Our long-term goal remains the same – significantly outperform the Indian market in US Dollars. Although ultimately it’s the absolute, not relative performance that should matter – after all you cannot eat relative performance, we believe that Indian markets will do very well over the long run and we intend to do better.
Consider this – For the last decade, MSCI India in US Dollar terms has returned an annualized return of 7%, similar to that of the S&P 500 including dividends. For the last 15 years, India has returned 11% while US has returned 5%. That’s a cumulative difference of 300%. Meanwhile, the US Dollar which used to be worth 43 Rupees in early 2000 is now worth 67 Rupees.
In other words, despite several recessions, massive currency depreciation, corrupt governments, weak central bank, inadequate infrastructure and many other hurdles, India has performed rather well. We see no reason why that should end now. If anything, recent developments have made India stronger than it was a few years ago. The oil import bill, and crude is India’s biggest import by far, has been cut in half. We import far more than we export to China, the country that seems in most trouble lately. We have an activist central banker who is laser focused on fixing the state owned banks. We have a reform minded central government headed by the best salesman-prime-minister India has ever seen. We are excited about India’s future.
As we write this, the Indian market is down close to 10% for 2016. To us, there is nothing unusual about that. Such volatility is a great feature of the Indian markets that only helps us in the long run. As we have written in the past, we want the market to present us with dislocations, and we want these dislocations to correct quickly. So volatility is a good thing.
Another great feature of the Indian market is its, sometimes absurdly high, dispersion. Indian stocks often dance to their own individual tunes. As some stocks are making new lows several are making new highs. While that’s true with any market, the extent of such dispersion in India by far the highest amongst comparable markets. So not only do Indian stocks move wildly but they also move in wildly different directions based on company and sector specific issues. In our opinion, the best way to invest in India is to pick stocks based on company level or at best sector level analysis, while consistently maintaining a contrarian mindset. The wrong way to invest then would be to treat the entire country as one big stock and panic every time the market drops 10-15%. Most foreign investors do just that. Unfortunately they also own 4 times the amount of Indian stocks than the domestic investors do. So again, the recent sell-off is neither all that surprising nor fundamentally logical.
We intend to stick to our plan and go wherever bargain hunting takes us. Currently, most of our energy is focused on sectors going through distress. When analyzing such companies we ask ourselves three basic questions; 1) can the company make money even if current depressed conditions remain intact? 2) if we buy the stock at current prices will we stand to make money in the long run, i.e., is the price right given the current depressed level of earnings and 3) is there a reasonable chance that conditions will get better soon? It takes three unequivocal yesses to get us excited. To be prudent, we are size these positions smaller and seek a higher margin of safety than do for high quality companies. Investing this way in 2015 has led to a portfolio that consists of a select few high quality stocks and several widely-spread, asymmetric bets placed within the most hated sectors of the economy. We describe the composition of our portfolio in more detail at the end of this letter. We have written about many of these positions at various points in our previous letters so our regular readers will find considerable repetition.
In closing, we remain optimistic about the Indian markets. Moreover, the value investing philosophy that we follow, though almost a century old, still works well in present day India. We certainly hope that it continues to do so for long time to come. We wish you a very happy New Year and thank you for investing with us. If you have questions regarding this letter or your portfolio, please do not hesitate to ask. As usual, you will receive your statements from NAV Consulting Inc.
Notes & Letters
A collection of our thoughts, views, and excerpts from our investor letters.