29% CAGR. 33 Years. Why Sector Cycles Matter More Than Stock Picking | Kushal Lodha #9

I will ask sector by sector. So what do you feel, is it in an up cycle or a down cycle? If I talk about paper, then I think the bust is over. It seems like it will improve from here. Sugar. I have almost stopped investing. Transformers sector will still do well because there is huge demand. Perhaps one or two years look good, and chemicals. Yes, chemicals can be very interesting. Financials. So financials is something where I have the highest weightage right now. So if the EBITDA margin of a stock is 71%, then you are saying that at that time you should not invest in that stock. Everyone will go and invest in that stock. Research reports also come at the same time. That stock is hot on social media at the same time. People invest due to FOMO. And that is a very big trap. What was your best stock pick to date, and how much X did you make on that stock? So there is a chemical company in which I invested in 2004. Balaji Amines. It went as high as 650x. The problem is one. We all want to buy at the bottom and sell at the top. I think which is not possible only. It cannot happen like this. India is currently the fastest growing large economy in the world, and if you want to take real benefit of this growth story, investing in Indian businesses and companies is non-negotiable. Whether you are already investing in markets or just starting your investing journey, Groww is one of the platforms to do it. Groww's interface is very clean and intuitive. Here you can trade stocks, mutual funds, ETFs, IPOs, bonds, even commodities, all from one app. Portfolio tracking is also very structured. You can see performance, understand sector allocation, and get a complete breakdown of your investments in just a few tabs. And because of this simplicity and trust, Groww has become India's largest stockbroker today. Check out the Groww app today for more details and stay tuned for this entire episode of Conversation with Kushal. So sir, you mentioned you have been investing in stock markets for 33 years. And I read that you have generated a CAGR of 20% plus over 20 years. Right? Yes, I think it will be more. But yes, you can say it is 20% plus. In fact, a few days back, one of my brokers sent me this report, and I was kind of surprised because I also then saw. I have an account with them from 2014, and till Jan 31, the CAGR was 29.85% from Jan 14. So yes, God has been very kind. But yes, over 20 years, it definitely should be more than 20%. Wow, that's amazing. And I was reading that there was a story about your father's HUL and Tata Motors IPO investments where the family was going through tough times, but these IPOs were invested in. So what was that story, and what lesson did that teach you about investing, and when was that? So I think when their IPOs came in the 70s, I think so. I remember my father, so there was, my father's friend who worked in the stock market and also facilitated IPO investments. At that time, one had to invest in IPOs by filling out forms. Generally. So at that time, my father also used to get me to fill out forms and all. So by filling out the form, and all issues were at par. So I remember at that time, HUL, Trent, Tata Motors, and Grasim, and all these companies, he invested by filling out the forms. So in Tata HUL, for example, he invested ₹250 or ₹500 at that time, and got allotments. Some were allotted, some were not. But these were some of those in which allotments were received. So yes, that was the time, and the thing was that at that time, IPOs used to come at par. So that's not the case anymore because now it's the opposite, that valuations are so high when IPOs come. So you won't believe it, I haven't invested in any IPOs for the last several years. Absolutely. Why would I look? The starting valuations are not at all right. So that era was different, actually. So it helped my father a lot in life. We were a typical middle-class family. You can say lower-middle class. So whenever my father needed something in life, like to buy a house, he sold those HUL shares at that time. Earned something. There was my sister's wedding. So in their tough times, this IPO investing, this equity investing, helped them in life. So that's why it came into my mind, and I decided that I also have to do equity investing because I saw this power at home itself. So, despite becoming a software engineer, and having a company, my heart was set on becoming an investor. So what was your best stock pick to date, and how much X did you make on that stock? So if we talk about X, then there is a chemical company in which I invested in 2004. [Clears throat] At one point, it went as high as 650x. From there, that stock is now down 18% and is still 150x for me. So this is the journey of stocks. Of course, over a period, I might have sold some, bought back some, this journey keeps going within one stock. But yes, from the starting point, this has been the journey: from 650x, it's now only at 150x. But I am still holding. Which stock was it? It's a company called Balaji Amines. So that's one. Another was a transformer company in which I invested in 2019-20. And that