Finding a marriage partner

Dated: 20th of June, 2017

 Performance and Portfolio Activity
The portfolio was up 4.7% Dollar terms for the month of May, 2017, compared to the investible Indian index, Nifty 50, which was also up 2.9%.


Stellar  stock price move of Avanti Feeds, a shrimp feed and shrimp exporting  business, helped matters. Avanti reported excellent numbers this quarter  as they move up the value chain from shrimp feeds to shrimps. Few other  stocks in the portfolio also reached their life highs in the month of  May. There were no additions, deletions or changes to portfolio  holdings.


As I have been stating ad nauseam, it has  become more and more difficult to find comfort in valuations as markets  show no signs of fatigue. The relentless rise in broad markets around  the world, including Indian ones, is probably causing a situation where a  portfolio assessed on future growth valuations, even if on a sound base  over the long term, is dancing on the verge of short term pain. It is  difficult to ascertain, probably impossible, to state with any  confidence the nearness to the tipping point. Maybe we might not ever  reach a tipping point, maybe we are extremely near it, but that's  markets for you. Two birds in the bush is not the question but the path  to catching them may not be as straight forward anymore with loads of  intermediary questions.


Even though we may not fancy the idea,  politics seem to have become a very heavy dominant factor in determining  short term/ medium term nature of markets. Mr. Trump may end up making  some huge policy errors/ or diplomatic mistakes which may ignite fear  among market participants (the opposite may also be true). The  constant news flow from the White House may not have rattled markets  till now but the chances of a disturbing news outburst is none the less  present. 


I am confident that Mr. Trump or no Mr. Trump,  businesses will be valued on its own merit over the long term but is  there any possibility that absurd presidential actions change future  business environment and hence future business valuation permanently?  Only time will tell. I hope that the market system is kept intact in all  circumstances.  


Finding a marriage partner...
When  we look for a marriage partner, we look intuitively for certain  qualities in a person which indicates with some confidence level that  the partnership will result in a situation where the sum is greater than  its parts. Although it is next to impossible to predict future  events, the basis of consideration is based on accumulating  information, some objective, some subjective, to determine the  possibilities of a successful partnership. I think lasting love is  simply a way humans express that intuitive fit. After all, as  animals, we all look for symbiotic relationships deemed best for  furthering our gene pool. 


I think in investing similarly, there  is actually no way to assess with certainty the future path of a stocks'  business prospects. Like in finding a marriage partner, I find that the  process of analysing a company's future business value is based on  historical facts, current business environment, qualities or  capabilities for the business or its management to grow business value  and assumptions about future business and economic environment. As we  can see, all we are essentially doing is to gather information, some  objective, some subjective, to form rational judgments about the value  of a business in five to ten years from now. 


With the above in  consideration, it is but very humane that we sometimes end up  overvaluing a business, like my wife did when she married me (and I keep  telling her that), and sometimes, grossly undervaluing some. As we do  not rationally analyse the value of a marriage partnership year after  year, I often come to think if it may be wise to constantly analyse  a business's value after every quarterly result? A buy and hold  strategy, akin to a marriage partnership, does hold very valid  advantages as the real value of a business may not come to light in a  distinct visible manner with known patterns.


Moreover,  overtime, if the basis of valuation is sound enough, the  undervaluation and overvaluation should cancel out leaving us with a  more than satisfactory result over the long term. Consider Amazon for  example, it is but impossible to ascertain a confident narrow  range future business valuation, but analysing Amazon's history,  capabilities of Mr. Bezos, and industry trends, it may be possible to  see that shareholder capital plus founder capital may result in a sum  greater than its parts in future.   


On a lighter note, lowering  expectations has been my strategy to try and keep my marriage  partnership in a healthy state. I am not yet sure if it is working.