge, you will have to pay a much
higher price.

13 March

• Panic in the Indian markets! The Nifty has hit 10 per cent lower circuit,
and trading has been halted for 45 minutes. A similar event had taken
place in January 2008. I didn’t think I would ever see a day like that
again. India isn’t alone in hitting a lower circuit today; South Korea and
the Philippines too have hit a lower circuit in their respective stock
markets.
• HDFC Bank and Kotak Bank have hit 20 per cent lower circuit! During
periods of crisis, leveraged players need a way out, even if it means
cashing out on the best names. This is what a fire sale looks like.
• The share prices on the screen are looking very scary. Hundreds of
stocks in the broader market are locked in lower circuit. I hope some
sanity prevails after the market resumes trading.
• Just when all hope seemed lost, an incredible recovery was witnessed in
the Indian markets today. The Sensex and Nifty shot up a stunning
5,381 points and 1,604 points respectively from their early morning
 lows, as reports of a big fiscal stimulus package in the US helped soothe
fears about an economic shock from the coronavirus pandemic. The
Sensex closed 1,325 points, or 4.04 per cent higher, at 34,103, while
Nifty closed above the 10,000 level at 10,023, up 433 points, or 4.54 per
cent. The intra-day recovery in many frontline names was simply
spectacular:
• IndusInd Bank—up 46.2 per cent
• Kotak Bank—up 26.6 per cent
• Coal India— up 26.1 per cent
• BPCL—up 26.0 per cent
• HCL Technologies—up 23.9 per cent
• GAIL—up 23.4 per cent
• Hero MotoCorp—up 21.2 per cent
• Axis Bank—up 20.6 per cent
• Yes Bank—up 20.4 per cent
• M&M—up 20.4 per cent
• ONGC—up 20.0 per cent

• US stocks had their best day since October 2008, as investors cheered
the possibility of a big fiscal stimulus from the US government. The
Dow surged 1,985 points, or 9.4 per cent, to close at 23,185. The S&P
500 rose 9.3 per cent to 2,711. The Nasdaq jumped 9.3 per cent to
7,874. Until volatility subsides and the indices stop trading like small-
cap stocks, these sharp bounces should be viewed as bear market rallies.

15 March

• In an emergency move, the Federal Reserve announced it is dropping its

benchmark interest rate to zero, and also launched a massive $700
billion quantitative easing (QE) programme to shelter the economy from
the effects of the virus. The QE programme will entail $700 billion
worth of asset purchases covering US Treasuries and mortgage-backed
securities. The Fed funds rate, used as a benchmark for short-term
 lending for financial institutions and as a peg to many consumer rates,
will now be targeted at 0–0.25 per cent, down from a previous target
range of 1–1.25 per cent. The Fed also cut reserve requirements for
thousands of banks to zero. In addition, in a globally coordinated move
by centrals banks, the Fed said the Bank of Canada, the Bank of
England, the Bank of Japan, the European Central Bank, and the Swiss
National Bank also took action to enhance dollar liquidity across the
world through existing dollar-swap arrangements. Despite the Fed’s big-
bang policy measures, the market’s initial response is negative. Dow
futures are pointing to a decline of 1,000 points at the open tomorrow
morning.

16 March

• Stocks in India were hammered out of shape today. The Sensex crashed
2,713 points, or 8 per cent, to close at 31,390. All thirty constituents of
the index ended in the red. IndusInd Bank fell the most (down 18 per
cent), followed by Tata Steel (down 10 per cent), HDFC Limited (down
10 per cent), and ICICI Bank (down 10 per cent). The Nifty tanked 756
points, or 7.6 per cent, to close at 9,199. All the sectoral indices ended
with deep cuts. The Nifty bank index tumbled 2,087 points, or over 8
per cent, to 23,079, while the Nifty metal index fell 9 per cent to 1,734.
The India VIX spiked 16 per cent to 59.74. The broader markets were
hit very hard again. The mid-cap index dropped 6 per cent, while the
small-cap index fell 5.66 per cent. For an investor who was fully
invested at the onset of the COVID-19 market crash, the best course of
action would be to switch from weaker business models to stronger
ones, keeping in mind the valuation differentials, and then just sit tight.
The strong businesses can be identified in one of the following two
categories:
• Category A: Large-cap sector leaders with robust balance sheets.
• Category B: Quality mid-cap companies which have good growth
along with emerging moats.
• If one thinks from an FII perspective, their initial inflows in future will
go into Category A businesses. Once those stocks reach very expensive
valuations, then FII money will flow to Category B businesses.
• Shares of the much-hyped SBI Cards IPO listed at Rs 661, 12.45 per
cent below its issue price of Rs 755.

Author’s Note
IPOs of good companies during bear markets are a promising
hunting ground for investors.

• Shares of multiplex operators PVR and Inox Leisure crashed 20 per cent
after the Maharashtra government announced that cinema halls will
remain closed in major cities till 31 March as the number of COVID-19
cases in the state is on the rise.
• Crude oil dropped 10 per cent to below $30 a barrel as China’s factory
output dropped at the sharpest pace in thirty years amid the spread of
coronavirus. This big fall in crude is a massive boost for India’s fiscal
situation. Once the dust settles, FIIs will favour India among emerging
markets.
• Another day, another fall of historic proportions in the US markets. The
Dow Jones plummeted 2,997 points, or 12.9 per cent, to close at 20,188,
after briefly being down more than 3,000 points intra-day. The Dow’s
drop was the worst decline since its ‘Black Monday’ crash in 1987
(Figure 6).83 Today’s drop surpassed its 9.99 per cent tumble last
Thursday. The Dow fell to its lowest point since 2017. The S&P 500
crashed 12 per cent to 2,386, hitting its lowest level since December
2018. The Nasdaq collapsed 12.3 per cent to 6,904. Apple’s stock
cratered 12.9 per cent. Bank stocks took a big hit, with Bank of America
and JPMorgan Chase each dropping more than 14 per cent. Morgan
Stanley fell 15.6 per cent, while Citigroup tanked 19.3 per cent. Today’s
losses put the Dow down 31.7 per cent from its all-time high, and the
 S&P 500 and Nasdaq more than 29 per cent below their all-time highs
from last month. The VIX surged nearly 25 points, or almost 43 per
cent, to close at an all-time record of 82.69. Calling the environment
scary right now is an understatement.