stock went up 80x in the next three to four years. And I made much more money in this stock than I made in Balaji Amines because my position size in this stock was quite good. Meaning, the number of shares I had and the percentage allocation to the portfolio was higher in this stock. So even though it became 80x, my wealth grew significantly in it. So that's why I say that position size is also very important. Rather than the X multibagger, as we call it, if your position size is not there, you won't be able to make that much money. So these are two examples I have given in which I made good wealth and my big mult baggers were made. So yes, these are two of my biggest mult baggers. Besides this, quite a bit in capital goods. So if you pull out a tweet, I tweeted in 2020 or 21 that, brother, look at capital goods, everyone. I had already obviously invested in capital goods stocks. And after that, the super cycle that came in capital goods, and especially a lot of transformer stocks, a lot of, you know, businesses which were in conductors, transformer oils, and they created a lot of wealth for a lot of people, including me. So if you get a super cycle and your allocation is good, it can change your orbit. So that's what happened for me. Capital goods gave very good returns over the last few years. And yes, so mult baggers have happened a lot in life, but these are just a few examples. And the second company that was in transformers, was it Shilchar? Yes, Shilchar Technologies. So this company, if I say, when I was buying it, its market cap was 75 to 80 crore, and this is not long ago, I'm talking about four years back. As of today, the company's 12-month profit is 150 crore. Okay. And this went to, I think, 6000 crore market cap. And it might have corrected a bit now, or whatever. Caveat: I have sold a lot of the stocks already. I do own some small quantity. But yes, that is that is the power of. And in this, we will talk about how cycles can work. This will be a perfect example to explain the power of cycles. So, let's talk about the power of cycles, and we want you to explain the three types of cycles also, which even a 13-14 year old should understand. So you would say that there are three types of cycles: business cycles, market cycles, and economic cycles. Can you, using the laptop and screen, explain to a 13-14 year old how to interpret these cycles and how to understand which cycle is coming now? So, first, let's say there is the economic cycle, which countries go through. When, for example, we say that in 2018-19, our economy's growth was slow, we can see that, right? So that is an economic cycle. It affects all companies, meaning everyone's growth reduces somewhat. But at that time, one thing happens: when the economic cycle is weak, quality stocks perform better because people want to fly to safety. So we will definitely see an example: in 2018-19, a handful of quality stocks were performing, the rest of the market was in doldrums. So that's the economic cycle, but that is more of, you know, at a broader level. For investing, what we need to understand more are market cycles and business cycles. So market cycles have to do with the valuations of companies, which company gets what valuation when, etc. And business cycles are basically the cycles of that business, which are based on demand and supply. So to understand business cycles, we need demand and supply. So we will focus on these two cycles: business cycles and market cycles. And business cycles are entirely based on demand and supply. And market cycles are basically where the market gives a certain valuation. Rerating, derating, as they say, rerating in the multiple or derating happens, all that is covered in market cycles. And business cycles, for example, there are less cyclical stocks, like if you take HUL, for example, which is an FMCG company, then the business cycle is very low. There are hardly any business cycles, meaning there isn't much variation. Their business is in a steady state; it will grow by that much only. Meaning, the difference in growth will be 1-2%. The difference in margins will be 1-2%. So they are less cyclical. We can call them shallow cyclicals or even non-cyclicals in a way. So, in very simple language, what is the meaning of cyclical stocks, and how do we interpret them? So, I was explaining that HUL, for example, we would say it's non-cyclical. Apart from this, there are a lot of stocks which are commodity stocks. Like a steel stock or a polyfills stock. They are more affected by business cycles, and there is a very easy way to identify them. Take the EBITDA margin. There will be a lot of variation in the EBITDA margin. When, for example, in an up cycle, they make 20% margins, and in a down cycle, they come down to even 3-4% margins. When that variation is there, that tells the cyclicity. These are called cyclical, commodity stocks, meaning their underlying business is commodity-based. So, this margin variation happens because of cycles. Why do cycles happen? Demand and supply. So when supply is very high, your margin shrinks. Demand is lesser. So that's the basic simple funda to understand. And when demand is high and supply is low, margins