The Best of 2022
As the year comes to a close, it is important to pause and take a look back at some of the thoughts I shared through the year.
Deglobalisation and inflation were major areas of concern in my first article of the year.
The net result of all these is that the manufacturing and services is likely to shift away from its lowest cost production centers globally in the next two-three decades. China+1 is just one such example. Similarly, we have seen Indian IT companies hiring significantly more in US and other “nearshores”.
We should witness a persistent inflation that is higher than what we are accustomed to in the past.
Another very important piece was about why investors should never ignore macros.
Think back to all the market crashes you have witnessed or read about. Covid crash, US Housing crash of 2008, Dotcom crash, Harshad Mehta crash. All have been results of some macro event. You may have done a lot of detailed fundamental research on a company and invested. But one fine morning the business or the market situation completely changes. Due to external factors completely beyond the control of the business, its earnings can get seriously impacted.
Buffett, for example, had positions in the ‘Big 4’ - American, Delta, Southwest, United before Covid. He had near 10% stake in each. His logic was fuel prices were on a secular downtrend and airlines had become like the railroads. So much so, he was even contemplating buying an entire airline. Then Covid crisis came. Macro event. Nothing to do with the airlines’ businesses. No fundamental research about the industry or company could have predicted the unprecedented contraction in earnings. Buffett sold out all his stocks. Possibly he panicked at the wrong time, but that is a story for another day.
Investors make money when they are on the right side of a business and economic trend. Buffett and Lynch and other US based investors in the last fifty years have done so well primarily because they had huge economic tailwinds behind them. Look at the counter factual, you will not hear too many great Japanese investors in the last 30 years. Why? Because Japan has not been growing or has been in a recessionary environment during this period. Same for Europe. Can you name one great European investor who invests in Europe only? You will likely struggle a lot. The most European names that you may think of will be global investors and have majority of their investments in US or global companies.
The fact is it is very difficult to swim against the tide. As a business and consequently as an investor. Good investors intuitively understand this. Arguably, one of the main reasons that there are so many great investors from the US in the last fifty years is because US has been the biggest economic growth engines in the world. Similarly, if you go back two centuries, you will find the world’s richest people originating from UK, Germany and France.
Why forecasting is futile
Nassim Nicholas Taleb wrote about Lindy Effect as a concept that says companies with a competitive advantage that have survived for many years are more likely to survive for many more years.
The concept is named after Lindy's delicatessen in New York City, where the concept was informally theorized. Lindy was a very popular restaurant that started in 1921. A restaurant running for nearly 90 years was supposed to last for another hundred and eighty years as per Taleb's theory.
The irony is Lindy shut its doors permanently in 2017. So much for theory!
The next interesting one was about why investing is not as easy as it looks.
The availability of information today, especially on social media, is so much that just by repeated exposure people tend to get a feeling of expertise. It is like if you see a cookery show about making an omelet everyday for six months, you will start getting a feeling that you are an expert at it. It may not even occur to you that you may not know how to even light the gas stove. Making a great omelet is really not easy. How hot should the oil be? How much do you beat the eggs? How much salt to add? How long should you fry one side? When do you flip sides? None of this can be learnt from watching omelet-making videos. You need to live through it, experiment with it and then slowly after a few times you will get a hang of it.
The same thing applies in investing as well. Repeated exposure to investment gyan and discussion provides an illusion of knowledge. Investing is a "lived" skill. The legendary trader Paul Tudor Jones once said, “This skill is not something that they teach in business school. I get very nervous about the retail investor, the average investor, because it’s really, really hard. If this was easy, if there was one formula, one way to do it, we’d all be zillionaires.”
ET NOW interaction (23-Dec-22):
Shared some thoughts on the sharp correction in the market in the last three days and the sectors to focus on for the next 1-3 years.