Dear Investor,
We hope this letter finds you and your loved ones safe and healthy.
Conservative Does Not Mean Low Returns
Off late some people have asked us if we are being too conservative in our investment approach. So, we thought we would use this opportunity to put things in perspective. The way we see it, risk and returns are two equally important dimensions of wealth creation. Ignoring risk and over-emphasizing returns can be detrimental to financial health in the long run.
To reiterate, we aim build a portfolio of good quality businesses with strong balance sheets and stable, durable & profitable growth. These businesses tend to be more resilient to market and economic cycles and typically come out stronger during periods of duress and hence perform better (in terms of earnings and hence share price) when the outside environment becomes challenging from time to time. We practice Value Investing in Growth Stocks (VIGS) i.e., we are very conscious of the price we pay to purchase shares in a business – we recognize that the best of businesses purchased at too high a price can result in sub optimal outcome.
The table below shows QRC’s performance during the more uncertain periods in the market over the last three+ years.
As one would observe, we have managed to limit losses to much lower than the market during periods of stress. This is especially important as it is during periods of stress/losses that one may end up making mistakes (for example: pre-mature selling and/or doubling down on bad investments etc).
However, this better relative performance has not come about at the expense of upside performance when the going has been good – as the chart below shows.
*Individual client portfolio returns may differ based on timing of their investment and specific instructions/circumstances. QRC returns are TWRR post fees & expenses. Source: BSE & NSE
Our aim remains to preserve and grow our clients’ wealth as we believe growth cannot happen without preservation i.e., it is important to play both offense and defence well. As public market investors we recognize that there are known unknowns (for example, the product/SKU level sales, margin, profitability etc of a company) and unknown unknowns (for example, the timing and spread of a global pandemic and the temporary or permanent impact it may have on consumer and business behaviour). Hence, it is particularly important to have a margin of safety while investing.
If managing risks and downside while earning better returns than the market through cycles is being too conservative – we are guilty as charged!
Market & Performance Update
This marked the fifth quarter of consecutive positive returns for the Indian equity markets. Markets shrugged off the early April worries around rising covid cases and a more dangerous 2nd covid wave to deliver a solid broad-based return. There is hope that the rise in inflation is transitory and vaccination pace pick up should augur well for a full normalization of life and economic activity. Foreign investors sold nearly $2.5bn of Indian equities. However, the strong inflow from domestic institutions continues with their share purchases at a net $3bn. Retail and individual participation continues to increase at a robust pace as seen in the number of new demat and broking accounts being opened. For the April to June 2021 quarter, the QRC Long Term Opportunities Portfolio (LTOP) was up ~15.5%.
*Illustrative. Individual client portfolios may differ based on timing of their investments and specific instructions/circumstances.
Looking Ahead
As vaccination picks up and life starts to return to normal, we are watching out for pick up in the real economy and sectors like autos, housing and hence loan growth in the economy. As we highlighted in our previous letter, we are optimistic on the performance of the businesses that we own and believe that growth should accelerate for them. We are still in the early stages of a strong economic recovery but will be maintaining a watchful eye on inflation and global interest rates. Another potential source of correction for the stock market could be the withdrawal of the excess liquidity from individual investors that has found its way in the market in the last few months given reduced needs in their businesses because of the slowdown.
We thank you for entrusting us with your money. Do feel free to reach out to us with your questions or suggestions.
Sincerely,
Saurabh
