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Reflecting on 2020
An extraordinary year only reaffirms a few ordinary, timeless learnings
I like December. Great running weather. Bandra has a nice feel. Theobroma has stollen. Test cricket’s back (our batting looks brittle, though). World slows down a tad. There’s tons of humour, as 2021 themes, outlooks and Sensex targets hit inboxes. It looks promising, as references to ‘bull run’ and its mother have started. Pro tip: save this year’s prediction without reading and read last year’s prediction instead. As I’m no good at looking forward, I’ll look back at what I (re)learned in 2020.
Mr Market’s nuts
80% of businesses that I track had a swing in stock price between X and 2X over 2020. Half of these swung by over 2.5X. Keep in mind that my kind of businesses are as boring as me. None of them have ‘platform’ in their name. Even in an oddball year, their value didn’t change by much, except for usual modest upward drift. Wild swings were entirely due to inexplicable moodiness of Mr Market, the most perceptive allegory in investing. A year like 2020 is an opportune time to reflect on Ben Graham’s precept of being informed by Mr Market without being influenced by it. Doing so is possible only if we stop assigning meaning into Mr Market’s incessant jiggles and listening to people who do so.
Predictions are dangerous
In an extreme year, good companies suspend guidance (great companies don’t give guidance in any year). If only rest of the world followed suit. Sadly, there was no lockdown for the non-essential service of forecasting. It was painful to watch: big miss, doomsday, downgrade to junk, massive beat, recovery plays, return to normal bets, GDP upgrade contest. Forecasters swung from band karo bazaar to bull run, following the market at every stage instead of anticipating it. I am not trying to be nasty to people whose jobs leave them with no option. I diss forecasts so that it’s easier to dismiss what is detrimental to sound judgment. Surest way to miss a decadal buying opportunity is by taking predictions seriously.
Boat over wind
Most investors try to guess wind direction, aiming for a strong tailwind on every leg of the journey. As active manager returns indicate, this doesn’t work well. While no one can predict an extreme storm like Cyclone Wuhan, tailwind chasing and weatherproofing don’t go hand in hand. There’s added danger from mid-storm boat switching. My investing and writing are about a dreary alternate approach: don’t predict winds, choose sturdy boats. I feel embarrassed admitting that I have no clue how fast my boat will go. Apart from faith in a modest tailwind over a cycle for all boats, I know nothing about wind. I mostly worry about whether boat will sink, make it to other side, not lose its way, not have captain who’ll leave me high and dry etc. While this approach has surprising all-weather efficacy, it’s extra gratifying after a year like 2020 for two reasons. First, inbuilt weatherproofing. Boats handled 100-year storm with aplomb. A second, under-appreciated factor: such boats aren’t solely dependent on wind. While winds are an industry factor, better players have secret outboard motor with full-tank that lets them gain within an industry. Without exception, sturdier boats widened gap vs peers over 2020. This happens in any year, but is exaggerated in a tough year when weak boats flounder. With market share gains, stronger balance sheet and strengthened connect with employees, suppliers and channel partners (from treating them well through tough times), they’re even better placed for next leg of the journey. Wind be damned.
Investing’s about balls
Investing’s a bit like athletics. There’s a long training period, with a short window once in four years that reveals who can hold it together when it counts. Analogy isn’t perfect. It’s not precisely four. No one even tells us that Olympics are on. Event feels closer to Jungle Olympics from Phantom comics. Wall of fire, hot coals, quicksand, snake pit, wild animals, even tiny bugs in this edition. 2020 felt like investing’s Olympic year and main differentiator was ability to hold one’s nerve. Years of prep went poof in March. 50% price drop no longer felt like a discount. Bottom-up investors discovered hidden macro selves. Value investors, whose entire life revolves around waiting for right price, got tempted to wait for something else (Time? Clarity? Uptick? Trigger?). One final difference: it’ll take years for medals to be decided, but false-starts may already be apparent.
This too passed
Hey, we’re still alive. We survived lockdown, online school, housing society rules, cleaning & cooking by ourselves, UV light, watching USA count votes, 100x increase in cyclists wearing disgusting shorts on running route. BTW, virus too. If I go by Hill Road, Linking Road and station ke paas, we’re more than alive. When airline gave PPE to middle-seat dude, he kept it on for warmth well after his mask came off along with fasten seatbelt sign. Pointless protests are back, with media calling them super-spreaders only if politically inconvenient. Chin-covering apart, new normal isn’t that different from old normal, which is how it always is. India is back to pre-covid levels of economic activity with an epidemic that’s under control and well outside top five mortality causes. My aim isn’t to trivialize real trauma of a few. It is to reiterate a safety warning that objects in the near view mirror are less dire than they appear. Short of Yellowstone caldera blowing its top, this too shall pass is a good dictum to live and invest by.
‘Experts’ are bogus
(This one’s a pet rant, so feel free to skip to the end)
Our formative view of an expert is based on maths, physics and chemistry. We’re not exposed enough to social sciences to appreciate how much messier it is. It’s challenging to unlearn a set view. A tendency to not question authority figures makes it worse, as dolts in global publications become the new quacks in lab-coats.
Every crisis exposes a new class of ‘experts’ as bogus. Last time around, it was economists, finance academics, peddlers of credit ratings and financial models. Psephologists, political scientists and commentators have been exposed as being both clueless and condescending about the plebs they claim to understand. Amidst fierce competition, 2020’s ‘expert’ of the year award goes to self-appointed epidemiologists. Like some Ramanan Maangamadaiyan and his million death nonsense in March. It felt like his ilk had done a disease-modelling course from Whitehat Jr and turned into Wolf Gupta ka baap. They personified the worst of what passes for ‘expertise’: confident, extreme assertions made for TRP without clue, context or skin-in-the-game; callous indifference to faux words having real consequences; brazening it out despite being wrong by 90%. Fear-mongering contributed to a tiny minority, who could work from home without consequences, showing psychotic indifference towards a sizeable majority who couldn’t work at all. I am harsh because history may well be harsher once impact on other dimensions becomes apparent (e.g. kids, poor, small businesses, non-covid healthcare deprivation).
I don’t want this to be solely a rant. There are real experts (without quotes) but they don’t come wearing that tag, like how real heroes don’t come wearing capes. They’re those with proven excellence in messy-world jobs, not paid per word. Investing is best learnt from practitioners and temperament from Rahul Dravid. Business and economics are best understood from Aditya Puri, HM Bangur and Sridhar Vembu. 2020’s real epidemiology expert was A Velumani of Thyrocare who tweeted real-time, reliable, granular data on India’s true covid prevalence, while media narrative was driven by meaningless reported case-counts (disclosure: Nalanda is a shareholder in Thyrocare). Alongside, he offered balanced, nuanced (and correct) insights through a unique combination of healthcare domain knowledge and a self-made entrepreneur’s appreciation of livelihoods. 2020 reiterated a need to screen experts based on what they’ve done, not what they say.
How about 2021 outlook? Mr Market, ‘experts’ and predictions will still be dicey. Disregarding these will soothe nerves, which is what it’ll again come down to. And yes, some other scary storm will pass. In a strong boat, you might even sleep well at night as it rages.
PS. 2020 was a productive year, both at work and at writing. I exceeded my bull-case target of 50 essays. For 2021, I downgrade myself to underperform, with a sharp cut in target to 25 essays. I’ve used up thirteen years of pent up supply and low hanging fruit is gone. In writing too, aim is quality and value over growth.