Alpha Ideas

So 6 to 8 ideas were usually 80 plus percent of our portfolio, so that portfolio management theory doesn’t like that strategy very much.

Warren Buffett has a good response to that as well. You know he says listen let’s say you sold out your business and you got $1 million and you are living in town and you want to figure out something smart to do with it. So you analyze all the businesses in town and let’s say there’s hundreds of business and you stick to — if you find businesses where the managements really good, the prospects for the business are good, it’s run well, they treat shareholders well, and you divide your million dollars between eight businesses that you researched well in town, no one would think that’s imprudent, they would actually think that was pretty prudent.

But when you get to call them stocks and you get stock quotes daily on these pieces of paper that bounce around put people put numbers on it and volatility and all these other things where really it’s not that meaningful, you know from one sense if you’re investing in businesses and you did a lot of research and invested in eight different businesses with the proceeds of your sale, people would think you’re a pretty prudent guy.

All of a sudden if you invested in stocks and did the same type of work, people think you’re insane, and it’s just an interesting analogy that I was think of when people make fun of me that I was that concentrating.

–said Joel Greenblatt

Let me also abreast you some of the headwinds faced by Indian equities.

In many of my writings on the blog and public discussions. I have sounded a note of caution that Indian economic growth and its reflection in the stock markets is masked more by economic value shifts rather sustained value creation by the economy. The shift of value from PSU Bank to Private Sector
Banks and NBFC, MTNL/BSNL to private telecom players, Air India to private aviation players,Railways to private logistic players, SME/MSME to large Industrial duopolies, etc. The market economics should have had addressed supply constraint in each industry.

Secondly, over that last one and half decade, our country has become a sustained consumer rather the producer of technologies thereby leading to ever-increasing trade deficits. Such inefficiencies and inability to create cutting-edge businesses are reflected in the jobless growth of India.

Thirdly, Indian equity market is facing a shortage of regular supply of high quality globally competitive businesses. On the domestic front, many MNCs are on the path to delist,and upcoming global businesses in India are held in the private domain.

In many cases, MNCs operating in private domain are gaining market against much-listed entities. The money is getting crowded into a fewer set of listed opportunities. I should put this Ancillary Conundrum; where ancillary businesses have started trading at a huge premium as the main businesses are not listed. Let’s take the example of Car or TV, Consumer durable business manufacturers. As many of them are not listed, a market participant is left with no choice to pay a huge premium to ancillary businesses.

Lastly, the convergence of technologies like Artificial Intelligence, Gene
Technology, 3D printing,  Robotics, etc. with manufacturing and services have started invading traditional businesses. India has also missed the evolution of new edge technology and commercializing on a global scale. You all may be surprised to know that Softwear Automation Inc. has developed a robotic table which uses machine vision to adjust to fabric stretching.
Assisted by this technological innovation, a Chinese apparel manufacturer has opened a factory in the US which will produce 23 mn T-shirts/p.a at a cost of Rs 25 per T-shirt. I would call this as the emergence of Made in the US by China. This indicates deflation of wages for many industries to come by. An estimate suggests that worldwide only 1600 out of 1.63 mn robots
were engaged in textile and leather trade. This sends a shiver down my spine, when I think of the full-scale impact on emerging economies like India, in future. The challenges of rising Current account deficit leading to capital account imbalances also exist for India.

–From Vallum Annual Letter to Shareholders