Figure 6: Biggest Dow losses of all time

17 March

• There was no respite for investors as the Indian markets once again
ended deep in the red amid escalating fears of economic dislocation due
to coronavirus. The Sensex fell 811 points, or 2.5 per cent, to close at
30,579, with ICICI Bank (down 9 per cent) being the biggest loser. The
Nifty fell 230 points, or 2.5 per cent, to close at 8,967. The India VIX
rose 7 per cent to 62.88. The mid-cap and small-cap indices fell 2 per
cent each.
• Shares of Zee Entertainment, a subsidiary of Essel Group, crashed 20
per cent after the Enforcement Directorate issued summons to a group
of borrowers of Yes Bank, including Essel Group chairman Subhash
Chandra, in connection with a money laundering probe against the
private lender’s cofounder Rana Kapoor.84 Anything can happen at any
time in the markets, so always diversify.
 New sectoral trends always emerge during a bear market. We need to be
• on the lookout for the next big investment theme. With regards to
guessing which sector will be the market leader or market favourite
going forward, I have realized over the years that it’s better to be
slightly late than too early. So, let the markets tell you where tailwinds
are emerging, rather than being trigger-happy and shooting in the wrong
direction.
• US stocks staged a sharp rebound as Wall Street cheered the White
House’s plans for a fiscal stimulus package that could inject $1 trillion
into the economy to cushion the blow of the coronavirus. The Dow
rallied 1,048 points, or 5.2 per cent, to close at 21,237. The S&P 500
rose 6 per cent to 2,529. The Nasdaq gained 6.2 per cent to close at
7,334. While it feels good to see the markets rally, the heightened
volatility is pretty disconcerting. One needs to closely monitor the VIX
going forward for any notable positive divergence (that is, the VIX
declining during a falling market) in order to get a sense that the market
is bottoming out.
• Meanwhile, the Fed has come out with another major policy measure to
stem the liquidity crisis. It has announced a special credit facility to
purchase corporate paper from issuers that have been having a difficult
time finding buyers in the open market. Treasury Secretary Steven
Mnuchin said in a news conference that the Fed’s policy measure could
total $1 trillion. With this move, the Fed will effectively backstop the
market for commercial paper—unsecured promissory notes issued by
businesses to meet their short-term liabilities as payrolls, accounts
payable and inventories. The commercial paper market had frozen
during the financial crisis in 2008, and at the time, the Fed was tasked
with finding a way to get operations flowing again. This time, it has
been vastly more decisive.

18 March
• The relentless selling on Dalal Street continued as stocks across the
board, especially from the financial sector, fell like a house of cards.
The Sensex sank 1,710 points, or 5.6 per cent, to end the day at 28,869.
IndusInd Bank crashed 24 per cent. Other blue-chip financial names
such as HDFC Bank, HDFC Limited, Bajaj Finance and Axis Bank
dropped 10–11 per cent each. The Nifty breached the 8,500 level, to end
at 8,469. The broader markets continued to bleed. The mid-cap index
fell 5.5 per cent, while the small-cap index tanked 6 per cent. I have
decided not to look at my portfolio anymore until the coronavirus
situation settles down. These are extraordinary times, and looking at
abnormal movements in one’s personal portfolio on a daily basis will
only mess up the mind. I have gotten some very valuable lessons
regarding asset allocation from the recent stressful experience:
• One of the most important, yet often overlooked, steps as an
investor is to determine what level of equity allocation in your
overall portfolio allows you to keep your lifestyle, sanity and peace
of mind.
• The best way of withstanding volatility and mentally handling big
market crashes is to have an adequate level of savings set aside in
fixed income (debt funds/bonds/fixed deposits), which gives you a
regular flow of income sufficient to take care of your essential
needs.
• Getting the asset allocation mix right should always be the first and
most important step, as it helps us sleep better during periods of
market turmoil.

• US stocks tumbled and reached a new COVID-crisis low amid

increased investor anxiety about the economic damage from the
pandemic. The Dow Jones sank 1,338 points, or 6.3 per cent, to 19,898,
marking its first close below 20,000 since February 2017. The Dow was
down more than 2,300 points at the lows of the session. The S&P 500
dropped 5.2 per cent to 2,398, and closed nearly 30 per cent below its
record level set last month. The Nasdaq fell 4.7 per cent to 6,989.
 Details of a potential fiscal stimulus package were not enough to curb
the selling pressures in the market. There were news reports that the
Trump administration is seeking a stimulus package worth between
$850 billion and $1 trillion. There was a violent reversal in Treasury
yields in response to this news report. The 10-year Treasury yield
jumped to 1.21 per cent after trading around 0.77 per cent near mid-day
yesterday. Wall Street has been on an unprecedented roller-coaster ride
amid the coronavirus turmoil, with the S&P 500 swinging 4 per cent or
more in either direction for a record eight consecutive sessions (Figure
7).85

Figure 7: An unprecedented level of volatility on Wall Street

• The hotel, airline and cruise line industries are getting decimated. One
thing that COVID-19 has clearly brought to the forefront is that these
are not durable industries to invest in. It is an important learning for
many.
• Crude prices had their third-worst decline on record (Figure 8), crashing
24 per cent to an 18-year low of $20.37.86 Oil is getting hit very hard on
both the demand and supply sides. A slowdown in worldwide travel and
 business activity is weighing on demand, just as major producers Saudi
Arabia and Russia prepare to ramp up production and flood the market
with supplies.

Figure 8: Biggest single-day oil price falls in history

• A viral news event of the day was investor Bill Ackman urging the US
government, in an impassioned plea on CNBC, to shut down the country
for thirty days to contain the fast-spreading coronavirus, calling it the
only option to rescue the economy. In Ackman’s words, ‘hell is
coming’.87

19 March

• The Indian markets continued to fall as investors remained risk-averse

amid escalating COVID-19 cases. The Sensex fell 581 points to close at
28,288. Bajaj Finance was the biggest loser, down another 10 per cent
after yesterday’s 10 per cent fall. The Nifty fell 2.4 per cent to 8,263.
The India VIX surged 13 per cent to 71.95. Until volatility subsides, the
broader markets will continue to suffer. The mid-cap index fell 4 per
cent, while the small-cap index crashed 5.5 per cent.
 There is incredible value on offer everywhere. It is a time to be highly
•
demanding in terms of the criteria for deployment of fresh incremental
capital. It is often said that investing is a negative art. The following is a
list of what I do ‘not’ want to do when evaluating stock opportunities in
the current market:
• I am not looking for a mere 2x in three years, when the whole world
is panicking and there is literally a fire sale on everything.
• I am not looking for safe havens. I already have some in my
portfolio, and they did a decent job of protecting capital amid the
mid-cap and small-cap carnage in the last two years.
• I do not want to buy something just because it is available cheap and
once the price–value gap closes, I would need to/want to sell it. This
is not the time to buy cigar butts, but to look for high-quality stocks
that are trading way below their historical valuations.

• Having laid down what I do not want to do, the following is a list of
what characteristics I am looking at for investing incremental capital:
• The return potential should be significantly higher than 2x in three
years.
• I want to buy business models that are scalable, with a proven
execution track record, but are facing/will face temporary challenges
due to the disruption caused by COVID-19.
• Survival of the business model under a prolonged period of stress is
not a question mark, and I am able to build conviction that three
years out, the company will be much stronger.
• I will demand quality of business and management, and also a large
discount to fair value—I do not need to compromise on either in this
depressed environment.
• If I buy something today, I would like to ride it out for at least the
next three years. For that, I need to be convinced about the strength
of the business model and earnings visibility.
• Even though the above list looks highly ambitious, in the current
market, if one works hard, one will be able to identify some
 investment opportunities that meet all these criteria.