increase. For example, we are talking about the transformer sector. I think in 2019-20, when we were investing, supply was very high, and demand was very low. It was an eight-year down cycle. And after that, because of post-COVID, because of AI, data centers, all this, and re-conduction, and the increase in power demand, all this, basically, there was a lot of demand. Now, in cycles, what happens? When a cycle remains in a down cycle for a long time, a lot of supply also exits the market. So, a lot of unlisted transformer companies shut down during this period. To sustain and survive an 8-year down cycle is very, very difficult. So when a good cycle came, those who survived and were good, they made fantastic profits. So these people, who were making 10% or 5% EBITDA margins, they went as high as to 30% EBITDA margins. Okay. So a company like Shilchar's stock, in three years, the profits went up 15x. Okay. And since the starting valuation was very low, the stock went up 80x. So this magic can happen when you are able to identify market cycles. So we are talking about these two cycles. We can take a few more examples. So, basically, I have explained that. Now I am explaining through slides that business always performs in cycles. Due to demand-supply mismatch, there is an impact on EBITDA margin and revenue, which basically reflects on return ratios and profitability. So, understanding this is understanding cyclical business cycles. So, this is a chart of the Mandowski effect, basically. So in this, it's completely inverse: when there is a bad cycle, their profits are so low that you see a very high PE, and when a good cycle comes, profits are so high, and PE is very low. And you can understand that their stock price also behaves similarly. So when the PE is high, if you are buying here, then you make more money than what [clears throat] you make when you buy at a low PE. At a low PE, your chance of losing money increases significantly. So, in a simple way, if I explain it. So here it's contrarian that, okay, you are recommending to buy a high PE stock and not a low PE stock because here the earnings are basically low. Because of this, the PE has become high. And if you caught it in this down cycle, then you can play out that rally. So, often people do the opposite, that they want to buy at a low PE, thinking this stock is cheap. But in cyclical stocks, a low PE can be a big trap because earnings are very high. Let me give an example. In graphite electrodes, in 2018-19, I bought a company in '17. Today, when I bought it, it was at a PE of 10. Okay, because the earning was ₹1 per stock. Okay, and the price was ₹150, I think. Within 18 months, the stock price was ₹4500, PE was five, because that ₹1 earning went to ₹850 earning. So it got such a cycle. So now, if you look conventionally, you would say, "Oh, 150 is very expensive, and five is very cheap." But those who bought at five, that stock came back from ₹4500 to ₹500 or ₹800, whatever. There was a substantial 70-80% fall. Okay. So in these stocks, a low PE can be a very big trap. That's why I always say that you should understand cross-cycle earnings. You should understand cross-cycle margins. In graphite electrodes, at that time, margins were as high as 71% EBITDA margin, which never happened in my life. But when it happens, and people get excited that, "Oh, this company is going to stay." When your steady-state margins are 10-15% or 20%, and it goes to 70%, it's not going to sustain. Why does it happen? Because there is demand destruction at that time. People will try to find alternatives for this. Or supply comes in. People say, "Oh, so much money is being made, let's invest more." So everybody will come and one person invests, then another invests, so supply comes in. When supply exceeds demand, then prices fall again, spreads reduce, margins come down. Exactly, it happened the same way. Across sectors, whether you say steel, sugar, paper, the story is always the same. Very good numbers come. Everybody comes with supply. Everyone says, "We will set up another plant." So if I have set one up, my competitor will say, "He is setting one up, why shouldn't I?" So because of that, everyone brings in supply, and then there is a supply glut. And then demand, whatever it has to grow, it will grow. If demand is growing by 5%, and your supply has increased by an extra 20%, it takes 4 years to absorb that. Then in that 4-year period, a down cycle comes. So that's what always happens in cyclical stocks. So if the EBITDA margin of a stock is 71%, then you are saying that at that time you should not invest in that stock? Everyone will go and invest in that stock. Yes, absolutely, you should not. But you will say that research reports also come at that time, on Twitter or social media, that stock is hot at that time, and everyone invests at that time due to FOMO. Now, that price has come, meaning someone has invested in it. So people invest at that price, and that is a very big trap. You should absolutely not do that. So, understanding cycles is very important. So I always say, these earnings, just 70%, don't call it E. Call it EE, Extraordinary Earnings. Okay? These are not normalized