September 2021 / Q2 FY22
Snakes And Ladders: Why Smart Money Stays The Course
“The contrary investor is every human when he resigns momentarily from the herd and thinks for himself.”
Dear Investors,
The Nifty 50 scaled fresh all-time highs of about 18,600 during the quarter and posted a return of close to 12% from the previous quarter. A swift correction of around 5% from the peak followed as the market began wrestling with what we have always called the “snakes” of investing.
The relentless climb up the “ladders” (which we have written about across earlier newsletters) has now been joined by familiar “snakes” — the Evergrande crisis in China and a faster-than-expected pace of US Fed tapering. Through this chop, several so-called “growth” stocks have corrected by 30%+ from their highs, and individual stocks across our universe are 15–20% off recent highs.
Takeaway
Through this volatility, we are happy to share that our portfolio has held up well against the broader markets — beating the Nifty 50 and the NSE Small Cap 100 over the six-month and one-year windows by a comfortable margin.
Our Performance
| Returns | 1 Month | 3 Months | 6 Months | 1 Year |
|---|---|---|---|---|
| Equitree Capital | 6.03 | 5.31 | 39.49 | 123.43 |
| Nifty 50 | 3.20 | 12.40 | 18.50 | 54.30 |
| NSE Small Cap 100 | 5.80 | 11.10 | 31.50 | 85.80 |
As on 30th September 2021. Returns over one year are annualised. Individual portfolio performance may differ.
Source: Equitree Capital internal performance records[1].
01The Market: A Game Of Snakes And Ladders?
Markets through this quarter have looked very much like the childhood game we all played. Every time we appeared to be inching closer to “100”, we found ourselves slipping back a few squares. That is the shape of the climb — a series of ladders interrupted by snakes, and the discipline is in not mistaking either for the destination. We discussed several of these “ladders” in detail in our June 2021 newsletter as well.
Some of the “ladders” we have repeatedly written about — record monthly merchandise exports from India of about $35.43 bn in July, an aggressive vaccination drive, and an Indian corporate sector that walked into FY22 with the cleanest balance sheet in years. The “snakes” we have flagged are not abstract — they have names: Evergrande in China, an accelerating Fed taper, and the very normal lumpiness of a market that has been on a one-way ladder for several quarters.
Takeaway
Markets do not move in straight lines. Volatility is the price of admission for compounding — we use it to deploy where conviction is highest and to stay disciplined where prices have run ahead of the business.
“Beware of the investment activity that produces applause; the great moves are usually greeted by yawns.”
02Smart Money Does Not Move With Market Momentum
Market momentum is seductive — it rewards conviction-free participation in the short run and punishes it in the long run. At Equitree, our discipline is built on five rules that look unfashionable in a euphoric tape and indispensable in a correcting one.
2AFocus On The Business, Not The Stock
Behind every stock sits an underlying business. We chase good businesses, not market tips. When the price is in the news but the business is not, we have learnt to slow down and read the latter.
2BStaggered Buying In Reasonably Valued Companies
Portfolios are built over time, not in a single deployment. Turbulent markets give us repeated entry opportunities in the same company at sharper prices — the discipline is to keep dry powder for exactly these moments.
2CReasonable Debt
Debt-to-equity below 0.5x is one of our hard filters. Lower leverage means more profits accrue to equity holders — and more importantly, means the business survives the snakes.
2DIn Investing, Laziness Is Good
Low portfolio churn but hyper-active on-the-ground research is our default mode. Momentum trading earns a quick buck; long-term company-specific conviction creates wealth.
