---
title: "Twelve Years of Investing Lessons: A guiding lighthouse for volatile waters | Quarterly Newsletter - June 2024 / Q1 FY25"
period: "Q1 FY25"
published: 2024-07-31
modified: 2024-07-31
url: https://equitreecapital.com/insights/newsletters/june-2024
markdown: https://equitreecapital.com/insights/newsletters/june-2024.md
authors: ["Pawan Bharaddia", "Ssuneet Kabra"]
publisher: "Equitree Capital Advisors Private Limited"
language: en-IN
---

# Twelve Years of Investing Lessons: A guiding lighthouse for volatile waters

Quarterly Newsletter, June 2024 / Q1 FY25. Published 31 July 2024 by Equitree Capital. About 13 minutes to read. Web version: https://equitreecapital.com/insights/newsletters/june-2024

> Quarterly Newsletter published 31 July 2024. Figures are as of the dates stated in the letter and are not updated after publication.
> Performance data has not been verified by SEBI. Past performance is not indicative of future returns.
> Current performance, with its as-of date and benchmark: https://equitreecapital.com/pms
> Performance relative to other portfolio managers in the same strategy: APMI, https://www.apmiindia.org/apmi/IaInsight.htm?IAID=407
> Not investment advice, an offer or a solicitation.

> The individual investor should act consistently as an investor and not as a speculator.
>
> Benjamin Graham

Dear Investors,

We are pleased to present our quarterly newsletter for **Q1 FY25**. FY24 has been a stellar year for the markets and for us.

## Our Performance

| Investment Period | 1 Month | 3 Months | 6 Months | 1 Year | 2 Year | 3 Year | 5 Year |
| --- | :---: | :---: | :---: | :---: | :---: | :---: | :---: |
| Emerging Opportunities | 16.72 | 35.02 | 27.78 | 86.18 | 58.24 | 36.98 | 28.68 |
| BSE 500 TRI | 7.05 | 11.66 | 16.68 | 38.28 | 30.91 | 19.94 | 19.96 |
| Outperformance | 9.67 | 23.36 | 11.10 | 47.90 | 27.33 | 17.04 | 8.72 |

As of June 30, 2024. Returns are computed on a TWRR basis, net of fees & expenses, and not verified by any regulatory authority/SEBI.  
Returns over one year are annualized. Benchmark changed from Nifty Smallcap 100 to BSE 500 TRI vide SEBI circular no SEBI/HO/IMD-PoD-2/CIR/2022/172 dated 16 December 2022.  
Source: Nuvama Custodian Services, Equitree Capital[1].

## Market Outlook

The chatter around valuations remains subjective and questionable. While the markets have been on a roll, **earnings growth has also been very buoyant**, thereby still keeping the overall valuation under check. We have spoken about our thoughts on valuations in our **[March 2024](https://equitreecapital.com/insights/newsletters/march-2024)** and **[December 2023](https://equitreecapital.com/insights/newsletters/december-2023)** newsletters and don’t see much change in the genre of companies we’re usually focused on. Our simple belief is that **markets, in the longer term, will reward companies that deliver consistent earnings**. We prefer to look at valuations in the context of those earnings.

Amidst the markets making new highs and the valuation banter — which we have discussed in the past and which largely remains beyond our control — this time around we choose instead to **share our learnings in investing over the last 12 years** since we set up Equitree. We sincerely hope that these learnings will act as a **guiding lighthouse** to navigate the volatile waters / anxiety with respect to investing in markets, at all points in time.

## 01. Key Learnings from 12 Years of Equitree

### 1A. Borrowed Conviction Never Works

Investing in the market based on **“tips” and “recommendations”** from “friends” and “friends-of-friends” has been long prevalent in the market. This has further accentuated now with the ease of digital technology. The **FOMO (fear of missing out)** and **greed of making a fast buck** generally make people cave in. While these do work in a bull market, it has been empirically proven that **this generally haunts back as the market cycle turns**.

Investors also tend to do **herd investing** or **shadow investing**, which again ends up with similar results over a long period of time. While people tend to follow marquee investors, what one doesn’t understand is that **risk profiling of each investor is different and holding tenure can also be different** for different investors — eventually leading to significantly different outcomes.

