Hello!👋 This week, we covered the Market snapshot, summarized Howard Marks’s recent memo where he explained when is the right time to sell stocks in a portfolio, covered notes from Li Lu’s Columbia address, 2006 followed by interesting visuals & curated reads.

1. Market snapshot

Markets had a good week, gaining 2.3%. Power/Utilities and Industrials were the top gainers at 7.1% and 4.5% respectively. Interestingly, many Industrial and Capital Goods small and midcaps are showing signs of a break-out.

Consumer staples was the only down sector for the week.

2. Howard Marks: When is the right time to sell stocks in your portfolio? 

Written by- Yashika Narang

Every person who invests or is looking to invest in stock markets is pretty much familiar with the concept of “Buying low, selling high”. Howard marks in his recent memo brilliantly explained why people sell stocks and when is the right time to sell. 

Here are the key pointers from the same:

• The main reason for selling stocks is Liquidity– People only sell when either the stock price is up or down and that happens due to liquidity in the market.

One should not sell a stock just because its price is up. Why? 

Many times we simply sell the stock because of the fear that the profits might go away or thinking that the market will crash & the company can be bought at a lower valuation later. And definitely- “No one ever went broke taking a profit” right? 

But what if, the company has the potential to become a 20x from here? Or what if market correction takes longer than expected? Or if it doesn’t correct at all? Is it possible to sit on cash till then? No! And how can one figure out when to enter back? 

One should not sell a stock just because its price is down. Why? 

Retail investors are usually the trend followers who tend to sell when the prices are falling significantly & miss out on wonderful opportunities. 

For e.g.: mutual fund investors rather than thinking that low prices can actually be an opportunity, keep on switching to best performing funds every quarter/year & this is the reason why even the average mutual fund investor performs worse than a mutual fund.

So when should one sell a stock? 

The decision of selling a stock should never be taken in an isolation with respect to just market timing! There are other factors to be considered before:

• Have the fundamentals of the company deteriorated? 
• Has the growth potential faded?
• Is the company overvalued?
• Has the probability that our investment thesis will play out reduced?
• Opportunity cost: Is there a better opportunity available in the market which might give superior returns? 

At times, one can sell one asset class to increase exposure in another asset class but this can’t be done just based on some portfolio optimization formulas. Even this needs holistic knowledge & judgment!

So, it’s important to keep in mind that selling when the price is up is not a good idea because “Great compounders are extremely hard to find” & selling when prices are down is again not a good idea because we might not just lose on wonderful opportunities but even underperform the index due to high taxes & capital gains paid if a holistic judgment by considering all the factors is not taken. 

3. Notes from Li Lu’s Columbia address, 2006

If you are like me, your bookmarks tab keeps piling up – there is always so much happening. One of the best I found is this – Li Lu’s address at Columbia in 2006. A complete investors’ delight (Note: Video starts around the 6-minute mark).

For the uninitiated, Li Lu is a Chinese immigrant in the US who manages a large fund called Himalaya Capital. In the words of Charlie Munger:

“I’m 95 years old. I’ve given personal (Munger) money to some outsider (anyone besides Warren
Buffet) to manage once in 95 years. That’s Li Lu.“

With that good enough reason for picking up this talk, let’s straight jump into key takeaways:

The value investing thought process comprises only 5% of the market. It is tempting to do what the other 95% of people do. The biggest challenge is to understand whether you are the 5% or the 95%.

Does not care where something was traded before. First looks at valuation – if the valuation doesn’t fit, don’t go beyond it. If you see a low P/B ratio, ask – What is in the book? How much is the book?

Look at pre-tax and pre-interest earnings. Look from an un-leveraged basis. Figure out how much capital is deployed in the business. Look at ROIC.

Management due diligence: Li Lu describes his diligence process before taking a (big) position in Timberland (the company that makes these rugged shoes in image).

Low key, closely-held business. While there were temporary growth outlook challenges related to the Asian Financial crisis, traded cheap at around book value (5x P/E), despite having grown well and decent profitability. But zero analyst coverage – clearly not liked by Wall Street. A good case of Balance Sheet to Income statement investing:

Gains can be even greater if the company’s current investors are paying a multiple of book value, but future investors are willing to pay a multiple of earnings, or cash flow, or EBITDA.

Li Lu flew out to the neighborhood of the owners, joined overlapping boards to meet the son (COO of company), and became intimate friends with the owner’s family. All this is to see how the management conducts their daily lives and business philosophy. Got comfort, allocated big, and made a cool 50x+.

The point here is that it takes a certain amount of hard work and obsession to “really succeed big” in investing. Taking shortcuts is tempting, but nowhere as rewarding.

Some other takeaways:

• Have a high bar for the margin of safety. You don’t have to buy a “maybe”. Your productivity in a year is not determined by how many stocks you bought, but what you learned.
• Let curiosity and passion drive your work, get boots on the ground and do the kind of research others don’t think to do.
• Have confidence in the niche you’ve carved out. Even the best investors can’t compete with you if you look where they don’t and think the way they don’t.

For anyone keen, here are more detailed notes from the talk.

Bonus: Here is Li Lu on the importance of culture in business: 

4. Visual of the week:

Did you know Apple’s market capitalization has quadrupled over the last 3 years 😱

Apple was the 1st company in the US to hit 1 Trillion$ in 2018, 2 Trillion$ in 2020. Now, it has become the world’s first company to hit 3 Trillion$. Both- Fundamental growth of revenues & profits (42% and 62% increase in last 3 years) and multiple expansion (P/E increased from 12.4x 3 years ago to 32.4x today) have driven this incredible increase in valuations.  

5. Curated good reads of the week:

5.1 A great read on “Why focusing on a single metric can cost you a 6 bagger”?

5.2 An insightful article by economic times on “Why it is important to keep following sectors to maintain portfolio health”?

5.3 The Turkish currency, Lira, is falling like a rock. It has lost ~88% of its value in the last 10 years. A thread by Capitalmind on “What is happening in Turkey? Is it heading for hyperinflation as Venezuela did?” 

5.4 A thread on the how the past investment journey in Infosys looks like– by Kumar Saurabh. 

6. Let’s rewind: Last week at Multipie 🔄

Selected highlights:

• Here’s a list of 71 profitable hyper-scalers along with a Google Sheet tracker. Expect some surprising names and a lot of financials on this week’s Multipie’s exclusive.

• Here’s an interesting read about an industry that is poised to grow 4x in 5 years and its exports to grow by 8x in 5 years. 

• What happens when the tailwind of good luck turns into the headwind of bad luck? Check out this excerpt to understand how choosing the right funds becomes crucial to avoid such dynamics.

• Guess, what’s brewing to make your experience top-notch? Have a glance yourself by tapping here.

• What does the future of export themes look like? It’s admirable that they never go out of fashion. Have a look at the opportunities in various sectors.

• We all hear that when we protect our downside, the upside takes care of itself. But what does it really mean? Here are a few pointers to keep in mind.

• It makes us so happy to see fruitful discussions happening among the community folks. One discussion on Airtel’s business and the telecom space caught our eye. Give it a read here.

See you next week. Until then, happy investing!

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