What is 2 + 2?

Consider your investing heroes. You remember them not because of their extraordinary trades, but likely because they courageously avoided the disastrous ones.

The memory of a fund manager who refused to meet with Internet companies at the peak of the dot-com bubble lingers on. Another veteran we admire refused to participate in the Infrastructure theme in 2007, probably risking his career. Both of them chose to protect their investors. And, in the process, became legends.

They did not resort to rationalisations such as: 1. ‘This is an unmissable theme’ 2. ‘In this bold new world, old principles are passé’ 3. ‘I need to close my benchmark risk’ 4. ‘My competition has this’ 5. ‘My job is to make money for my investors and not stubbornly cling to what’s “right”...

Standing firm against occasional irrationality (and there is always some in some sub-segment of the market) is our job. Is our mandate. Is our responsibility. Is our promise. Is how we should earn our fees.

Today, unfortunately, we’re seeing a resurgence in such arguments. Even the best amongst us are expressing doubt regarding the fundamental investing beliefs we’ve lived by. This is natural. The markets can make even the most skilful investors look like fools, for a while.

A 12% ROE company trading at 6X book, a 15% ROE (less than GDP growth) behemoth trading at 35X earnings, companies that have never in their existence recovered cost of capital becoming market darlings, and rerating led by capex announcements with unknown Equity IRRs: all this is enough to give pause to even the most resilient and indifferent fund manager.

What is right? The value of a company is all the cash it will generate from today to judgement day discounted back at a sensible rate. Since the world is unpredictable, you have to estimate cash flows based on conservative assumptions.

Most of us know what’s right. The challenge is standing by it. 80% of our clients are small investors/channel partners who might not be equipped to judge investing philosophies, manifestos, and frameworks. It’s not easy to embrace the fact that the path to a worthy destination is rarely easy and smooth.

So we end up relying on short-term measures of performance. On prognostications of market pundits who are aligned to the current cycle and hence sounding intelligent.

Principles don’t change. Execution is constantly evolving.

We reject the clamour to accept a ‘new paradigm’. A paradigm where you buy themes/narratives irrespective of value. A paradigm where you are constantly assessing what the world believes to be right, not what actually is right.

We recognise that the world can be wrong. There are no new eras. Excesses are not permanent. The benefits of new technologies go to consumers first. Profitable + scalable models take a long time to evolve. Decisive winners emerge much later.

We remember: 2 + 2 will always be 4.