earnings. These earnings are not going to sustain. And when it comes back to an earning of around 4%, then we call it depressed earnings. That is also not normal. That is also not going to last. It will revert to the mean. Whatever its normal is, 10-12%. So money is made when you buy here and sell here. That is the way to make money. But a lot of people do it the other way around because the PE at that time, let me paint a picture. So that's why I say that in cyclical stocks, PE is the worst measure. PE is one of the worst measures to look at cyclical stocks. So let's move on. I will give some examples. For instance, market cycles. We have talked about business cycles. I have given examples. Now I will give you some examples of market cycles. This is a quality company, Avenue. I made this presentation last year. I gave it to the students of MDI Gurgaon. It's the same. And this data is also from then, from that time. It will be similar, obviously. So for 3 years, their sales have improved by 24%, earnings have improved by 22%. So what happened to the stock price? We will tell you further. I have already talked about a small-cap company. This is about Shilchar. So, just let me mention, none of what I discuss, I am taking any stock name, it should not be considered an investment advice for anyone at all. This is purely an educational podcast. So I am taking stock names to explain the concept. Some stocks I am invested in, some I may not be. But you should absolutely not consider any stock name as advice. I am just giving these examples to explain the concept. So please keep that in mind. So we talked about Shilchar, that in this, the stock went up 15 times. [Clears throat] So, in the leading retailer, the first one that was, in that, you see, in three years, what happened to the price? 1% CAGR. Okay, while because it grew, and earnings also grew, earnings also grew. It has always been growing. And how many examples, in fact, the five-year CAGR was more than that, meaning the three-year CAGR, but the returns did not come in the stock. The reason is only one: this is affected by market cycles. Here, your starting valuation.

The valuation was so high, meaning this stock, I think, was trading at a 150 PE, plus 150 PE. So that is not sustainable. You are growing at 25% and you are at a 150 PE, so there is one major metric which is called PEG. Okay? And I use PEG a lot, and it is very good. Especially in non-cyclical stocks. So this is a non-cyclical stock. Meaning, it is a consistent grower stock. For them, PE and PEG are very important. But people don't look at PE and PEG in these. And in cyclical stocks, PE and PEG are not at all relevant. That is where they look. So at a 150 PE, your PEG is six. So that is just not sustainable. So what will happen? Market cycles will affect you. You will have years of no return. I will show some examples. I had also tweeted about some companies. I will explain how it affects and how it actually happens. So this stock we are talking about. We are talking about the transformer company, Schneider. So you see that profit went from 6 crore to 92 crore. Okay, this is also, again, last year's data. But the stock price went from 115 to 8000. Okay? So that is the power of market cycles. De-rating and re-rating. This stock was priced very cheaply, so it got re-rated and it became expensive. And I will tell you the interesting part. Even in the last one year, it has gone up. Again, it is like a pendulum. So from low valuation, it went to high valuation. This stock went to high valuation at 80 times. Even after this, for the next one year, after this particular data, this stock still had a profit growth of 55%, but the stock was negative in the last one year. Why? Because the pendulum had swung towards overvaluation. So it happens like that. So you need to understand that your starting valuation is very expensive. So PEG is a very, very good metric for this. So even though there was profit growth and the price-to-earnings ratio was high, its stock price still increased because it is basically a cyclical stock. And here it got re-rated. It got re-rated, basically. So the starting valuations were lower, and then they say, from lower valuation, it went to overvaluation. Got it. This is what I was telling you, that see, their profit actually went up by 65%, but the stock was down 25%. Why? Because it had become overvalued. So how do you understand that it had become overvalued? So as soon as, like for this company, I can tell you, basically, despite me owning it and all that, I am telling you. If anyone asked me, I would say that I have sold a lot. I could see the valuation. I had a lot of this thing. So my position currently in this stock is 5% of what I had. So that is kept for sentimental reasons, whatever it is. I will not talk about my current valuation, nor will I give a call, or whatever I am telling based on past data, okay? So at that time, it had become very high valuation. So I was uncomfortable, but I have been selling. No, but my question is, how did you know it was high valuation? Yes, so its valuation reached a PE of 40, plus 40 PE. Margins went to 30% plus, which is not sustainable for transformer