Ashmayu Quarterly Newsletter- Developing Power to Hold

By Harini Dedhia

Dear Investor,

It has become quite fashionable of late to say that ‘the markets are too expensive’, ‘I am sitting on cash’, ‘India is trading at record high premiums to other countries’, ‘Too much money has gone into the markets’,etc. Alot of the money that has missed either a part or whole of the rally, has called a top the past 23 all time highs. Yet the markets have continued to surprise all, and we are no different. To counter the “I can’t find value” narrative, here are two counterintuitive data points:

1. Markets spend 30% of their time at all-time highs

2. Investing in all-time highs is more profitable than investing any other time

Chart 1: Average S&P 500 returns (ATH and any time)

(Source:JP Morgan, S&P500 Cumulative dataset from1990- 2023)

In light of these two data points there is a larger reality that emerges. Booking profits and exiting at the sight of all time high markets results in you missing out on the next all time high more than anything else.

Reversing trends usually takes a lot of effort. While this statement may sound like an epitome of technical analysis, there is an underlying fundamental justification for the same. An all time high price on any asset, typically indicates things have never been this good. For this good fortune to get derailed, either exhaustion over time or a significant event needs to take place. A business that has found itself in a favorable cycle, is akin toa cricketer finding form- it usually sticks around for a while.

And, if 30% of the time is spent in all time high markets, we really cannot afford to sit those periods out and miss out on the best time frame of compounding. Best, i.e. the smoothest/easiest journey in compounding.

An extension of this value seeking narrative is the ‘I am waiting for a 10-15% correction to enter the markets’ narrative. When an all time high market reverses into giving a 10-15% correction, the chances are some event pushed them out of form- and the likelihood that the market languishes there or falls further is higher. Let’s see what the results would have been like if we invest at the sign ofthe first 10% fall from all time high:

Chart 2: Average S&P 500 returns (ATH, anytime and 10% fall from ATH)

(Source:JP Morgan, S&P 500 Cumulative dataset from 1990- 2023)

We are by no means advocating investing regardless of prices but we certainly advocate holding on to one’s structural/ long term bets if there has been no change in the business environment that warrants an exit.

Characteristics that give us the will power to hold

You don’t sell a Virat Kohli the moment he gets going. If that is the case, how does one identify these Virat Kohli’s of one’s portfolio? These ‘in form’ structural bets where the management quality and the business quality warrant you to look at the larger picture have unique tells according to us. Two of these are almost sure shot signs of management that you must stay invested with through their all time highs.

The first is a management that admits its mistakes and understands its circle of competence. The biggest case in point for this would be M&M in 2020. The following two images are slides from their presentation in August 2020.

(Source:M&M August 2020 Investor Presentation)

The first one is an admission that they have lost their way, that they haven’t lived up to their potential (a rarity for a company of this size and scale to admit publicly). The second is one that shows their desire to focus on what they do best and shed any non-core businesses in the process. They recognize their strength in the farm and rugged SUV space and choose to focus completely on that and decide to shed any ambitions on non-core ventures such as SsangYong, pursuing sedans,etc.

A management that recognises what they are not good at, is a great one to partner with in your wealth creation journey.

The second tell we have seen of managers capable of scripting strong market share gain stories are manufacturers that have some initial background working in the supply chain of the product that they are now producing.

Polycab is a cable and wires manufacturer established in Bombay in 1983. This is almost four decades since the establishment of Finolex Cables in geography. Yet Polycab today is almost 4x the size of Finolex in the cables and wire industry.

Polycab’s founder, Mr. Inder Jaisinghani started working in the family’s hardware shop in Lohar Chawl, Mumbai. In doing so he understood the mindset of a dealer/ distributor better than his competitor. He realized that having multiple SKUs available with Polycab with lowest turn around time would go a long way with distributors. This would require Polycab to have a manufacturing base of warehouses spread across (so that the inventory is easy to access for all distributors) and Polycab to have higher working capital requirements than peers as they would keep this ready inventory on their books. The latter would help distributors operate with a much lower capital required while still servicing orders in time.

Almost all manufacturers that we have come across that have had a history of being a part of the supply chain have figured out a unique hook to sell. Their product need not be better or different, but simply their way of selling.

These are two unique indicators we have found with in managements that have sustained market share gains and continued to compound cash flows over long periods of time. In these all time high markets, these two characteristics are a guiding light for what we are supposed to hold on to. The list is of course not limited to just two, but these are two of the more rare traits we see. They give us the conviction and therefore the ability to ride from one all time high market into another.

As always, we thank you for putting your faith in us and entrusting us to be your partners in your wealth creation journey.

Best,
Harini Dedhia
Head of Research