Vijay Kumar Gaba

 Yesterday I had a long discussion with a renowned social media influencer. The core topic of the discussion was what could be a good method to test the character and strength of a phenomenon, e.g., popular leader, progressive society, ideology, innovation, system, organization, etc.

The point of debate was whether the evaluation should be based on how the underlying has performed under the normal stable circumstances or should include the handling of exceptions as well. The conventional wisdom says that the true test of character and strength of a phenomenon is tested during a crisis. When the sailing is smooth, even an ordinary captain will command the ship safely to the destination.

My view is very clear in this context. I believe a phenomenon could be termed so only when it has helped in normalizing an exception(s). For example, to me a captain would be phenomenal if he designs or helps in designing a guidance system that enables all sailors to navigate through turbulent waters comfortably. Similarly, a political leadership would be phenomenal in my view, if it implements a policy framework that is efficient enough to handle most exceptions in the normal course.

In the investment context, enterprises that are always geared to handle economic cycles in the normal course of their business should be the most preferred investment candidates. The enterprises that have shown extreme volatility in their profitability and sustainability during crises like global financial crisis and Covid-19, regardless of eventual recovery and growth should be less preferred than the enterprises that weathered the crises smoothly and maintained a steady progress.

To put it simply, the managements which were showing extreme exuberance in 2018-2019 and have been regularly complaining about raw material price hikes; worker shortages; supply chain issues; consumer demand etc. to justify their poor performance every quarter since mid-2020 may not be the ideal companies to invest, regardless of their popularity or average performance track record over a longer period.

Investors need to remember that it is highly probable that they may need to sell their investment during a crisis when there would be few buyers in the market and the stock they own would be trading at the lowest price in the market cycle. Because this would be the time when their finances would be constrained and their inclination to borrow money, while staying invested in equities, would be at the lowest. Hence, the statistics about 10yr XIRR (usually from the low point of previous market cycles to the highest point in the current market cycle) of a stock is not only redundant but also ridiculous. If at all, they should consider the XIRR from the median point in the previous market cycle to the lowest point in the latest market cycle to assess the performance of a stock.

Elsewhere, some of the most powerful political leaders (technically) in the world, e.g., Joe Biden and Boris Johnson, et. al., have shown extreme vulnerabilities in handling crises. The unconventional monetary policy followed since 2009 has also failed its first examination. Many experiments with laissez faire in India have failed repeatedly. Accordingly, long US equities (on Trump loss); Long London real estate; long developed bonds and long PSUs in India have been some of the notable disappointing trades in recent years.