The Indian equity market had a strong rally in January from oversold levels – the weakest performers of Nov and Dec had the sharpest rebounds. Low valuations and very strong inflow by FIIs (highest monthly inflow over the last one year) triggered the rally in both equities and in the currency markets. Our portfolios delivered a healthy return and for the financial year to date, we continue to be well ahead of the Nifty, which is down 11% in the same period.
The sharp rally in stocks has taken the prices of some of the high quality companies that we like away from the ideal buy zone – however, these companies are performing well and are still looking quite interesting based on next year’s expected numbers. As we move towards the end of the current financial year, the market should begin to factor in next year’s revenues and profits. The upside for our high quality universe continues to look attractive looking 12 months forward.
We are committed to buying into highly profitable, consistently growing companies which have a track record of having done well through time. An interesting event during the month further brings focus on this approach to equity investing. Eastman Kodak, a 120 year old company filed for bankruptcy this month, giving a different meaning to the ‘Kodak Moment’. In an environment, where a large majority of companies fail to survive 15 years in business, Kodak was able to perform well for over a century. Yet, the bankruptcy of Kodak highlights that even exceptional companies can fail to keep pace with competitive forces and can miss the next wave of changing customer habits. One can soon expect a few case studies of how and why Kodak failed. In a competitive world, where some exceptional minds are continuously at work, giving shape to new ideas, one can expect more such Kodak moments to occur.
From our point of view, where we aim to buy into great companies when things are not necessarily going their way, we need to be aware of the possibility that one of our companies can fail. We try our best to manage these risks through continuous monitoring of our investments as well as choosing businesses where the rate of change is low. However, despite this due diligence we are aware that we could face a similar situation in the future – this is the reason we follow a reasonable degree of diversification to limit the impact of such an event on the portfolio. The other learning we have had over the years is to limit the size of our investment in companies where there may be a possibility, however remote, of a ‘Kodak moment’.