• It was a very volatile session in the US markets, with stocks erasing

steep losses from earlier in the day to close in the green. The Dow Jones
rose 188 points to 20,087. The S&P 500 inched up 0.5 per cent to 2,409,
while the Nasdaq rose 2.3 per cent to 7,150. Earlier in the session, the
Dow was down 721 points, or more than 3 per cent. The S&P 500 had
also briefly fallen more than 3 per cent. Crude snapped back strongly to
post its biggest one-day increase on record, rising 23 per cent to $25.22.
The sharp recovery came on the back of deeply oversold levels (crude’s
relative strength index had fallen to 14 yesterday, the lowest I’ve ever
seen for any commodity in the last fifteen years).
• There’s a dollar strain on the system globally. The dollar is in huge
demand right now. If you look at everything across the board, it’s all
going down together. The one thing going up that’s dollar-denominated
is the US dollar. The US Dollar Index, which tracks the greenback’s
performance against a basket of other currencies, rose 1.5 per cent to
102.67, its highest level since January 2017.
• The Federal Reserve is in overdrive. It has announced $450 billion in
foreign exchange swap lines to the central banks of Australia, Brazil,
South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New
Zealand, with the swap lines for the Central Bank of Brazil, the
Monetary Authority of Singapore and the Bank of Korea amounting to
$60 billion each. The Fed also established an additional lending facility
to backstop money market mutual funds. The move is aimed at ensuring
that the nearly $4 trillion money market fund industry can weather
sudden redemptions by investors, households and businesses amid a
market crash on Wall Street and a sharp rise in layoffs caused by the
coronavirus crisis.

20 March
• The Indian markets witnessed a sharp rebound as positive cues from
Asia boosted sentiment. The Sensex rallied 1,628 points, or 5.7 per cent,
to close at 29,916. The Nifty rose 482 points, or 5.8 per cent, to end at
8,745. The broader markets also gained, with the mid-cap index up 5
per cent and the small-cap index up 2 per cent.
• Governments worldwide are saying they will do ‘whatever it takes’ to
combat the economic impact of the coronavirus outbreak. They are
spending huge money today to solve the initial problem, but in my view,
this will have to be paid for at some later stage in the form of high
inflation in the real economy (as opposed to inflation in financial assets
in the last decade).

Author’s Note
In inflationary environments, nominal earnings tend to increase, but
cash conversion significantly deteriorates, as a larger portion of
earnings are consumed by the rising ‘nominal’ working capital and
fixed asset requirements that high inflation imposes. Thus, valuation
multiples decline. In high-inflation environments, nominal ROEs
rise (or at least remain stable), but real ROEs tend to fall, and after-
tax real returns plummet (as nominal gains are taxed). This is why,
historically, inflationary periods have led to low P/Es, despite decent
‘nominal’ earnings growth.

• Stocks on Wall Street resumed their slide as investors grappled with

mounting fears over the economic fallout of COVID-19. The Dow
Jones closed 913 points lower, or more than 4 per cent, at 19,173, after
rallying more than 400 points earlier in the day. The S&P 500 fell 4.3
per cent to 2,304. The Nasdaq closed 3.8 per cent lower at 6,879, after
being up more than 2 per cent earlier in the session. These sharp intra-
day reversals denote the underlying weakness in the fabric of the
market. The Dow dropped more than 17 per cent for the week, its
 biggest one-week decline since October 2008, when it fell 18.2 per cent.
Both the S&P 500 and the Nasdaq also had their worst weekly
performances since 2008, down 13 per cent and 12.6 per cent
respectively. The Dow is now 35.2 per cent below its all-time high level
from last month, while the S&P 500 is 32.1 per cent below its high.
• In its ongoing efforts to keep liquidity flowing through the system and
to stabilize credit markets, the Fed has announced the expansion of its
asset purchase programme to include short-term municipal bonds.
Continued disruption in the markets for state and local government debt
had led to a collapse in the market for municipal bonds this week, with
few willing to step in and buy the government debt amid the current
climate of high uncertainty.
• More than 14,000 cases of COVID-19 have been confirmed in the US,
along with over 200 deaths, according to Johns Hopkins University.
Globally, more than 2,45,000 cases have been confirmed. I know that
humanity will eventually overcome this virus; I just don’t know when.
• Earlier today, I recommended Hans Rosling’s book, Factfulness, to my
investor friends. It is a very helpful read at times like these to get some
optimism based on history in an inherently pessimistic world. What we
are facing now will eventually pass, but we don’t know if it will pass in
six months, a year, or a couple of years, and what damage it will leave
in its tracks. When the coronavirus crisis is over, many companies
would have gone bust, business models would have undergone serious
transformation, and markets may not give lofty valuation to any stock
for a long time as people will see black swans everywhere. As investors,
we need to begin preparing ourselves for the big change coming in a
vastly different world.

21 March

• This has been a very tough period for me in the market. For the last two
years, somewhere in my mind, I knew I would face the music at some
point, but I’m observing behaviour in myself that I didn’t think I would
 exhibit when I imagined facing a full-blown bear market in theory. With
my relatively frugal lifestyle and a decent amount of cash set aside in
my checking account for covering my living expenses for the next five
years, I always used to think that I would enthusiastically keep buying,
perhaps at a faster pace as stocks went down. But when my portfolio
started crashing this month, I noticed I was losing my enthusiasm for
buying stocks even faster. The best I could do was to stay still and not
sell any of my stocks in panic to convert a paper loss into an actual loss.
Whenever I opened my portfolio and looked at each of the stocks I own,
all I could envision were the many different risks that may still be
uncaptured in each business’s share price. Of course, the risks were
always there. They were there in 2018, they were there in 2019, and
they are still present in 2020. The primary reason I am suddenly acutely
aware of the risks is, indeed, the much-lower share price. I know my
stocks will eventually go up. I know the coronavirus mayhem will
eventually settle down. In the next three to five years, if I see my stocks
40–50 per cent down from here, it will be not because of COVID-19,
but Schumpeterian creative destruction. The shadow of such creative
destruction and its gnawing possibility consumes our attention as our
stocks begin to fall. But such possibilities are always there; it’s just that
we acknowledge their existence in a bear market.
• Bear markets are the best time to remind ourselves of why we want to
be investors. When times are good, it is easy to want to pursue this
activity. When the market becomes unforgiving and brutal, only then
can we start separating our genuine interest in investing from merely
making money. It is essential to have great enthusiasm for the
intellectual process of investing in order to sustain in this field for a
long time. Without the inner strength of our passion for investing to
carry us during the periodic phases of pain and suffering, it is unlikely
we would be able to survive in this field for long. Stock market
investing remains the most fascinating analytical sport I have ever come
across, and it is my lens to understanding the world. Because of
investing, I feel more connected to the world around me. To be a truly
 passionate investor means you are always thinking about the future and
the direction of the world. It means you are always enthusiastically
observing everything around you. Investing isn’t just a process of
wealth creation; it is a source of great happiness and sheer intellectual
delight for the truly passionate investor. I wouldn’t want to live any
other way. I truly love what I do and I feel blessed and fortunate to have
discovered my passion rather than sleepwalking through life.