At Equitree, we practice **independent thinking** and prefer focusing within our **circle of competence** to mitigate potential disasters. Our ground-up approach to investing gives us the conviction to invest in businesses with a long-term approach rather than chasing shallow “momentum” / “herds” / “flavor of the market” themes. This helps us even more during market downturns, where we can take more informed decisions on our holdings rather than panic-sell.

*When following the herd, your result can be as good as the herd, but if one needs a different outcome, one needs to challenge and have a completely different and independent approach.*

### 1B. Right Position Sizing Leads to Financial Liberty

Getting an investment decision right is only **half the battle won**. In investing, what is more relevant is **how much money one makes when one gets it right, and how much one loses when one gets it wrong** — and this is where right position sizing becomes extremely important.

Investing with “borrowed conviction” substantially hinders investors’ ability to do right position sizing. That’s where **even with a supposedly good investment, wealth creation seldom happens**.

#### Anecdote: Benjamin Graham and GEICO

In **1948, Benjamin Graham** — often hailed as the “Father of Value Investing” — made a pivotal decision that diverged from his own teachings, resulting in one of the most remarkable investment successes of his career[2]. Graham, typically an advocate for diversification who rarely allocated more than **5% to a single holding**, identified a deep-value opportunity that compelled him to break his own rules.

He deployed an unprecedented **25% of his partnership fund’s AUM** into this single investment and, for the first time, allowed the position to run contrary to his usually strict valuation methods. The magnitude of the decision’s success is staggering: **Graham’s $712,500 investment for 50% of GEICO grew to over $400 million in just 25 years — a phenomenal 550+ bagger return**[2].

While one might argue this was an anomaly or attribute it partly to luck, it was ultimately Graham’s **conviction and willingness to make a calculated deviation** from his standard approach that led to this extraordinary outcome.

At Equitree, while we maintain a discipline to **not invest more than 10% of original capital in a single stock**, we don’t unnecessarily over-diversify either. We look to build a **concentrated portfolio of 12–15 high-quality businesses** based on our deep conviction, and meaningfully deploy capital in each of them. Once invested, we believe in **letting our winners run** and harnessing the power of compounding rather than unnecessarily cutting positions just because the value has gone up as a percentage of the portfolio.

### 1C. Patience — The Chinese Bamboo Tree Principle

Like any plant, growth of the **Chinese Bamboo Tree** requires the staples: water, fertile soil, and sunshine. However, its growth journey is very different from most other flora. **In its first year, we see no visible signs of activity. In the second year, again, no growth above the soil. The third, the fourth — still nothing. But finally, in the fifth year, we see phenomenal growth of about 80 feet in just six weeks.**

Patience — a virtue most commonly ignored in the markets — in effect remains the **quintessential quality in outsized wealth creation** from investing. This principle in our field has been coined as **“asymmetrical payoff.”**

In investing, businesses seldom function in a linear manner. One does get caught on the wrong side of the cycle, face prolonged headwinds, or encounter sudden unforeseen events. This impacts stock prices in the short term and may go through extreme volatility — akin to no growth seen in a Chinese Bamboo for the initial years. However, **if the business fundamentals remain strong through these headwinds**, probability is that such strong businesses come back with a bang — achieving the 80-foot growth.

Time and again, our biggest winners have put our resolve to the test. Yet we’ve discovered that **blending patience with well-founded conviction is the magic formula**. This aligns with microcap investor **Ian Cassel’s “ugly duckling” theory**[3], which suggests that the most promising investments often start as overlooked or underappreciated companies. Just as the ugly duckling transforms into a beautiful swan, these seemingly unattractive investments can blossom into remarkable performers over time.

### 1D. Staggered Investing vs Dollar Cost Averaging (SIP)

In micro-caps and small-caps, we’re often hit by **erratic price action** — in both the upside and the downside. **Doing a standard SIP at a fixed interval generally does not augur well for microcap investing**, as the erratic price behaviour may lead to disproportionate exuberance or makes one continuously buy the pessimism. For incremental capital allocation, one rather needs to **understand the reasons for either of the price actions based on business fundamentals**, instead of adopting a fixed time-interval-based investing.

At Equitree, **staggered buying** involves deploying a decent amount as base capital into our portfolio, while always maintaining some cash. This allows us to understand the business cycles better and build positions accordingly based on execution of the business as well as market volatility.