companies. This company is sustaining because demand is very high. But over a period, what will happen is, a lot of new capacity. Everyone has announced capacity expansion, they are coming. So that is going to happen here too. These 30% margins are a super cycle that came because of data centers, and because of that, it is sustaining for a few years. But how long will it sustain? It may not sustain in the long term. This is my view that 30% margins in a transformer, because ultimately it is not a product where there is a big moat. Okay? There are differences in efficiency from company to company, etc. So some companies, like Schneider in this sector, are making 30% margins, but other companies are only making 20%. So Schneider has efficiency, but no matter how much efficiency it has, 30% margins are not sustainable. For example, many other companies that were making 10% or 5% have come to 20%. When the cycle turns, they will come from 20% to 10%. This 30% can come down to 15%. It will still be better than others, but it can still de-rate quite a bit. So all these margins are not sustainable. So I will give you another example of peak margins. So 40 times earnings and peak margins, it is a very deadly combo. And I will give you an example of post-COVID chemical companies. You must have seen. So in 2021, all chemical companies were extremely valued, meaning, their valuations have not come back yet. Even the top companies are still 70% down from that point. Why? Because margins went up because of post-COVID demand and all that. So commodity companies whose margins are stable at 10-12% went as high as 25-30%, and specialty chemical companies went to 40% margins. That is never sustainable. So at those 40% margins, you gave a PE of 50 again. You paid for extraordinary earnings. Then you have an accident where for five years, you are still down 50%, even in the best company. So these accidents happen. So I kind of, this could happen in this as well. Okay? From there, this stock has corrected a bit, 25-30%, whatever it is. But I am trying to tell you when to sell. That is a very, very difficult question to answer. But there are, you know, you have some sense over the years that this is not going to sustain. At the same time, you want to ride it to the max. See, what is the goal of every investor? To optimize your returns. If you have found a big company with tailwinds, you should make good money. But how long to ride it is up to the individual person, and your tracking, and you understand that okay, the situation is still good. Demand for transformers is still very good even now. Okay? And it looks like it will stay good for some more time. Okay? But capacities are coming, that is also known. So, margins will moderate. Now, when to exit, it is person to person. And you cannot exit at the top. As long as you capture the major part of the rally and re-rating, you are fine. So my endeavor is never to, you know, sell at the highest price. That can never happen. It has never happened with me. I gave the example of the graphite electrode company. I sold it at 10x, but after that, it went up another 3x. Okay? So this happens. Now, as investors, I am also trying to improve my processes over the years, that how can I capture that last 3x? Can I capture the other 2x at least? So for that process, we use something like, you know, a reverse stop loss, or you keep increasing the stop loss with every rise. Keep a stop loss, let's say 20% or something, and keep increasing it as the price rises. Because in euphoria, where the price goes in a bubble, nobody knows. So this company's price went to 8000. I mean, I even think in my dreams that this price can come, but it did. How do I capture the maximum of it? So with reverse stop loss, selling periodically, these are different strategies we can adopt to maximize. But there is no exact science. Like, when to exit now, when is the top? Everyone has their comfort. Sometimes a stock makes a lot of money, sometimes you exit early. So they say, the stock market is a place of regrets. If you do it, there is a lot of regret. If you don't do it and you are happy with your returns, then you are fine. So that is how it is. It is not an exact science. This is interesting. Reverse stop loss. So what does it mean? As the price of the stock increases, you also increase the percentage of the stop loss. So let's say the price is 1000. Okay? You feel it has become very expensive. But it is in momentum. Reports are coming. People are giving targets of 1500, 2000. You want to see, if it goes up, I should be able to benefit. So what should you do? You should be ready to lose 20% from there. So you set a reverse stop loss of 800 and wait. Tomorrow it goes to 1200. So 20% of 1200 is 240. So you increase your stop loss to 960, a mental stop loss or whatever. You can do it through a GTT order or something. But you have made it 960. Tomorrow it goes to 2000, so you bring the stop loss to 1600. So that is how you do this. It will come down once in a while, and your stop loss will be triggered. Which is fine. But then you were going to exit at 1000, and you have a chance to exit at 1600. Sometimes you also get shaken out, but that is