23 March

• Markets across Asia-Pacific crashed as fears over the economic impact

of the global coronavirus outbreak continued to weigh heavily on
investor sentiment. The Straits Times Index in Singapore plunged 7.35
per cent. Over in Australia, the S&P/ASX 200 tanked 5.62 per cent. The
Kospi in South Korea sank 5.34 per cent, while Hong Kong’s Hang
Seng Index dropped 4.86 per cent.
• Today was a day I will never forget for the rest of my investing career.
Equity markets in India crumbled as stocks across the board fell like
ninepins. The Sensex hit 10 per cent lower circuit within minutes of
opening, and trading was halted for forty-five minutes. It was the
second instance of halted trading in the Indian market in a span of ten
days. The sell-off in the market continued when trading resumed. The
Sensex and the Nifty recorded their largest single-day losses in history.
The Sensex crashed 3,935 points, or 13 per cent, to close at 25,981. The
Nifty cratered 1,135 points, or 13 per cent, to end the session at 7,610.
Both the headline indices are now at their lowest levels since 2016. The
India VIX rose 6.64 per cent to 71.56. The Nifty bank index crashed 16
per cent. The Nifty auto index plunged 14 per cent. Mid-cap and small-
cap investors have been obliterated in this bear market. Those indices
tanked a further 13 per cent and 12 per cent respectively. Not looking at
my portfolio helped me greatly today.
• There was nowhere to hide in the market today as blue-chip names were
also hammered out of shape. The collapse in their share prices was
 nerve wracking, to say the least. I have never witnessed anything quite
like this:
• Axis Bank—down 27.63 per cent
• IndusInd Bank—down 23.67 per cent
• Bajaj Finance—down 23.39 per cent
• ICICI Bank—down 18.15 per cent
• Maruti—down 17.28 per cent
• L&T—down 16.85 per cent
• Bajaj Auto—down 14.36 per cent
• UltraTech Cement—down 14.29 per cent
• Asian Paints—down 13.97 per cent
• Titan—down 13.89 per cent
• Tech Mahindra—down 13.62 per cent
• HDFC limited—down 13.22 per cent
• State Bank of India—down 13.16 per cent
• Reliance Industries—down 12.66 per cent
• HDFC Bank—down 12.17 per cent

• I was rubbing my eyes in disbelief, looking at Bajaj Finance. How the

mighty have fallen. For a long time, I used to regard this company as
invincible. Now, I have realized that there is nothing that can be termed
as ‘invincible’ in markets.
• It is on days like today that you acknowledge that the market is the
ultimate humbling machine.
• Investors on WhatsApp groups are posting philosophical messages
about life. I empathize with them. This market has been excruciatingly
painful. It’s a time to support each other emotionally.
• Unlike the period of 2018 to 2019, when I felt anxious and nervous on
many occasions during sharp sell-offs in the market, this time I know
that I am in the safe hands of quality, and my portfolio’s eventual
recovery is a matter of when, not if.
• US stocks continued to fall even after the most aggressive market
intervention by the Fed in its history. The Dow Jones closed down 582
 points, or 3 per cent. The S&P 500 fell 2.9 per cent while the Nasdaq
ended flat. The Fed announced a commitment to continue its asset
purchasing programme ‘in the amounts needed to support smooth
market functioning and effective transmission of monetary policy to
broader financial conditions and the economy’.88 This potentially
represents a new chapter in the Fed’s money printing saga, as it has
committed to keep expanding its balance sheet as necessary, rather than
a commitment to a set amount. Previously, the Fed had announced it
would buy $500 billion worth of US Treasuries and $200 billion in
mortgage-backed securities. Today’s move represents an open-ended
commitment to the QE programme. Treasury yields plunged after the
Fed announcement. The yield on the benchmark 10-year Treasury yield
dropped 25 basis points to 0.69 per cent. The yield on the 30-year
Treasury bond fell 20 basis points to 1.34 per cent.

24 March

• Read a blog post which quantified the huge damage to investor

portfolios from this bear market in India since January 2018, and how
the severity of the pain is equivalent to the 2008 crash:89
• 79 per cent of stocks are down more than 50 per cent since mid-
January 2018 (in 2008, 87 per cent of stocks were down more than
50 per cent).
• 70 per cent of stocks are down more than 60 per cent since mid-
January 2018 (in 2008, 79 per cent of stocks were down more than
60 per cent).
• 56 per cent of stocks are down more than 70 per cent since mid-
January 2018 (in 2008, 60 per cent of stocks were down more than
70 per cent).

• The Indian markets ended the day with gains amid positive global cues
from Asia and Europe as investors cheered the aggressive stimulus
measures by the Fed. The Sensex rose 693 points to 26,674, while Nifty
 closed the session at 7,801, up 191 points. The broader markets were
mixed, with the mid-cap index up 1 per cent and the small-cap index
down 1 per cent.
• India’s prime minister, Narendra Modi, has imposed a nationwide
lockdown from midnight for twenty-one days, in an attempt to slow the
spread of the coronavirus. I hope this does not lead to hoarding of
essentials by the public during the resultant chaos in a country of 1.4
billion people.
• Amid all the gloom and despair caused by the pandemic, I announced
the launch of the revised edition of my book published by Columbia
(Figure 9).90 I hope to do justice to the kind words of praise for the book
that Warren Buffett shared with me after I had sent him a copy of the
manuscript. If my work is able to bring about a ray of hope and
optimism into the lives of even a few of my readers, I will consider the
book to have been successful in its endeavour.

Figure 9: The day my life changed forever

 Author’s Note
Buffett’s words for the book came true. The Joys of Compounding
went on to become an international best-seller.91

• US stocks soared as investors bet lawmakers in Washington D.C. would

soon deliver a stimulus bill to rescue the economy from the damage
caused by the coronavirus. The Dow Jones vaulted 2,112 points higher,
or more than 11 per cent, to 20,704, notching its biggest one-day
percentage gain since 1933. The S&P 500 surged 9.4 per cent to 2,447
in its best day since October 2008. The Nasdaq jumped 8.1 per cent to
7,417. Bear market rallies are truly breathtaking.

