2 weeks Ago
The Indian markets have bounced back impressively over the past two weeks. A pause on reciprocal , helped fuel this rally. But it's not the time to get carried away.
There's still a lot in flux. Rather than chasing potential winners in a global trade shuffle, we're focusing on businesses that are more insulated from political drama. And while smallcaps had a great week, we would advise against getting overexposed.
Stick to your asset allocation, stay selective, take a slow, staggered approach, and respect the margin of safety while buying stocks. In markets like these, protecting your capital is just as important as growing it. The markets now seem to be getting over the tariff blues, and focusing on .
The result season is the busiest time for analysts. It keeps them occupied with year on year and sequential growth, deviation analysis, and extrapolating future performance based on what happened in the quarter. They also ask bookkeeping questions to the management and pressure them to give growth guidance during conference calls or concalls.
These concalls with the managements offer a great opportunity to get a sense of their vision, to assess their transparency when the going gets tough, and their focus and priorities–long-term sustainability or short-term targets. These calls can help analysts understand the broader industry environment and the company's competitive positioning. However, such concalls also have some limitations.
They can defeat the purpose of better understanding and analysis of the business when the analysts resort to upgrading target prices and valuation multiples based on a single quarter's performance or when they take management's guidance too seriously. But this quest for precision and the short term obsession can be futile and farcical. GE (General Electric), along with its superstar CEO Jack Welsh, is a case in point.
Under his leadership, GE's business was driven by short-term targets. Perform or perish was the guiding mantra. Obsessed with Wall Street's earnings expectations, the company met and surpassed consensus estimates every quarter for almost a decade (1995-2004).
And the stock price followed. However, and with accounting gimmicks, as the subsequent years revealed. In the pursuit of growth led by acquisitions, the company became too big to manage or be nimble.
Its unregulated finance arm– GE Capital–that lifted the performance - turned out to be the biggest chink in the company's armour. When the subprime crisis struck, the credit market dried up. The money-spinning finance arm thus became its undoing.
Sharing lofty guidance, even meeting them in the short term, did not help the business or its investors. Some businesses are owner-operator driven, where managements neither offer nor falls for this bait. Then there are appointed managers who love to spew out quarterly guidance.
Always be cautious of the precise ones in the short term. The pressure to meet them and street expectations is one of the biggest reasons for poor capital allocation decisions. A company may still meet short-term guidance and dole out to the concerned appointed manager his short-term performance-linked incentives.
However, this does little good for the business in the long term. You could deploy the best of forecasting skills, and top them up with fancy DCF analysis, but a business won't follow the trajectory as projected in excel. Throw in a bit of Red Sea crisis, a pandemic, a war, a liquidity surge, or a regulator suddenly coming up with a ban, or a whimsical president.
.. and it won't matter how much precision you were working with.
It's best to be humble in this profession and aim to be roughly right than precisely wrong. That includes admitting that no matter how hard we try, not all the variables can be factored in precisely. There will always be 'known unknowns' and 'unknown unknows' in practice.
Instead of trying to be accurate about that percentage point in growth or margins, it's better to assess if we are investing in the right management team that's operating in the right industry from an investment perspective. In fundamental analysis, one needs a sense of the trajectory. But the focus should be more on the expected direction, understanding the downsides, and ensuring a margin of safety.
Focus on what's important–the industry or opportunity size, potential downsides (including from tariffs), balance sheet quality, and the management quality. Also, keep in mind the time horizon of the investment and your personal asset allocation. Finally, welcome volatility and uncertainty.
It's what is not yet known and factored in, that provides opportunities to outperform the market. Happy Investing..
