India’s recent regulatory supervision has been focused on limiting retail activity in only the F&O segment (220+ stocks), engendered by the explosive increase in volumes in this segment post COVID. There has been limited regulatory action to curb retail activity in 90%+ of the other actively traded 2500+ stocks on the exchange. Since COVID, most small and mid-cap stocks have seen a stratospheric rise. No one (investors, regulators or the government) is complaining as investors in aggregate have created wealth. The losses in specific pump and dump stocks are few and far between (especially in bull markets), and also not easily quantifiable. The bulk of the losses is deferred and will only show up as permanent erosion of wealth in the next bear market.

Continue reading The Case For A Vibrant Short-Selling Market In India →

In the late 1990s, Buffett and Munger faced a number of questions from shareholders regarding the lack of high-tech stocks in Berkshire’s portfolio. This was during the dot-com boom, when tech stocks surged, while Berkshire’s performance lagged the overall market. Below are some excerpts from Buffett and Munger’s responses¹ to these questions.

Continue reading Knowing Our Boundaries →

The Indian markets have fallen 17%¹ from the top and many stocks have fallen significantly more than the headline indices. After a long time, investors are wishing they had done independent work on their investments. This may be a good time to step back and reflect on how investors are constantly influenced by a “barrage of bullish influence”. Without a healthy dose of scepticism, one may be sucked into making avoidable mistakes.

Continue reading The Barrage of Bullish Influence →

“Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” – Benjamin Graham

Investors often get asked questions about their exposure to the latest hot sector that is witnessing rapid growth – be it Electric Vehicles, Quick Commerce, Solar Module Manufacturing etc. It is presumed that such an exposure will lead to positive outcomes.

Continue reading The Growth Mirage: Why High-Growth Sectors May Not Yield High Returns →

In 2004, the Indian government reduced the long-term capital gains (LTCG) tax rate to 0% and the short-term capital gains (STCG) tax rate to 10%¹ on listed equities. By offering favourable tax treatment on capital gains on listed equities, the government sought to attract both domestic and foreign investors. The government introduced the securities transaction tax (STT) in lieu of the capital gains tax reduction.

Continue reading The Invisible Tax Burden →

Base rate neglect or base rate fallacy is a cognitive error wherein we ignore the base rate or statistical data in favour of the anecdotal or individual information. We end up making judgements based on our assessment of the anecdotal information which has very little predictive value and we largely ignore the base rate which is far more useful. This leads to flawed reasoning and incorrect conclusions.

Continue reading Base Rate Neglect & Absurd Valuations →

A few years back, we wrote about Our Worst Investments in our Q2 FY21 quarterly letter. The letter talked about all the investments where we lost more than 15% of our invested capital. Each of those investments hurt our returns and dragged down the overall portfolio performance. In these cases, it was our buying decision that turned out to be wrong.

In this letter, we talk about another kind of decision that has had an even larger impact on the portfolio returns – the selling decision. Since our fund’s inception, 6 out of our 25 exited investments have delivered returns of 5-15x post our exit. If we hadn’t exited these investments, our portfolio returns would have been substantially higher. We discuss below these 6 investments – the investment/selling rationale, what we missed, and learnings, if any.

How should value investors react to an adverse event/news in a portfolio company? While it clearly depends on the exact nature of the event/news, in most cases, a long-term investor should avoid reacting impulsively.

Let us discuss the main reasons why selling based on an adverse event is often not a prudent idea:

Continue reading The Folly Of Selling On Bad News →

The equity markets in India have begun FY24 on a promising note. Following a flattish FY23, the Nifty 50 index has surged by 14.0% in H1 FY24. Returns in the mid-cap and small-cap space have been notably higher. Stock returns in H1 FY24 have exhibited a negative correlation with market capitalization – the smaller the market cap, the higher the stock price appreciation. IPOs have once again gained popularity, experiencing massive oversubscription and substantial listing gains. SME IPOs are in a completely different orbit.

Continue reading Optimism And The Stockdale Paradox →

“In investing, there are three ways to achieve a desirable “unfair” competitive advantage: the physically difficult, the intellectually difficult, and the emotionally difficult. The physically difficult way to beat the market is the most popular, or at least the most widely used. Believers in this game plan get up earlier in the morning, stay up later at night, and work on weekends. They read more reports, make and take more phone calls, go to more meetings, and send and receive more emails, voice messages, and text messages. They strive to do more and work faster in the hope that they can get ahead of the competition.

Continue reading Size Does Matter →