The Art of Skating to Where the Puck is Going to Be
Authored by Arun Chulani, Co-founder of First Water Capital Fund
Over the last few years, many of us have heard the cries from fellow investors of some of the flavours of the month as though they were supporting football teams.
· “My number 1 pick is Tesla, it’s going to take over the EV market”
· “NVIDIA – AI is the future”
· “Crypto for life!”
And it’s hard to dispute these claims when the bull market is in full swing (does anyone remember the end of 2021?). What is pricy may yet become pricier still. But these chants usually amplify when that asset class has already run up considerably and people are chasing momentum backed by a promise.
However, I would suggest that one should keep their contrarian nature switched on and look to invest in countries, sectors and companies which may be seen as the underdogs, but simmering with a possible value unlock. Alpha is hopefully created by being ahead of the curve and coming in just as the party starts rather than when people have started swinging off the chandeliers.
For us, as value guys, we should be constantly reviewing our addressable universe to identify the next sector or company that we can invest in. Across the world, multiple bear and bull markets are happening at the same time. Even within a country like India with over 1,000 listed stocks, we can witness the same phenomenon occurring. It is generally through this active management and re-deploying from companies experiencing bull cycles into those that are at cyclical lows that we can keep our overall valuation multiples lowish, and structurally take money off the table.
Once you do that, the market will find it very hard to take it back off you. Of course, it's an art of how much you redeploy. With too much, you may find yourself not doing enough justice to your current crop of winners and sitting in a bunch of laggards, while doing too little can leave you wrong-footed when the cycle turns. And that is the beauty of the public markets, the liquidity allows you to trim and add at the push of a button and in part.
While life is always beautiful in hindsight, we like to try and see what lies beyond the curve and looking back we have had some decent hits and of course, some misses as well. Some that come to mind are:
Infrastructure – It was in 2018, that the Indian government announced its USD 1.5 trillion infrastructure program topped up by another USD 1.2 trillion announcement in 2020. These are massive numbers. But of course, along comes COVID-19, and with it came commodity price volatility which delayed the rollout. But we never lost sight that if India is to become the 3rd largest economy in the world, better infrastructure needs to be a must. I had even mentioned it back in November 2022 on record in one of India’s leading financial portals.
Today, of course, infra space is doing very well, with many companies’ order books at record highs and share prices have reflected this.
The slowdown of China and the rise of India as a counter-balance.
Today, we are peppered with articles on the weakness in China’s economy as it matures and how companies, like Apple, are looking to diversify towards India. It has been a theme that we have been very keen on for a long time, again on record, we mentioned it in a leading global business magazine back in 2020.
Of course, unless you are Nostradamus, no one is going to have a clear vision of the future. As a value investor, however, it is important not to be stuck in biases. Just because a certain sector or stock has done well, it may not provide the same returns going forward. A second level of thinking is required to ensure that one doesn’t get carried away by momentum and the current market sentiment.
The Dalai Lama might suggest that we live in the present, but when it comes to investing, I would rather listen to ice hockey’s all-time great, Wayne Gretzky who famously remarked, “I skate to where the puck is going, not where it has been.”
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.