2EDo Not Try To Time The Market
Bank of America looked at the impact of missing the market’s 10 best and 10 worst days each decade since 1930[2]. The arithmetic is brutal in both directions — and decisive in favour of staying invested.
| Decade | Price Return | Excluding Worst 10 Days | Excluding Best 10 Days | Excluding Best & Worst 10 Days |
|---|---|---|---|---|
| 1930 | -42% | 39% | -79% | -50% |
| 1940 | 35% | 136% | -14% | 51% |
| 1950 | 257% | 425% | 167% | 293% |
| 1960 | 54% | 107% | 14% | 54% |
| 1970 | 17% | 59% | -20% | 8% |
| 1980 | 227% | 572% | 108% | 328% |
| 1990 | 316% | 526% | 186% | 330% |
| 2000 | -24% | 57% | -62% | -21% |
| 2010 | 190% | 351% | 95% | 203% |
| 2020 | 18% | 125% | -33% | 27% |
| Since 1930 | 17,715% | 3,793,787% | 28% | 27,213% |
Decade-by-decade S&P 500 price return, comparing staying invested vs missing the 10 best / 10 worst trading days each decade.
Source: Bank of America[2].
In Focus
Missing the 10 best days each decade since 1930 reduced total returns from 17,715% to 28%. Staying invested is the only strategy with that asymmetric a payoff.
“Successful investing is about managing risks, not avoiding it.”
03How We Invest: A High-Conviction Idea, Held Through The Drawdown
3AThe Story: A High-Conviction Idea
A few years ago, on the back of detailed bottom-up work, we identified an agri-equipment company as a long-term high-conviction idea on the Indian solar-pumping opportunity. The business case stood on four legs:
3BThe Story In A Chart
Shakti Pumps (India) — adjusted close, Sep 2017 – Sep 2021
Buy zone marked at March–May 2020 trough. Position doubled at the bottom; held through the recovery.
Shakti Pumps
Daily adjusted close, ₹. Source: NSE; Equitree Capital reconstruction from public market data[3].
3CWhy We Did Not Sell
After our initial purchase, the stock fell about 50% from our buy price as the macro turned and March 2020 added a covid-driven shock on top. The temptation to take a small loss and move on is always there. Instead, we doubled the position at rock-bottom prices because nothing about the underlying business case had changed.
Takeaway
Holding through that drawdown is what produced ~4.5x returns from those lows — and it is the same discipline that lets us hold conviction positions today through the current chop, rather than mistaking a snake for the end of the climb.
“Know what you own, and know why you own it.”
04The Secret To The Market: Know What You Own
Across our portfolio companies, we expect earnings growth of north of 20% for Q2 FY22. The average portfolio P/E currently sits at about 17x — which we still consider rather reasonable given the underlying growth profile.
We are selectively booking profits where valuations have run ahead of fundamentals and redeploying into new opportunities where the business is still mispriced. As an example of the kind of opportunity we are working on: a kids-segment knitwear exporter — about ₹700 crore topline, trading at about 9x FY23E earnings with an expected growth profile of 20–25% over the next few years.
In Focus
The discipline through every quarter is the same: own businesses we understand, sized to our conviction, bought at prices that already discount the snakes.
05In Closing
As always, please feel free to reach out to us with your comments, suggestions, and queries. We are grateful for the trust you place in us through every quarter — the steadier the snakes, the more the ladders compound.
Sources
- 01
Equitree Capital internal performance records as of 30th September 2021. Returns over one year are annualised; individual portfolio performance may differ. Portfolio outperformance vs NSE Small Cap 100: +0.23 pp (1m), +7.99 pp (6m), +37.63 pp (1y).
- 02
Bank of America — “Decade-by-decade S&P 500 price return: missing the 10 best vs 10 worst days each decade since 1930.” Cited in BofA Global Research market commentary.
- 03
NSE; Equitree Capital — Shakti Pumps (India) Ltd. adjusted close prices, September 2017 to September 2021. Buy zone (₹150–180) corresponds to the March–May 2020 trough; ~4.5x return from those lows is computed against the July 2021 closing peak.
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. References to specific securities (including Shakti Pumps) are illustrations of our investment process and are not a recommendation to buy or sell.
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.
Equitree Capital Advisors Private Limited