Author’s Note
Little did I know that we were about to embark on a big bull market
over the next two years—one in which I made my first ever twenty-
bagger in India.92 Peter Bernstein had rightly said, ‘survival is the
only road to riches’.
 Notes

1. In Principles, Simon & Schuster, 2017.

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10. Adam Hayes, ‘Big bath: Definition, accounting examples, legality’, Investopedia, updated 31
December 2020.
11. Shishir Asthana, ‘When IL&FS nearly sank the financial system’, MoneyControl.com, 27
December 2018.
12. Alicia Tuovila, ‘Current Account Savings Account (CASA): Definition and formula’,
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13. ‘André Kostolany: The 15 best phrases and their biography and bibliography’,
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15. Ashish Rukhaiyar, ‘Union Budget 2018: Long-term capital gains makes a comeback’, The
Hindu, 1 February 2018.
16. Dilsher Dhillon, ‘SEBI has hurt smaller companies with its recently-implemented mutual fund
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17. ‘What are benami properties? All you need to know’, IndianExpress.com, 25 December 2016.
18. Gulam Shaik Budan and Anuj Srivas, ‘Essel Group link emerges to company being probed for
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19. Tweet by @BTVI, 28 January 2019.
20. Adam Helfman, ‘Ben Franklin: The father of home improvement’, Detroit Free Press (provided
by Hire It Done), 24 October 2014.
21. U. Sudhakar Reddy, ‘I-T sleuths carry out searches on top pharma company in Telangana and
Andhra’, TimesOfIndia.com, 15 February 2019.
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Press Trust of India, 19 February 2019.
23. ‘Sebi orders impounding of Rs 1 cr from ADF Foods’ promoters, 4 others in insider trading
case’, TimesOfIndia.com via Press Trust of India, 24 February 2019.
24. Ankit Panda, ‘Indian Air Force strikes Pakistan-based terror camp in “preemptive action”’, The
Diplomat, 26 February 2019.
25. Uday Sampath Kumar and Nivedita Bhattacharjee, ‘Kraft Heinz discloses SEC probe, $15
billion write-down; shares dive 20 percent’, Reuters, 22 February 2019.
26. ‘Sharda Motors & Bharat seats promoters settle; leave minority shareholders short-changed’,
MoneyLife.in, 1 March 2019.
27. Ron Lieber, ‘The fall of “America’s money answers man”’, The New York Times, 1 March 2019.
28. David Skok, ‘The SaaS business model and metrics’, SlideShare.net, 8 May 2015.
29. Emily Barrett and Katherine Greifeld, ‘U.S. Treasury yield curve inverts for first time since
2007’, Bloomberg, 22 March 2019.
30. ‘Companies cut AC, refrigerator prices by up to 20% amid tepid demand’,
TimesNowNews.com, 25 March 2019.
31. Tweet by @Gautam__Baid, 4 May 2019.
32. ‘The danger of comparing yourself to others’, 21 December 2019, Farnam Street Blog.
33. Ketan Thakkar and Ashutosh R. Shyam, ‘Auto companies slam brakes on production’,
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34. Vishal Khandelwal, ‘Buy and hold: Simple, not easy’, SafalNiveshak.com, updated 23 May
2022.
35. Eleventh Annual Value Investing Panel, Creighton Business, YouTube.com, 8 May 2019.
36. Joshua M. Brown, ‘When everything that counts can’t be counted’, TheReformedBroker.com,
13 June 2019.
37. ‘KRBL plunges 20% as ED attaches properties in Embraer defence deal case’, Business-
Standard.com, 5 July 2019.
38. ‘DHFL warns it may not survive as a going concern’, MoneyControl.com via Reuters, 14 July
2019.
39. Rahul Oberoi, ‘26 special stocks that rallied up to 1,000% when market saw free fall’,
ETMarkets.com, 9 August 2019.
40. ‘Oberoi Realty share price falls over 7% after I-T dept conducts search operation’,
BusinessToday.in, 22 August 2019.
41. ‘18 public sector banks hit by 2,480 fraud cases of Rs 32,000 cr in Q1: RTI’, The Hindu
Business Line via Press Trust of India, updated 6 December 2021.
42. ‘Double blow for stock market: Credit Suisse downgrades India two steps in model portfolio’,
FinancialExpress.com, 11 September 2019.
43. Rajeev Jayaswal, ‘Govt plans rejig in personal tax slabs to boost spending’,
HindustanTimes.com, 5 July 2020.
44. Tweet by @CNBCTV18News, 4 October 2019.
45. Krishna Kant, ‘Stock mkt more polarised after tax cut; 91% of gains cornered by 13 firms’,
Business-Standard.com, 8 October 2019.
46. Jason Zweig, ‘A (long) chat with Peter L. Bernstein’, JasonZweig.com, 25 June 2017.
47. Blas Moros, ‘On Howard Marks’ memos’, Blas.com, October 2019.
48. ‘Infosys shares suffer worst fall in 6 years: What triggered the slump?’, IndiaToday.in, 22
October 2019.
49. ‘The big call—bubble in quality?’, AbbakusInvest.com blog, October 2019.
50. John Hempton, ‘When do you average down?’, Bronte Capital blog, 4 January 2017.
51. ‘Learning from Nick Sleep’, MastersInvest.com, 23 December 2020.
52. ‘Vodafone Idea posts India’s biggest ever quarterly loss at Rs 50,921 crore on AGR hit’,
ETMarkets.com, 16 November 2019.
53. ‘If you buy quality stocks even at 100 PE, you will still make money: Saurabh Mukherjea stays
defiant & rubbishes fears of bubble in valuations’, Rakesh-Jhunjhunwala.in, 23 November 2019.
54. Tweet by @ViaWealthy, 25 November 2019.
55. Haresh Chawla, ‘Making sense of the new capitalists’, FoundingFuel.com, 25 November 2019.
56. Tweet by @Gautam__Baid, 28 November 2019.
57. Chaitanya Marpakwar and Yogesh Naik, ‘Projects okayed by Devendra Fadnavis under scanner;
CM Uddhav Thackeray orders stop payment for all ongoing works’, Mumbai Mirror, 3
December 2019.
58. ‘Bank credit growth likely to fall to 58-year low in FY20’, BusinessToday.in, 27 December
2019.
59. Ashley Coutinho, ‘New margin norms imposed by NSE may hit mid, small cap segments hard’,
Business-Standard.com, 7 January 2020.
60. Aarati Krishnan, ‘Behind the bipolar market behaviour’, TheHinduBusinessLine.com, 10
January 2020.
61. ‘Aarti Industries share price slips 4% after I-T searches’, MoneyControl.com, 10 January 2020.
62. Madhvi Sally, ‘Maize prices fall 15% on the back of rising imports’, The Economic Times, 18
January 2020.
63. ‘From Bangkok to Hongkong and Seoul, Asia steps up defence against coronavirus,’
financialexpress.com via AFP, 21 January 2020.
64. ‘Singapore confirms first case of new China virus—Straits Times’, Reuters, 23 January 2020.
65. ‘Australia scientists claim first re-creation of coronavirus outside China’, Reuters, 29 January
2020.
66. ‘ELSS Funds—What is ELSS?—invest in best equity linked savings scheme funds & save
taxes’, ClearTax.in, updated 16 March 2023.
67. ‘What is SEO—Search Engine Optimization?’, SearchEngineLand.com, updated 16 June 2023.
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69. ‘Cash Reserve Ratio (CRR)—meaning, objectives current CRR’, ClearTax.in, updated 29 June
2022.
70. The repository is hosted at Blas.com.
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China’, ThePrint.in, 19 February 2020.
72. Morgan Housel, ‘100 little ideas’, Collabfund.com blog, 20 February 2020.
73. Bloomberg.
74. Howard Marks, The most important thing illuminated: Uncommon sense for the thoughtful
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2020.
76. FactSet.
77. Morgan Housel, ‘The laws of investing’, Collabfund.com blog, 12 August 2019.
78. Anand Sridharan, ‘Growth is overrated’, LinkedIn, 9 March 2020.
79. ‘Coronavirus: Up to 70% of Germany could become infected—Merkel’, BBC.com, 11 March
2020.
80. Dawn Kopecki et al., ‘World Health Organization declares the coronavirus outbreak a global
pandemic’, CNBC.com, 11 March 2020.
81. ‘Coronavirus outbreak: India seals its borders as COVID-19 scare turns into pandemic’,
IndiaTVNews.com, 12 March 2020.
82. Tweet by @MarceloPLima, 8 March 2020.
83. FactSet.
84. Devansh Sharma, ‘Stocks bleed on COVID-19 scare; Sensex slumps 810 points, Nifty sub-
9,000’, LiveMint.com, 17 March 2020.
85. Yun Li, ‘“Hell is coming”—Bill Ackman has dire warning for Trump, CEOs if drastic measures
aren’t taken now’, CNBC.com, 18 March 2020.
86. FactSet.
87. FactSet.
88. Press release by the US Federal Reserve, 23 March 2020.
89. Nooresh Merani, ‘Equity–never been so bad so quick. What next?’, NooreshTech.co.in, 24
March 2020.
90. Tweet by @Gautam__Baid, 24 March 2020.
91. Tweet by @Gautam__Baid, 1 October 2022.
92. Tweet by @Gautam__Baid, 10 August 2022.
 Index