> **In Focus:** Staggered buying lets us **turn volatility into an advantage** — adding meaningfully when business fundamentals are intact but the price action is irrational.

### 1E. When to Exit

This question is perhaps the most pertinent question an investor must ask or deal with on multiple fronts. The beauty of it is that **nobody is always right; as long as we win more than we lose, it leads to substantial wealth creation over time**.

Most investors tend to either **exit at marginal profits**, or **hold loss-making companies in the hope of a revival**, as cutting losses becomes extremely difficult psychologically. The other extreme is to follow a strict **“stop-loss” strategy**, where one books losses if a stock drops 20–30% only to realise that it rises back as a phoenix.

At Equitree, we follow a **well-defined exit strategy**. We would look to exit our investment **only if any of the following situations arise**:

• **Change of thought on the business prospects**  
• **Poor execution over time**  
• **Valuations going out of our comfort**  
• **Compromise on corporate governance**  
• **Hit by any other unsystematic risk**

> **Takeaway:** Across all five lessons, one thread runs through: **independent conviction, sized correctly, given time, deployed staggered, and exited only on thesis-breaks**. The five filters compound on each other — and that compounding is what has produced our 12-year track record.

## 02. Two 30-Baggers, Two Lessons

### 2A. Shakti Pumps — The Reward of Independent Conviction

We’ve been buying into this business **since 2017**, when the company was in **complete oblivion**. Most market men had either not heard about the company or didn’t have much confidence in the management. Nonetheless, we did our **ground-up research**, and based on our conviction, stuck our neck out.

During the journey, our conviction got tested numerous times — and **every time, we would go back to the roots to get a reconfirmation of the same**. Gladly, our conviction has played out beautifully — the investment turning out to be a **30-bagger** for us[4], and now the market is awakening to this and buying in the optimism.

[Chart: Shakti Pumps (India) Ltd. — Stock Price Journey. NSE: SHAKTIPUMP | Weekly closes Sep 2016 – Jul 2024, log scale | ~30-bagger from the ₹150 first buy. Drawn on the web page: https://equitreecapital.com/insights/newsletters/june-2024#case-studies]

Series: SHAKTIPUMP.

Weekly close (last trading day of each week), 2 Sep 2016 – 31 Jul 2024 (issue date), log scale. Pre-split basis: NSE closes adjusted for the 25 Nov 2024 corporate action are multiplied back by 6, which reproduces NSE’s unadjusted closes exactly (₹4,514.90 on 5 Jul 2024, the last price on the letter’s chart). The letter’s ATH of ₹4,739 is the 25 Jul 2024 intraday high; the peak weekly close is ₹4,515. First-buy dot: the weekly close nearest the ₹150 entry the letter cites for 2017 (exact date not given). Drawdown dots: peak-to-trough on weekly closes; the table below uses the letter’s own figures, read off daily highs and lows. Source: NSE end-of-day prices; Equitree Capital[4].

| Phase | Drawdown from Local Peak |
| --- | :---: |
| First wave (2017–2019) | 60% |
| COVID drawdown (2020) | 80% |
| 2022 correction | 55% |
| 2023 mid-year shake-out | 21% |
| 2024 interim correction | 20% |

The same chart, read as a sequence of drawdowns. Each row is a peak-to-trough decline a holder had to sit through to capture the 30-bagger[4].

Five separate drawdowns, including two of 60%+, would have shaken out anyone investing on borrowed conviction. We held — because **the ground-up reconfirmation kept telling us the business was getting stronger, not weaker**.

### 2B. HBL Power — The Reward of Patience

This company had the **first-mover advantage for a niche product**, however got plagued by **delay in approvals from the government**. Once the commercial orders started kicking in, it gave the company a first-mover advantage in the industry. The **improved execution and product mix** led to a complete change in the numbers of the company, which led to a **re-rating** for the company — making it a **~30-bagger** for us[5].

**First buy at ₹20 (~2018); still holding at ₹620 (mid-2024).** The interim was **5 years of stagnated growth: regulatory hurdles, supply chain inefficiencies, fluctuating profit margins**. The eventual turnaround came from increased batteries and defence demand, streamlined operations and supply chain, and investment in R&D and strategic alliances.

