As we begin 2014, I hope you are only dealing with a physical hangover and not the financial variety. 2013 was undoubtedly a volatile year for Indian markets. We had a major summer swoon due to the fear of a Fed “taper” and then a recovery in the second-half after the dreaded “taper” was announced. Which brings me to the biggest lesson that I learned this past year. Never trust an economist. At the beginning of the year the consensus was interest rates were peaking and inflation would ease. Basically, the exact opposite happened. If you had tried to base your investment decisions on the forecasted economic outlook at the beginning of the year, your portfolio would’ve been hammered.
To shed some more light on the subject of economic forecasts and investing, I’ll turn it over to the “Oracle”. Buffett stated the following in his 1994 annual letter:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.”
Economic reality is never as good or as bad as market participants make it out to be. The market moves from euphoria to despair in very short periods of time. The summer decline in the Indian market reinforced my belief that you need to stay focused on the underlying fundamentals of the businesses you’re going to invest in. Focus on buying high quality companies that are trading at discounts to fair value.
I think a lot of investors got tripped up by trying to time the “tapering” decision. It’s extremely difficult to be a macro trader. Most macro hedge funds have delivered middling performance in 2013 because there was so much uncertainty globally. If you had exited the market in the summer, what is the likelihood that you would have gotten back in at the right time to catch the massive rally? As Vitaliy Katsenelson, the author of Active Value Investing, recommends you need to time stocks not the market.
By focusing on finding attractive businesses trading at cheap valuation levels, the VIIR (Value Investing India Report) portfolio massively outperformed the Nifty.
I can honestly say that the VIIR model portfolio beat even my highest expectations. Stock picking was the key driver of the portfolio. Although I can’t promise past performance will translate into future returns, I’m confident that our investment process is capable of identifying high quality companies that trade at significant discounts to their true underlying value. However, as Tiger Woods once said: “no matter how good you get you can always get better, and that’s the exciting part.” There is always room for improvement. So, I’m planning on spending the 1st quarter of 2014 reassessing and refining the VIIR investment process in the areas that I think can still be improved. I’ll plan on sharing more with you as the year progresses.
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