fine. Once in a while, this will happen, the market falls 20%, it falls, you exit, and then it goes up again. That can also happen. But often, you will be able to capture a bit more than what you generally do. And you also mentioned another strategy, selling periodically. So can you explain through an example that in what periods you sold what percentage of that stock, and why only that quantum of percentage? Yes, so asset allocation and stock allocation also matter in that. If a stock becomes very heavy for you, sector-heavy. Meaning, my capital goods, if I would have kept everything, it would have been a very, very large portion, which I am not comfortable with. I don't want to put more than 20-30% in any sector, except financials. And I don't want to go above 10-15% in a stock. Because I have a diversified portfolio and a large portfolio. So I don't want to take that much risk. I am happy with slightly lower returns, but I want peaceful returns. I should be able to sleep at night. That kind of situation. So I don't want to get into a situation where something, you know, a black swan event happens, and it is a very large position, and it hits multiple lower circuits. So can this happen? So you have to control your risk. Asset allocation, portfolio percentage allocation to sectors, to stocks, all have a limit. For me, I am 57, right? So for me, the risk-taking capacity is different. And because I don't have any other source of income, I am not working now or anything, so if it falls or something happens, I will bring in other money. For me, the risk-taking capability will be different than, for example, you. You are young, right? You have incoming, meaning income is coming. Your working years are still ahead. So you can take higher risks. Okay? And I will have to take low risk because of my age, because of my situation, whatever the size of the portfolio. So even big investors, when they were young, used to be in single stocks. But today, even those big investors are in multiple stocks. So with size, you have to diversify. So what happens is, when this stock increases so much, it becomes so big in your portfolio that it starts, you know, it makes you uncomfortable. So there is no harm in selling a little. You bring it back to some weight. So for example, if a stock goes, I, what I do is, I have an upper limit of 15%. But I will let it go to, let's say, 18%. If it becomes 18%, then I will cut 3% and bring it back to 15%. If such a tailwind comes, it will go to 18% again, 20%. I will sell another 5% and bring it back to 15%. So exactly this happened with these stocks, that suddenly my, it was going above my limit continuously because of the rise. So I kept on selling this thing. So 15% of your total portfolio, or got it. So if it increases and basically becomes 20%, then you sell the equivalent amount. And then you put that sold money into other stocks. Obviously, obviously. And so there are multiple reasons for selling. One is overvaluation, or something happens, or there is a mistake. So we can talk about selling. When do you sell? Either you become very uncomfortable with the valuation, or you realize you made a mistake. If you made a mistake, I always say, don't look at the price. Whether you have a loss or profit, it doesn't matter. If you feel you have made a mistake, you should sell immediately. And the third is, is there a better opportunity? There are three reasons to sell. So generally, mistakes have to be cut. But most of the time, selling is also triggered by some better opportunity where your risk-reward is better. So I feel this stock will still give me 10% CAGR. But I have another idea where I think 20% CAGR is possible. Then it makes sense to sell this and buy that. You can do that, absolutely. And we actively do that. That is what I actually do a lot with my portfolio. Within periods, I will always evaluate what is the risk here? What return can it generate? In comparison, do I have any idea, or within the portfolio, is there another idea where I can increase the weight, where I have more comfort, more conviction? So this kind of recalibration, one should always do in the portfolio. Right now, the situation is such that many people say, I don't have money to invest. But you have a portfolio, right? You do a ranking of the portfolio. Evaluate from it. You will always find some stocks where you have lower conviction. And you will find some stocks where you have higher conviction. It makes sense to get out of those lower conviction stocks and move to those with higher conviction and higher potential return. So we can do that. So from here, we will move to the next. So this is my tweet about PT company, Asian Paints, from 2021. So I basically gave that this company's 10-year sales growth is 11%, which is phenomenal at that size. Profit growth is 14%, but stock price CAGR is 25%. Now, generally, what happens over a long period is that your stocks will give returns of your earnings growth. They merge. But there will be periods in between, like this period, where there is so much divergence. Now, the divergence from 14% to 25% CAGR is huge. So this happens. So my question was basically, at that time, I put this. I felt, I