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Deepak's Memos

Capitalmind Turns 9!


Capitalmind turns 9 on August 26. It’s been a good time building what was initially about markets and content, and in 2017 moved into asset management. As a portfolio manager, we now manage 1290 cr. of customer money into Indian markets, largely equity. (Read our last year’s note, when we turned 8)

First, the performance this far. Both Momentum and Surge India have had fairly decent returns in the last three/four years. It’s been a strong market since April.

Momentum Returns Surge India Returns

In March, we weren’t doing that well, and at end-August, we are outperforming in nearly all time frames. Of course, the market has recovered substantially, so there’s a layer of timing, luck and fortune involved, but the thing about luck is that you have to be around to take advantage of it.

A lot of things did change internally – moving back to more disciplined quantitative portfolios by building an internal framework (With Vashistha‘s work, we can run complex back tests in seconds!) to simulate the real world, adequately culling positions to a better positioned Surge India etc. These terms are confusing, but I won’t get into too many details – we’ll always be learning as we grow, so we’ve had our trysts with our own selves at many times.

Much about investment is behaviour. Not just of an investor, of a fund manager as well. We are all victims of the same set of narratives we see, and with news flying around every day, emotions will swing. Meaning: we get the same whatsapp forwards and have the same feeling like “oh maybe I should sell everything”.

And it’s also complicated that you fight your inner demons, and people ask you at the same time: are you thinking of selling everything? But the instincts also keep you sane – you can identify behaviour at extremes, and react according. In March, we wrote this:

But there’s always a bad thing waiting to happen. Too many times it looked like Vitalstatistix was going to be right, for those of you who have read Asterix (and if you haven’t, it’s an awesome comic book set, where the character called Vitalstatistix was always worried that the sky would fall on his head)

There was Brexit, where the British vote to get out of the Eurozone. many eons before they actually did. It caused a flutter in markets, but no one now remembers. There was a volcano in Iceland that erupted and caused air traffic to shut down in Europe for a week. There was a worldwide outbreak of a hugely contagious Covid, which even locked the world down for months and in some cases, years. All of these things actually happened, and markets seem to have not cared. It’s the nature of the game to worry – and the sky never falls on Vitalstatistix’s head either. 

Markets have triggers on the upside, we’d said: Foreign investors would stop selling, earnings would rebound, and interest rates would stabilize. Guess what – all three have happened – and in fact, Foreign Institutions have put in as much money since March as they took out in the last year. Median Nifty company earnings growth is 17% a year. And Indian interest rates are stable. The fear in March was palpable – but the emotion was similar, in many ways, to how people behave when markets bottom.

There is similar behaviour at tops. The exact opposite reaction to fear, called greed but I’d just say extreme optimism. It’s usually like this, “I made 4% this month which means 48% a year, which means in five years I can retire”. When that becomes believable, you’re at an extreme.

What we wrote in the last year

In the last year, we’ve written about how this shapes us. In Identities or Beliefs, Anoop speaks of how labels are dangerous, like “I’m a value investor” versus “I think this company is cheaper than the rest of its crowd, and I’ll invest knowing fully well I could be wrong tomorrow”.

He followed it up with The stock does not know you own it in which the basis is that why do you fall in love with your stocks when they don’t love you back? (Loving stocks makes unreasonable behaviour into an acceptable trait, like loyalty) And then the more legendary Plan less, live more and his 10 money messages to my former self. More on that later.

On analysis, we got a whole lot of data work done, along with ChatGPT and other AI subscriptions. The interesting pieces that came out of them:

  • Where do superhero stocks come from? Not from earnings, it turns out. Because the stocks that did 10x in 10 years (one out of 11 stocks in 2012 went up that much) were mostly a result of P/E expansion, not earnings growth. Meaning, earnings was only responsible for 1/4 of their stock price growth – the rest was all about a larger multiple.
  • The futility of analyst recommendations Oh, just following what analysts say about a stock is a coin toss in terms of being able to beat the Nifty. This is a quantitative assessment of Indian stocks followed by analysts.
  • That wily ROCE and how it impacts shareholder returns: a data-based look at the metric called Return on Capital, and how stocks behave when you rank them using it. Short story: it’s not that helpful.

