The Irrelevance of Short-Term Investment Performance
Short term (less than 12 months) performance of an equity portfolio is significantly affected by noise. The tools that can help deliver consistent short-term outperformance over benchmark indices usually bring with them the risk of compromising long term (3 years or longer) absolute returns. For instance, Berkshire Hathaway’s monthly performance has exceeded that of S&P500 […]
Maximise the ‘Signal’, Minimise the ‘Noise’
An investor looking to compound her wealth through equity investments faces two key risks: (a) the risk from short term fluctuations in stock prices (i.e. noise); and (b) the risk of long-term capital erosion/weak returns due to investments in sub-standard companies. To mitigate these risks, the investor can utilize two tools. Tool#1 is to increase […]
CCPs Increase Investments During a Crisis
Historically, once every five years, Marcellus’ CCP companies have faced a challenging external environment. In such instances, CCPs have ramped up capex and working capital investments (ex-financials as these parameters are not applicable to them). This has been followed by a sharp acceleration in the franchises’ growth rates in the subsequent 3-4 years. FY22 was […]
CCP’s Capital Allocation is Shifting Towards Tech Capex
As technology adoption becomes ubiquitous, the competitive advantages of winning businesses will be determined by their quality of capital allocation across four distinct layers – Enterprise Resource Planning or ERP (backbone), operational optimization (muscles), data analytics (brain) and customer interface (face). While a traditional business begins its tech investment journey from the first layer (ERP) […]
Studying the ‘Holiday Schedule’ of Consistent Compounders
Share prices of CCPs often go on a ‘holiday’ for 12-24 months, delivering weak or no returns. These ‘holiday’ periods of share price are typically uncorrelated with fundamentals because during such periods these companies continue implementing initiatives to enhance the sustainability of their competitive advantages. Once the ‘holiday’ period ends, share prices of CCPs deliver […]
Mistakes, Lessons, and Strengthening of our Research Processes
Marcellus’ fund managers and research analysts continuously evaluate their decision-making to identify mistakes made and hence lessons learnt to help improve the quality of our investment decisions in future. In 2019 and 2020 we lacked granularity in our assessment of capital allocation decisions made by companies in our coverage universe. This resulted in our decision-making […]
Acceleration in growth rates of CCP companies’ fundamentals
Marcellus’ CCP companies grew their revenues in 3QFY22 (vs 3QFY20) at 19% CAGR. This is significantly higher than: a) the 17% revenue growth reported over FY14-19 (i.e. prior to Covid-19); and b) the 16% revenue CAGR that was reported in 2QFY22 (vs 2QFY20). The drivers of this acceleration can be categorized into two types. Firstly, […]
How Volatile Funds Cost Investors Dear
High volatility in an equity portfolio creates zones of ‘excitement’ and ‘fear’ based on recent performance. This adversely affects the quality of decision making by equity investors. As a result, historically, investor returns in Indian equity funds have been lower than fund returns across different periods. Similarly, a recent example from the US – NYSE […]
The Benefits of Timing are Inversely Correlated with the Quality of Fundamentals
The rate at which fundamentals of a company compound (and hence its share price) over the long term is inversely correlated with the quantum of benefit that an investor can achieve by perfectly timing her purchases at the bottom of the share price trajectory. Moreover, for a portfolio consisting of high-quality companies, benefits from a […]
CCPs use more ‘S-curves’ to elongate their fundamental compounding
Value addition from every initiative undertaken by a company follows an ‘S-curve’ with three parts to it – the investment phase, the growth phase and the fade period. The fundamentals of the overall company are a consolidation of ‘S-curves’ of all initiatives. There are several limiting factors to every initiative such as addressable market size, […]
The Path to Consistent Compounding is Paved with Free Cashflow
There are four key drivers of free cashflow in a business – revenue growth, profit margins, working capital efficiency, and asset turnover. The order of importance across these four drivers differs across businesses. As Marcellus’ CCP companies invest in technology to improve operational efficiencies, those companies that sell day-to-day essentials to their customers whilst avoiding […]
How Portfolio Rebalancing Tools Enhance Investors’ Returns
Every stock market crash causes a dislocation in a portfolio of high-quality companies, due to differential drawdowns in the share prices of constituent stocks. Rebalancing such a portfolio in the aftermath of the crash not only generates additional returns, it also crushes the risk of being left with uninvested cash. The biggest challenge faced by […]
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