didn't want to explicitly say that it is very expensive. But so if we see the question, who is going to bear this differential? So this was borne by people who invested at that time. And I will just show you this thing. Same company, post that, with three years of data. Actually, their profit growth was higher than the years, which was 14%. It grew by 20%. But what was their CAGR? It was -8%. So despite profit growth being 20% CAGR and sales growth being 18%, this stock's growth was nothing. Negative, negative, negative. It went down. Okay? So this happens. And later, there came a period where profit growth and my timeline, I have tweeted about it. You can check my timeline to see the tweet. The day I saw that both converged, the 10-year profit growth and the 10-year stock price growth converged, it came to exactly 166. I have tweeted about it. So it actually converged. So this is a live example of one of the best companies. So Asian Paints, a superb company. I am not talking about the quality of the company at all. I am talking about market cycles and valuation. That when you enter at the wrong time, you can lose money even in good stocks for a very long period of time, or there are periods where you don't get any returns for 5 years, 10 years, even in quality stocks. So this is what I am trying to educate through my tweets, through my podcasts, and all that. Be cognizant of these market cycles. See, Asian Paints is fairly non-cyclical. It varies quarterly a bit because of crude, but if you look at the annual thing, generally it is a non-cyclical demand. It grows. It is a stable, fantastic company over the years. But market cycles affect even such a company. This is what I am trying to show. So this happened after reaching that equilibrium. And there is another tweet after this, meaning another data. When the equilibrium came, after that, the situation was such that the 10-year CAGR of this thing, the stock fell further. It was less than the sales growth. And after that, in the next one year, its profit went down by 14%, but the stock went up by 17%. So pendulum, pendulum swing. So what happened exactly? You are saying that the 10-year stock price CAGR was lesser than the year's sales growth, or profit growth. Good profit growth, and the stock price was low for 10 years. Okay? And after the profit fell, the stock still went up by 17%. So this is okay. We cannot be too confident based on one year's data. But this actually happened. And if you want to buy a quality company, you should buy at such times when the price is in your favor, when the stock price CAGR is lesser than the company's growth. Okay? But you also need to understand the business, whether it will do well in the future or not. This is all based on historical data. You also need to understand the future. But sometimes, such opportunities are found in quality companies. Meaning, they are found in the best of companies. That is the time. If you are an investor in quality companies, those are the times you should invest. And investors should have that much patience to wait for their price. So in this, there was actually negative sales growth, negative profit growth. But still, the stock went up by 7% in one year. So now, let's talk a bit about market cycles again. And let's take a very long example. From 2000 to 2024, leading IT company profits went from 300 crore annually to 15,000 crore. Which one is TCS or Infosys? So, no, no, TCS was listed later. So it was not listed in 2000. Okay. Infosys, it is not even Infosys. Infosys did better. So this company increased profits by 17.7%. And if you see the stock price CAGR, it was only 2%. Okay? Now, such a huge variance. It is only 67% absolute in 24 years. Sorry, the stock went up only by 67%, whereas profit went up from 300 crore to 15,000. A 5000% absolute profit increase. So why this?

Happens? This happens? Because in the boom of Y2K in 2000, companies, people took this company to a PE of 300, which is not sustainable. The company is growing at 17%. So again, I am saying, the pack, the pack was very, very high. So by the year 2020. So it took 18 years to get that price, the 2000 one. In 2018, perhaps that price came back. And to make some returns, in another 6 years, it still was only 70%. So this is what can happen. This, this I am saying, market cycles. And why I always say that starting valuations matter a lot. So this one, what do we call this, a cyclical stock, or no, no, this is telling me about market cycles. Okay. Business cycles, no, it's not about business cycles. The business of this is good. That company is growing continuously. There is no business cycle in this, but there is a market cycle. Okay. So this is why I always say starting valuations matter a lot. And in the long term, your profits and stock returns converge. Your stock will take as long a period as your profit has grown with CAGR, it will grow by that much. Okay? So in between, when such periods come. So I always say, what I am trying to do, under do is, when if I have a stock, such periods come when it becomes very overvalued, and there is a divergence between the profit CAGR and the stock price CAGR. And I know the business is the