A couple of useful podcasts to mention too:

Now about that awesome performance…

But performance is tablestakes. Over the long term, everything will turn out well, and on a longer term, none of us will exist to bother. The point about prosperity is that it is supposed to bring us contentment, happiness and the feeling of confidence. Often, it doesn’t, because we end up comparing to someone else or some other such thing (why didn’t I just put all my money in NVidia?). Because it’s endless, it creates some kind of fear, uncertainty and doubt that you should be doing better.

It’s complex, this feeling. It’s there in the parent whatsapp groups in schools – where you hear of children asking their teachers to please put a higher score on a paper (but enter the correct one in their system) because it will impress their parents. Those anonymous chat apps where even a foetus makes 3x the income you do.

Anoop put a few things in perspective – on ten things he would tell his younger self. There isn’t a number to target, instead, there’s a great life to live and spend and be happy. He wrote more about it (Plan less, live more) and brought in a point about what makes a difference to your long term wealth:

The highest probability 100+ bagger you can own is your earning capability. You can maximise your earnings by moving countries and industries, becoming an entrepreneur, upskilling formally or informally, or even being good where you are.

Getting good at something valuable is your best shot at maximising future net worth.

Most people overestimate their investments’ future growth rate and underestimate their earnings’ future growth rate.

The topic has become closer and closer to our hearts, that the levers to freedom and wealth are often not in the money itself, or the returns generated – it’s in what you regularly do. I wrote about it too (Investing more, versus higher returns) where I even get mathematical about it. Which is the wrong way to look at it, perhaps, because what matters really is that warm fuzzy feeling of comfort, not that it looks good on a spreadsheet.

Optimising for feeling good

For most of you, this might not be a problem. Consider the argument that “Don’t buy a Mercedes, you’ll just be just as badly stuck in Bangalore traffic like a maruti alto”.

Indeed, but if you have to be stuck in Bangalore traffic, wouldn’t you rather be in a Merc?

In all honesty, this light never really came on for me. I’ve been a struggling entrepreneur for so much of my life that it almost seems illegal to spend anything big. And when I did, I’d fight that feeling of “oh, it’s too much”. Optimising for feeling good involves that fight. Old Monk is still a fantastic drink even if it’s cheap, but there’s a bunch of very interesting names that are, well, not as cheap; it’s a little leap of faith to enjoy them all equally.

I was once in a “Cognac tasting” session by Hennessy, at a time when I couldn’t afford the cheapest of their bottles. I ran through people saying that one felt like it was “woody” and something else was “fruity” and what not, and I almost felt strange because I couldn’t get beyond “it’s a nice drink”. Someone asked in the end: What do you pair Cognac with?

The host – who was French – told us a story. One shop in Texas was selling the largest number of bottles of a very expensive Cognac, that cost $10,000 a bottle. He went to find out more, and was told that it was all from this one customer. That customer happened to come in, and took ten cases of these bottles, and opened one bottle right there; and poured it into a glass with….Coca cola.

The host then told us: if you’re buying ten cases of $10,000 Cognac, you pair it with whatever you want!

We should probably translate that into the financial aspect of our lives – it isn’t as useful to store it as it is to spend it, regardless of what we think is “right” by worldly perspectives. Learn to live, spend and extract happiness from wealth, rather than allow the desire to accumulate it engulf you. Maybe I listen too many genres of music, but there’s a little line in a dhinchak number from Munna Bhai MBBS, that goes:

Jeevan hai barf ki naiya (Life is like a boat of ice)
Naiya pighle haule haule (That boat melts slowly as the days go by)
Chahe hans le chahe ro le (Even if you smile through, even if you cry)
Marne se pehle jeena seekh le (Learn to live….before you die)

In a year, we’ll turn 10. We will get older, and hopefully, a little wiser. But what I’d wish on all of you is: I hope you all get a little happier. To greater times!



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Capitalmind Turns 9!


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