Aarti Industries
Aavas Financiers
accumulation phase
Ackman, Bill
acknowledgement
Additional Surveillance Measure (ASM) rules
ADF Foods
Advent International
Airbnb
Airline stocks
Aksharchem
allocation
altcoins
Amazon
Amber Enterprises
America
American Airlines
angel investors
anticipation
Apex Frozen Foods
APL Apollo Tubes
Apollo Hospitals
Apollo pipes
Apple
Ashapura Intimates Fashion
Ashok Leyland
Asian Paints
asset
management
monetization plans
assets under management (AUM)
Associated Alcohols
Astral Poly
asymmetric risk-reward
Aurobindo Pharma
auto-ancillary stocks
auto stocks
Avanti Feeds
Axis Bank

Bajaj, Sanjiv
Bajaj Finance
Bajaj Finserv
Bandhan Bank
banking system credit growth
Bank of America
bankruptcy
bear markets
experience
feedback
IPOs
learnings from
public money
resilient
test
below-average business overall
benefit-to-cost ratios
Berger Paints
Berkshire Hathaway
Bernstein, Peter
‘Best Private Banking Services Overall’ award
Bhansali Engineering
BHEL
Bhushan Steel
binge-watching web series
Birlasoft
Bitcoin
‘Black Monday’
crash
market crash
Bloodbath
blue-chips
in India
stocks
Blue Dart Express
Bombay Stock Exchange (BSE)
small-cap index
bond repayments
book value per share (BVPS)
borrowing
branding
Brent crude
broad-based market
correction
selloff
broad-based rally
BSE 500 index
BSE Limited
BSE Sensex
Buffett, Warren
bull markets
mania
business integrity
business-to-business (B2B) companies
business-to-government (B2G)
Butterfly Gandhimathi

capable managements
Capacite Infraprojects
capital
allocation
cycle
deployment
expenditures
gains tax
incremental invested
intensity
market
misallocation
permanent loss
preservation
capitulation
Care Ratings
CASA liability franchise
cash
conversion cycle
flows
reserve ratio exemption
cash flow from operations (CFO)
CDSL
Center for Disease Control and Prevention
Century Plyboards
Chandra, Subhash
‘China Plus’ strategy
Chinese economy
Chinese imports
Chipmakers
Coal India
Colgate
commercial papers (CPs)
commodity chemical stocks
commodity inflation
commodity trap
compound annual growth rate (CAGR)
Congress-led coalition government
conservatism
construction finance
consumer franchises
Consumer Price Index
contract manufacturing
contract research and manufacturing services (CRAMS) business
coronavirus
corporate bond issuances
corporate governance
corporate lending
corporate tax
cut announcement
rate
cost of borrowing
cost-to-income (CI) ratio
coupon-bearing securities
COVID-19 market crash
credibility
CreditAccess Grameen
credit-related event
Credit Suisse
CRISIL
cross-cycle normalized ROAs
cryptocurrency market
CSB Bank
culture
current account savings account (CASA)
current market cap
cyclical businesses

Dalal Street
Damani, Radhakishan
data
analytics
DB Corp.
DCB Bank
debt
-free balance sheet
-market-induced pain
repayment
Deepak Fertilisers
deep-value investing
degrees of patience
demand-supply dynamics
deployment
destruction
Dewan Housing Finance Limited (DHFL)
DFM Foods
DHFL
Dilip Buildcon
discounted cash flow (DCF) calculation
discount retailer
diversification
product and geographical
dividend distribution tax (DDT)
Divis Labs
Dixon Technologies
DMart
domestic consumption
domestic institutional investors (DIIs)
domestic investor money
domestic mutual funds
Dow Jones
Dr Reddy’s Laboratories
Druckenmiller, Stanley
DSP Mutual Fund
DZire

earnings before interest, taxes, depreciation and amortization (EBITDA)

earnings per share (EPS)
Ebola
ECL Finance
economic recession
economic reform in India
economic slowdown
economy leaders
Edelweiss
Eicher Motors
elasticity to governance
Endurance Technologies
Enforcement Directorate
enterprise value per tonne
enthusiasm
entrepreneurship
EPC (engineering, procurement, and construction)
Equitas
equity
capital
funding
 investors
-linked savings scheme
markets
value
Essel Group
Ethereum
ethical promoter
euphoria and correction
euphoric broad-based bull market
Euromoney Private Banking
European Central Bank
exchange-traded fund (ETF)
expectations
Exxon Mobil

Facebook
fast moving consumer goods (FMCG)
‘fear index’
Federal Reserve
Fed funds rate
feedback loop
financial crisis
financial independence
financial innovation
Finolex Cables
fixed-income investments
FMCG stocks in India
FOMO
foreign institutional investors (FIIs)
foreign portfolio investors
free cash flow generation
full-time investor
fund
 deployments
managers
Future Consumer
Future Enterprises
Future Retail
Future Supply Chain

Gayatri Projects
Glassdoor
GlaxoSmithKline
Glenmark
global financial crisis 2008
global stock markets
GMM Pfaudler
GNFC
Goa Carbon
Godrej Consumer
gold
Goldman Sachs
good investing
Goodman, Jordan
Google
Graphite India
gratification
Great Depression
Greenpanel
growth in lending
Gruh Finance
Gujarat Ambuja Exports
GVK Power