[Chart: HBL Power Systems — Stock Price Journey. NSE: HBLPOWER (now HBLENGINE) | Weekly closes Jan 2018 – Jul 2024 | ₹20 first-buy level → ~₹620 holding → ~30-bagger. Drawn on the web page: https://equitreecapital.com/insights/newsletters/june-2024#case-studies]

Series: HBLPOWER.

Weekly close (last trading day of each week), 5 Jan 2018 – 31 Jul 2024 (issue date), log scale. The dot marks the first weekly close at ₹20 (26 Jul 2019); the lowest weekly close in 2018 was ₹25.65. About five years of sub-₹100 trading through Sep 2022 were followed by a 6× breakout in 2023–24 as defence and battery orders converted into reported earnings[5]. Source: NSE end-of-day prices (HBLENGINE.NS, checked against NSE bhavcopy); Equitree Capital.

> **Takeaway:** In both cases, the **business was right**, the **valuation was right**, and the **promoter was backable** — the only missing ingredient was **time**. Patience converted both into 30-baggers; impatience would have converted both into mediocre exits at 2–3×.

## 03. Budget 2024 — Our Two Cents

The budget for 2024–2025 was **broadly in line with our expectations**. Despite a coalition government in place — which increased expectations of the budget being more “populist” and drifting away from the erstwhile focus on infra spend — it was pleasant to see that **the government has not given in to any of these pressures**.

The focus on infrastructure spending continues with a **~16% growth in capex**[6]. With that, it was heartening to see the government being cognizant of fiscal prudence and **maintaining fiscal deficit at 4.9% of GDP**, which should help in improving India’s sovereign rating as well.

> **In Focus:** **4.9% fiscal deficit** with **16% capex growth** — fiscal discipline and infra continuity simultaneously. A rare combination in a coalition-government budget.

| Category | FY19 A | FY20 A | FY21 A | FY22 A | FY23 A | FY24 RE | FY25 I | FY25 BE |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Transport | 1,436 | 1,534 | 2,168 | 3,222 | 3,905 | 5,249 | 5,440 | 5,441 |
| Defence | 2,908 | 3,187 | 3,401 | 3,665 | 3,991 | 4,559 | 4,548 | 4,548 |
| Subsidy | 1,968 | 2,283 | 7,077 | 4,462 | 5,310 | 4,135 | 3,812 | 3,812 |
| Agriculture & Allied | 633 | 1,125 | 1,344 | 1,433 | 1,259 | 1,405 | 1,468 | 1,519 |
| Interest | 5,826 | 6,121 | 6,799 | 8,055 | 9,285 | 10,554 | 11,904 | 12,629 |
| Transfer to States | 1,191 | 1,489 | 2,115 | 2,746 | 2,734 | 2,740 | 2,868 | 3,222 |
| Total Expenditure | 23,151 | 26,863 | 35,098 | 37,938 | 41,932 | 44,905 | 47,658 | 48,205 |
| Total Exp YoY % | 8.1 | 16.0 | 30.7 | 8.1 | 10.5 | 7.1 | 6.1 | 7.3 |

Broad-segment central-government expenditure, FY19 – FY25. Figures in ₹ ’00 Cr (e.g. 48,205 = ₹48.21 lakh crore Total Expenditure for FY25 BE). **A** = Actuals · **RE** = Revised Estimate · **I** = Interim Budget · **BE** = Budget Estimate. **Transport** (capex proxy) more than triples from FY19 to FY25BE; **interest** is now the single largest line. Source: Union Budget 2024–25; Prabhudas Lilladher; Equitree Capital[6].

Indeed, there was a **negative surprise for the capital markets** in the form of tax-rate hikes — from **10% to 12.5% for LTCG** and **15% to 20% for STCG**. We believe this may have a **short-term sentimental impact rather than any long-term fundamental impact**.

From our perspective, being **long-term and less-frequent churners**, the ability to **stay invested and defer taxes** helps in compounding that capital too — which materially reduces the impact of taxes on the eventual returns.

