Latest stories

Resilience

By Rohit Chauhan
In Quick thoughts
18 hours ago
2 Min read
R

our recent post to subscribers:

The war in the middle east has opened a pandora’s box. Even if the war ends tomorrow, the rules of the game have changed

There were several red lines in the conflict, which have been crossed. The elimination of the leadership in Iran, direct attacks on the other countries in the gulf and now the closure of the strait of Hormuz. This means that we can expect higher risks and volatility in the future

We have no geo-political expertise to know how this will play.

Our approach to the risk and uncertainty in life at the micro and macro level has always been the same – build resilience

Invert the problem

How does one get impacted by the smallest of problems? Let’s invert the problem and the answer is quite simple

Have a high-cost lifestyle with no financial buffer, bad health and poor relationships

Any combination of the three will lead to fragility at the personal level and result in bad decisions. We cannot control the macro but can influence our personal situation. We have agency over it

Build resilience

Our suggestion is to follow the old fashioned virtues – have financial cushion, avoid debt, take care of your health and have good relationships

Take care of the above and you will have the fortitude to weather the turbulence with ease. If you have a large cushion, you may even be able to turn it to your benefit.

We have  always been over-cautious in our approach to investing and have maintained a larger than necessary cash buffer. We plan to deploy it over the coming months as prices get attractive

If you have any questions or concerns, write to us. We will collate all of them and respond via a common post

Read on

Can we time it better?

By Rohit Chauhan
In General thoughts
2 weeks ago
3 Min read
C
We talk more about losses than winners with our subscribers. Winners take care of themselves and show up in the portfolio returns. Losses, especially in markets like now, are painful and take effort to manage.
Following note was published to our subscribers

We recently sold Company A (name withheld due to regulations) after 40% drop from the all-time highs. We got queries asking if we could have timed it better

Let’s break down the transaction in terms of how it played out rather than ‘anchoring’ to the all-time high

We invested close to 4% of the portfolio in several tranches. The exact price will vary for you based on when the transaction was executed. On average, the loss would be between 15-25% for most subscribers. This translates into a portfolio loss of 0.6% to 1%. Even in the extreme case of someone buying at the top, this amounts to 1.5% loss at the portfolio level

This is within the bounds of our risk management for individual positions. We try to keep our max loss between 20-25% of buy price and total risk at portfolio level at around 1-1.5% on cost basis. Based on historical data, this gives us a 3:1 to risk reward ratio and with a 55-60% win rate, our returns over the long run are above average

Hopefully the above live example shows how we think mathematically about individual positions and that Company A played out within our set parameters

Managing risk from all time high

We do not manage risk from all-time high for any stock

Doing so is valid for swing trades with shorter time horizons. We have done this partially with our position trades in the MA accounts, but Company A was not such a position

For our time horizon, selling a stock when it drops from all-time high, will result in jumping in and out of positions, especially in choppy markets such as now.

Trying to manage this type of risk brings up the following questions

  • At what level should one exit? 20%, 30%?
  • Do we re-enter if the stock drops 20% and resumes the journey upwards?
  • Is there a fundamental criterion to exit? Keep in mind prices react before the fundamentals
  • How about bear markets versus bull markets? In bear markets, a small miss can cause the stock to drop more than 20%

It is always easy to look at the stock price in hindsight and ‘know’ the right decision

Risk is managed probabilistically

The answer to the above questions is that ‘it depends’ and there is no perfect answer.

We aim to lose less when we are wrong but gain more when we are right. If we do this consistently over the long run, our portfolio returns will be good (as they have been for the last 15 years)

We will continue to exit positions which have not worked out, and it will be painful during bear markets. Exiting a position, even at a loss, does not mean we will not revisit it. We have made this mistake in the past and missed a 50 bagger

PS: There is a lot of nuance on this topic. We plan to publish a video post on it soon to explore it further

 

 

 

Read on

Doing the work

By Rohit Chauhan
In Quick thoughts
4 weeks ago
3 Min read
D

Following is a note we sent our subscribers

We conducted a webinar on navigating the current bear market. The following were some  points on how to invest in such a market

  1. Look for bottom’s up ideas using the value approach : Momentum does not work well in such markets
  2. Evaluate progress based on portfolio earnings growth and valuations
  3. Have patience : No one knows when the market will turn

The market peaked in September 2024 and is down 2% for large caps and 10%+ for the smaller companies. We have navigated this market with our financial and mental capital intact

During this period, we exited 10+ companies and bought 8+ companies. The exact number varies for the model portfolio versus the managed accounts. We have exited fully valued positions or companies which are not performing and bought stocks where the business is improving and valuations are reasonable

This ties to point 1 above. We are not waiting for the market to turn. We will continue to improve the quality of our portfolio as opportunities are available.

How do we assess the quality of the portfolio? A quantitative way is laid out below

Our portfolio level PE was around 40 times earnings with an earnings growth of ~ 19%. The same number is 22  with an earnings growth of 20%.

How are these numbers calculated ?

  • EPS for the company * No of shares held in the portfolio = absolute earnings for the company (each row in the table above)
  • Add earnings of all companies to get the portfolio earnings (circled number). Portfolio PE is Portfolio amount/Portfolio earning

As the market drops, we will deploy the balance cash or rotate out of existing positions into new ones such that the total earnings increase with the PE ratio dropping at the same time. Our goal is to buy growth at the cheapest possible price.

Not a physics formula

Please think of the above as a framework. We will not publish these numbers and there are qualitative aspects which cannot be captured. That said, there is a strong correlation between the portfolio PE and future returns (as it should be).

As the portfolio gets cheaper, it becomes coiled spring. When the market reverses its direction, our portfolio will rise

And this brings us to the 3rd point. No one can predict when the market will turn. Instead of agonizing over it or trying to time it, our approach is to keep doing the work

Read on

Webinar recording: Navigating a grinding bear market

By Rohit Chauhan
In Education, Webinar
2 months ago
2 Min read
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We conducted a webinar last week on how to navigate a grinding bear market

Brief summary of the session below. Recording and ppt from the webinar posted at the end of this update

Grinding bear markets are rarely dramatic – they are slow, frustrating, and psychologically draining. This session focuses on a repeatable way to think and act when prices stop rewarding you, even while earnings keep moving

The core framework

· V-shaped ‘macro’ bear markets: exogenous shocks, sharp drops, and quick recoveries driven by policy/liquidity.

· U-shaped ‘valuation’ bear markets: endogenous grind where stretched valuations mean-revert over time.

· Key point: this is a framework to guide behavior – not a formula to forecast dates or exact drawdowns.

Practical takeaways you can apply

· Stop relying on ‘bear markets last X months’ narratives; focus on what you can control.

· In valuation-led grinds, patience is a strategy: normalization happens via earnings, time, or price.

· Do bottom-up work: hunt for reasonably priced businesses that can still compound (often 15%+).

· Measure progress with portfolio ‘look-through earnings’ (portfolio earnings growth + valuation), not just price.

Examples + discussion

The session has a walk through of illustrative cases to show how improving fundamentals + cheapening valuations can set up the next leaders. The recording also includes an active audience Q&A on drawdowns, market breadth, cyclicals, new-age businesses, and diversification

slides : Navigating a grinding bear market

recording

Navigating through Grinding Bear Market

Read on

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