Hang Seng Index

HCC
HDFC AMC
HDFC Asset Management Company (HDFC AMC)
HDFC Bank
HDFC Life
HDFC Life Insurance
HDFC Limited
HDIL
heavy debt
HEG
Hero MotoCorp
HFCs
high net-worth individual (HNI) investors
Himadri Speciality Chemicals
Himatsingka Seide
Hindustan Foods
Hindustan Unilever
historic liberalization
HLE Glasscoat
home loans
Housel, Morgan
housing finance company (HFC)
human behaviour
hypergrowth

ICICI Bank
ICICI Prudential Life Insurance
ICRA report
IFB Industries
IIFL Wealth Management
IL&FS
credit ratings
crisis
illiquid small-cap stock
illiquid stocks
income tax
raids
regime
Income Tax Department
incremental capital
incremental credit
Indiabulls Housing Finance
Indiabulls Real Estate
India Glycols
Indian economy
Indian rupee (INR) depreciation
India Ratings and Research (Ind-Ra)
India’s financial system
IndoStar Capital Finance
IndusInd Bank
Infibeam
information technology (IT) stock
Infosys
infrastructure stocks
Initial Public Offerings (IPOs)
Insolvency and Bankruptcy Code (IBC)
institutional investors
institutional shareholding
Intel
interest rates
interest-versus-nil interest
intra-day recovery
investing/investment
management
opportunities
portfolio
process, precedence in
investors
anxiety
maturity and discipline
mid-cap and small-cap
problem for
sentiment
and traders
IOL Chemicals

Jain, Rajeev
Jamna Auto
JBF Industries
Jhunjhunwala, Rakesh
Jobs, Steve
Johns Hopkins University
JP Associates
JPMorgan
JPMorgan Chase

Kajaria Ceramics
Kapoor, Rana
Kaya Limited
key differentiator
Khadim India
Kostolany, André
Kotak Bank
Kraft Heinz
KRBL
Kwality

Lakshmi Machine Works

land acquisition issues
large-cap consumer stocks
large-cap funds
Las Vegas Sands
Lehman Brothers crisis
lenders
lending industry
leverage
liabilities
mismatch
profile/source of funds
LIC Housing Finance
life insurance companies
LinkedIn
liquidation
liquidity
crisis
risk
trading
loan book
loans against property (LAP)
longevity
long-term capital gains
long-term loans
low-cost advantages
low-probability events
low-valuation stocks
L&T Finance
LT Foods
L&T Infotech
luck
Lumax Industries

Madhya Pradesh
Maggi
Mahindra & Mahindra (M&M)
management
capital allocation skills
quality
Manappuram Finance
manias and crashes
Manpasand Beverages
marginal cost
margin contraction
Marico
market
crashes
cycles
indicator
expectations
-linked business
phase
rewards managements
-share capture
tolerance level
volatility
market cap
market cap-to-gross domestic product (GDP) ratio
mark-up phase
Maruti Swift
massive investment push
mass liquidation
Max Financial Services
Mayhem on Dalal Street
mediocre-quality business
medium-density fibreboard (MDF) industry
mental pressure and stress
Mentor Financial Services
Merkel, Angela
MGM Resorts
micro-cap
company
investing
investment situations
stocks
microfinance
companies
entity
stocks
microfinance institutions (MFIs)
mid-cap index
mid-cap stocks
Miglani family
Mindtree
M&M
M&M Financial Services
Mnuchin, Steven
Modi, Narendra
Moneylife article
Morgan Stanley
Morningstar
mortgage-backed securities
Motherson Sumi
MSCI Emerging Markets Index
MTNL
multi-cap approach
multinational companies (MNCs)
multiplex stocks in India
Music Broadcast
Muthoot Capital
Muthoot Finance
Muthoot trades
mutual funds
debt

narrative-based investing
Nasdaq
NASDAQ 100
National Company Law Tribunal (NCLT)
National Stock Exchange (NSE)
Navin Fluorine
Naysayers of Bajaj Finance
NBCC India
NCC
NELCO
Nestlé
Nestlé India
Netflix
net interest income (NII)
net interest margins (NIMs)
net profit
network effect
newbie investors
Neyveli Lignite
Nifty
bank index
IT index
Metal index
P/E
pharma index
PSU Bank index
stocks
Nitrite, Deepak
NOCIL
Non-Banking Financial Company (NBFC)
crisis
funding
industry
stocks
non-convertible debentures (NCDs)
non-financial company
non-lending business
non-performing assets (NPAs)
non- promoters
Norwegian Cruise Line
NSE of India
Nvidia

Oberoi Realty
oligopolies
Olympic gold medal
ONGC
online businesses
operated stocks
optimism
Oracle’s SAP software

Page Industries
party transactions
passive income
patience
PC Jeweller
personal income tax rates
personal portfolios
pessimism
pharmaceutical stocks
Pidilite
Pied Piper
Piramal Enterprises
PNB Housing Finance
Poddar Housing
Pokarna Engineered Stone
Pokarna Limited
polarization
Ponzi scheme
portfolio
erosion
structuring
Powell, Jerome
Prakash Industries
pre-bookings
predictability
price-to-book (P/B) ratios
price-to-earnings (P/E) ratio
price-value gap
private equity
funds
product and geographical diversification
productivity
profit
-booking
margins
before tax
profitability
project-based businesses
promoters
-quality
risk
PSP Projects
public
 fund managers
health emergency
money
sector banks
sector stocks
Punjab National Bank (PNB)

QIP money
Qorvo
qualified institutional placement5 (QIP)
quality mid-cap companies
quality stocks
quantitative easing (QE) programme
Quess Corporation

Rain Industries
Rane Holdings
Ratnakar Bank
RBI
RBL Bank
Real Estate Regulatory Authority (RERA) act
reflexivity theory
regulatory risk
reinvestment risk
Reliance Capital
Reliance Home Finance
Reliance Industries
Reliance Retail
Repco Home Finance
Reserve Bank of India (RBI)
retail
investor
lending
return on assets (ROA)
return on capital employed (ROCE)
expansion
return on equity (ROE)
return on invested capital (ROIC)
returns
ratios
revenue
growth
and net-profit growth
opportunity
revive domestic consumption
Ricoh India
risk
-adjusted returns
in investing Indian market
business risk
promoter risk
regulatory risk
valuation risk
management
definition
perspective
RITES Limited
Rosling, Hans
Royal Caribbean Cruises
rule-based selling procedure
Rupa & Company
rupee depreciation

safe stocks
SAIL
Saregama
SBI Cards IPO
SBI Life
sectoral diversification
Securities and Exchange Board of India (SEBI)
securitization
seed marketing
self-awareness
severe acute respiratory syndrome (SARS)
Shankara Building Products
sharp recovery
Shemaroo Entertainment
Shipping Corporation of India
Shivalik Bimetal
Shoppers Stop
short-term
capital loss
financing instruments
liabilities
minded clients
trading
Shriram Transport Finance
single-product company
Skipper
Skyworks Solutions
sleep deprivation
small-caps
funds
index
stocks
small finance banks (SFBs)
small-scale broking houses
social media
software-as-a-service (SaaS) companies
Solara Active Pharma
solvency
Somany Ceramics
Soros, George
South Indian Bank
S&P 500
Spandana Sphoorty Financial
special-situation investing
Spier, Guy
Sreeleathers
startups, private market valuations
State Bank of India
‘statistically cheap’ securities category
Sterling Tools
Sterling Wilson Solar
Sterlite Technologies
stock
advisory business
in India
liquidity
market
picking
prices
selection
stock-keeping units (SKUs)
Straits Times Index
stress
Strides
Sundaram Clayton
Sun Pharma
sustainability
sustainable money
Suven Life Sciences
Suven Pharma
Suzlon
Swiss National Bank