## 04. What Are We Doing Currently?

Our portfolio companies have reported **29% growth in PAT for FY24**. Business visibility for most of our companies continues to be very good, and we expect FY25 as well to register **~30% growth** — poising us for some interesting times ahead.

| Market-Cap Bucket (Ex-BFSI) | Net Sales Growth | PAT Growth |
| --- | :---: | :---: |
| Equitree Capital (15) | 10% | 29% |
| BSE 500 (415) | 2% | 29% |

Equitree portfolio earnings growth vs the broader BSE 500. FY24 vs FY23, ex-BFSI. Figures in brackets indicate number of companies. Source: Company filings; Equitree Research[1].

Despite the stock price performance during the last quarter and year, our portfolio still trades at a **median PE multiple of 21.5× FY25 PAT**. This makes us extremely comfortable holding the portfolio.

We are cognizant of **froth in valuations in some parts of the market**. The pace at which markets have been hitting new highs owing to burgeoning domestic liquidity, potential regulatory measures to curb the volumes in F&O, curbing margin funding by **taking around 1,000 companies out from the allowable list of securities for margin**[7], and geopolitical issues — are some of the issues which may have an impact on the market in the near term. We believe these issues may bring about a **5–7% correction in the indices and around 15–20% in small and mid caps**. Individual stocks may of course behave differently based on earnings growth and valuations.

Based on this, we have been reviewing the portfolio very closely on business developments and valuation. In line with that, we have **partially booked profit in one of our portfolio companies** and have **pared down holding in another** where, despite good operational performance, reported profit is suffering due to a change in accounting policy.

We continue to find interesting opportunities which fit our parameters and have **added a new company to the portfolio** — which we believe could be an **emerging leader in the consumer durables space**.

> **Takeaway:** We remain extremely confident on the **business visibility** of our portfolio companies and the **current valuation it trades at**. However, rather than being rashly exuberant, we are building up the portfolio in a **staggered approach** to leverage the volatility, should one arise. Any such opportunity, when it happens, is likely to be **short-lived** — investors should latch on to it from a long-term wealth-creation perspective.

Please feel free to [reach out to us](https://equitreecapital.com/contact) for any feedback or further information.

Sincerely,

Team Equitree

- Pawan Bharaddia, Co-Founder & CIO (pawan.b@equitreecapital.com)
- Ssuneet Kabra, Co-Founder & CEO (skabra@equitreecapital.com)

## Sources

1. Nuvama Custodian Services; Equitree Capital internal performance and NAV records (June 30, 2024). Returns are TWRR, net of fees and expenses, and not verified by any regulatory authority/SEBI.
2. Benjamin Graham investing in GEICO (1948): 25% partnership-fund allocation; $712,500 stake in 50% of GEICO compounded to over $400 million in 25 years (550+ bagger). Sourced from Graham biographical accounts and partnership records.
3. Ian Cassel — “Intelligent Fanatics” / “Ugly Duckling” theory of microcap investing (MicroCapClub).
4. Shakti Pumps (India) Ltd. (NSE: SHAKTIPUMP) — TradingView price history (2017–2024); first buy ₹150, all-time high ₹4,739 (July 2024).
5. HBL Power Systems Ltd. (NSE: HBLPOWER) — TradingView price history (2018–2024); first buy ₹20, holding at ₹620 (mid-2024).
6. Union Budget 2024–2025; Prabhudas Lilladher; Equitree Capital — sectoral and capex breakdown of central-government budget; fiscal deficit set at 4.9% of GDP.
7. SEBI circular — Removal of ~1,000 companies from the list of securities approved for margin funding; tightening of derivatives and SME IPO norms.

## Disclaimer

This newsletter is prepared by Equitree Capital for informational purposes only and is directed at existing investors of its Portfolio Management Services. It does not constitute investment advice, an offer, or a solicitation to buy or sell any securities.

Past performance is not indicative of future results. Returns are computed on a TWRR basis, net of fees and expenses, and are not verified by any regulatory authority. Individual portfolio performances may vary. Forward-looking statements are subject to risks and assumptions that may not materialise.

Investments in small- and micro-cap equities carry higher volatility, liquidity, and business-specific risks, including the possible loss of principal. Equitree Capital is a SEBI-registered Portfolio Manager. Recipients should consult their independent financial, legal, and tax advisors before making any investment decisions.

This document is private and confidential. It may not be reproduced, redistributed, or published, in whole or in part, without the prior written consent of Equitree Capital.