Memo to clients

Date: 14.12.2017

Hi all,

Thank you all for showing faith in my abilities by following the investment advice given by me without iotest amount of doubt. I really mean it.

Most difficult part of Investment Advisory business is setting up clients’ expectations.

So let’s be very clear, Equities as asset class is wonderful ONLY if we stick to disciplined investment process and adhere to it in both good and bad times.

The CAGR returns you get is often misunderstood by many. Many real estate proponents say that property prices have moved up 40000 times in last 100 years. If you sit back and calculate it’s just over 10% compounding return. Important thing to remember here is that compounded annual growth rate in equities is not fixed yearly return. So it is number of years root to the actual return you got in those years. E.g. If you get double returns in 3 years then its cube root of 2= 1.26 means you got 26% CAGR returns over 3 years. That doesn’t mean you should get 26% return every year. One year may be flat, second down and third year bonanza (100 rs value at year 1 end =100, year 2 end= 80, year 3 end=200).

As investors, we need to see things clearly, identify right long term opportunities to invest, stick with the opportunities in good and bad times and let the saplings grow to become trees. Our job as investors is to always look for margin of safety at the time of buying, to follow right investment strategy diligently. If the process is right, outcome has to be right in long run.

See illustration below which is self explanatory. The more you fall down by % of your portfolio in downturn; it’s difficult for you to come back to your original capital itself.

I sincerely believe that in current market conditions we should be in large caps to take brunt of possible weather changes in markets.
1) They offer wonderful safety net , Protection from downfall in sever market corrections
2) Liquidity at the time of Exit
3) The companies are already proven winners, they have weathered many storms to coming to the stature they are at today.
4) These companies (of course chosen few) are wonderful compounding machines which grow wealth in steady but definite manner
5) We can enjoy one of the most precious thing in our life, sound sleep

Let Mr. Market do it’s idiosyncratic things, we as investors can control our habits, approach towards wealth creation, Let us focus on that. We can control our saving methodology, we can keep tab on our expenses, and we can control our behavior by not succumbing to irrational pessimism and irrational optimism.

I sincerely believe that nobody can Time the Market. One can’t and one need not to. Time in the market (Number of years you stay invested) is much more important thing in compounding equation than the gains you try to achieve by timing the market.

Year gone by was wonderful year for market. Earnings have not picked up yet. I believe next year FY19 and next to next year FY20 will bring out real earnings growth to the markets which has been elusive for a quite while.

I am absolutely convinced on the superb outlook on themes we are betting on, which are combination of contra play (IT, Pharma), Infrastructure (Infra, Power, Power financiers), Private banking space, Affordable housing space, Rural inclusion (Microfinance, FMCG plays)

Last but not the least, investing in wonderful companies test patience at times, but they give right returns in long run.

Sincerely yours,
Amit Gadre

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