Taj GVK Hotels

Tata
Tata Motors
Tata Steel
tax
benefits
-rate slabs
-saver mutual funds
-saving benefit
TCS
Tech Mahindra
technology infrastructure
Tejas Networks
terminal value
Think Budweiser
Thompson, Myles
Tide
Tinplate
Titan
trade-to-trade (T2T) stocks
trading
liquidity
view
volume
Transpek
travel-related stocks
Trump, Donald
Twitter
two-sided network
Uber
Ujjivan Financial
Ujjivan Small Finance Bank
ultra-high net worth (UHNW)
unethical managements
unfavourable base effect
‘unforced errors’
Union Budget
US-China trade war
US Department of Commerce
US Dollar Index
US Federal Reserve
US interest rates
US Securities and Exchange Commission
Uttam Galva Steels

valuation
contraction
discount
in lending business
value creation, for shareholders
ValuePickr Forum
value traps
VanEck Vectors Semiconductor ETF
Varun Beverages
Venky’s
venture capitalists
Visa
Vodafone Idea
Wall Street
wealth
creation
destruction
 management businesses

Wealth Management Awards

Welspun Enterprises
WhatsApp groups
wholesale lenders
Wockhardt
working capital
World Health Organization
Wynn Resorts

Yes Bank
YouTube channel

Zee Enterprises
Zee Entertainment
Zee Learn
Zydus Wellness
 Acknowledgements

Learning and accepting help from others creates value far beyond our
individual capabilities. Look at every interaction as an opportunity to learn
from the people you meet. You will be amazed at how quickly you grow
and how much better you become, both as a professional and, more
important, as a human being… The more you reach out to and associate
with individuals (whether younger or older) who are better and smarter than
you are, the more you will learn and the faster you will improve... If it were
not for the generous help and guidance of my smart investor friends and
colleagues, then my personal portfolio would never have been able to
perform as well as it did during the 2018–19 bear market in India. I give
them a large part of the credit for my healthy portfolio returns to date and I
hope to always keep learning from them throughout life.
—From The Joys of Compounding

I am a student of the market, and my investor friends and colleagues are my

lifelong teachers. I am grateful to them for selflessly sharing their
knowledge and insights with me over the years. Having access to such an
incredible ecosystem of wise individuals is an honour for me. This book is a
heartfelt tribute to all of my investor friends and colleagues. It contains
several of my learnings from them. Since there are many people in my
investing circle, instead of listing down their names individually here, I give
all of them the bulk of the credit for the content in this book. Any mistakes
are mine alone.
It has been my privilege to work with Sachin Sharma and his all-star
team at HarperCollins.
Thanks to my family and friends for their love, motivation and support
over the years.
Last, but not least, obvious and immediate gratitude is due to you, the
reader.
Thank you all.
 About the Book

THE MAKING OF A VALUE INVESTOR follows Gautam Baid’s

development as an investor during a brutal bear market, when he recorded
his reflections, observations and learnings in his investment journal in the
face of an increasingly uncertain future. This book charts the mistakes and
successes in the battle for investment survival during one of the most
tumultuous market phases in history.

Through time travel-like storytelling, Baid skilfully captures his collective

experiences of that period, allowing readers to truly connect with his
evolving worldview. The entries from his journal presented in a
chronological manner, with added retrospective commentary, are a treasure
trove of everlasting investment principles. The result is a book that provides
you invaluable lessons on navigating financial markets and building
resilience.
 About the Author

Gautam Baid, CFA, is the managing partner of Stellar Wealth Partners

India Fund, a Delaware-based investment partnership that is available to
accredited investors in the USA. Baid is also the equity advisor to Complete
Circle Stellar Wealth PMS, a portfolio-management service available to
Indian citizens and NRIs. Both funds are modelled after the original Buffett
Partnership fee structure, and invest in listed Indian equities with a long-
term, fundamental and value-oriented approach.
Previously, Baid served as portfolio manager at Summit Global
Investments, an SEC-registered investment advisor based in Salt Lake City,
USA. Before that, he served at the Mumbai, London and Hong Kong
offices of Citigroup and Deutsche Bank as a senior analyst in their
investment banking teams.
Baid is the author of the international bestseller on value investing, The
Joys of Compounding (2020). He is a CFA charterholder, and a member of
the CFA Institute. He has an MBA in finance from Nirma University, India,
and an MS in finance from ICFAI University, India.
Baid’s views and opinions have been published on various forums in
print, digital and social media. In 2018 and 2019, he was profiled in
Morningstar’s Learn from the Masters series.
Learn more at www.stellarwealthindia.com and
www.completecirclewealth.com.
 Also by the Author

The Joys of Compounding:

The Passionate Pursuit of Lifelong Learning
 30 Years of

At HarperCollins, we believe in telling the best stories and finding the

widest possible readership for our books in every format possible. We
started publishing 30 years ago; a great deal has changed since then, but
what has remained constant is the passion with which our authors write
their books, the love with which readers receive them, and the sheer joy and
excitement that we as publishers feel in being a part of the publishing
process.

Over the years, we’ve had the pleasure of publishing some of the finest
writing from the subcontinent and around the world, and some of the
biggest bestsellers in India’s publishing history. Our books and authors have
won a phenomenal range of awards, and we ourselves have been named
Publisher of the Year the greatest number of times. But nothing has meant
more to us than the fact that millions of people have read the books we
published, and somewhere, a book of ours might have made a difference.

As we step into our fourth decade, we go back to that one word – a word
which has been a driving force for us all these years.

Read.
 TALK TO US
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 First published in India by Harper Business
An imprint of HarperCollins Publishers 2023
4th Floor, Tower A, Building No. 10, DLF Cyber City,
DLF Phase II, Gurugram, Haryana – 122002
www.harpercollins.co.in

2 4 6 8 10 9 7 5 3 1

Copyright © Gautam Baid 2023

P-ISBN: 978-93-5699-428-7
Epub Edition © October 2023 ISBN: 978-93-5699-431-7

The views and opinions expressed in this book are the author’s own and the
facts are as reported by him, and the publishers are not in any way liable for
the same.

Gautam Baid asserts the moral right to be identified as the author of this
work.

All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system, or transmitted, in any form or by any means, electronic,
mechanical, photocopying, recording or otherwise, without the prior
permission of the publishers.