same. Meaning, sometimes it can happen in business that a very big run-up is coming in the business, a very big thing is coming. So then you have to evaluate it differently, obviously. But assuming the business is also running the same way. But this variance comes. That is the time, even if you like the stock, you like the company, you want to stay invested, you should sell. That's what I do. You should sell, sort it out, let it converge, then you can get back in if you like the company. That is what I am trying to do in my investing, that so many of the stocks which I hold for so many years. Okay? I see out also, there are periods when I sell them, sort it out, when I feel comfortable that valuations are in favor again. I still like the company, I like the management, I will enter again. So with this, you can maximize your returns a bit. And you can do this only when you understand cycles. Business cycles are to be understood, but market cycles, this is a very ignored factor. People don't pay much attention to it and don't talk about it. But I think market cycles are equally important as business cycles. And in non-cyclical stocks, market cycles are very, very, very important. And I am giving you example after example. So we can talk a bit about the investment process. What should we look for in cyclical stocks? So in cyclical stocks, as I gave in the examples, PE is one of the worst parameters to look at. PE will give you a completely wrong picture. In the upcycle, in the downcycle, a completely wrong picture. Only when there is a mid-cycle, that is the only point where it will give you a true picture. But those stocks are not always in mid-cycle. Often they are in a down cycle or an up cycle. So at that time, PE is a completely useless parameter. So what parameter should be looked at? I always say, price to book and replacement cost. Okay? So let's say there is a cement factory. So what is its replacement cost? That can be looked at. And price to book. How will replacement cost be calculated? So every industry has this. Like a cement factory, it is calculated on EV per ton. Enterprise value per ton. So roughly, to set up a new plant, it is $100 to $110, $120 per enterprise value per ton. Okay? So you can very easily calculate from capacity that what is its current price. So often you find cement companies where the cost of setting up a new plant is $10, and you are getting it at $30. So you are getting an asset at 30 cents to a dollar, basically. So when should you invest in cyclical stocks? Again, it is a bit nuanced. In cement, like big companies, they also trade at 20-20 because they have efficiency, size. So they get valued differently. But I am talking about mid-cap cement companies. Generally, it is that they, but smaller companies you get at 30, sometimes 40. Now if there is an acquisition, then it is at 80, 90, 100, so your money can be made. Meaning, despite that, the asset is 100, and you are getting it at 30. Your inherent margin of safety is quite high in it. And you get it at 30 when things are bad in the sector, only then. So for example, last year was bad for cement. That is the time you will get this kind of option. So replacement cost is one good parameter. If it is a steel plant, what is the cost of setting up a one million ton plant? That is very easy to find out. Right? You see that it has a capacity of 2 million tons. What is its enterprise value? You can immediately find out how much discount it is to the replacement cost. And how much premium. When the cycle is good, they also go at a premium. Meaning, they even go at 2x of replacement cost. So those are good times to sell. Because companies are making profits in that. So people, I told you, invest on PE. You know the sector is hot. So people invest by looking at price to earnings, so they take valuations up. So price to book and replacement cost, these are two good parameters. We always have to look at these. We mostly buy in the down cycle. That is when we initiate. So at peak pessimism level, when everything is bad. Meaning, people, I will give you an example. We were working on a steel company in 2015-16, the steel sector. So we talked to quite a few people in the sector, etc. So we got interested in one company because this company had a lot of capacity and was available very cheaply. So we talked to other companies. They were also very negative. Oh, what will happen, God knows. The company had a market cap of 200 crores, debt was 2400 crores. Again, highly risky. So they say, check if the company has cash, manageable debt. So its manageable debt was not much. Okay. So it was a very high-risk debt. We took it, a lot of money was made in it. But we have to understand the risk we are taking. A company with a market cap of 200 crores has a debt of 2400 crores. Meaning, if the cycle turns, a lot of money is made in such a company. Meaning, that company today, I think it has gone to a market cap of 10,000-15,000 crores, whatever it is. But it had to survive. So many times it will not survive. If you are taking such a bet, then you should never make it your only bet. Because that company can go bust. So you should have three or four stocks at least, so that if one goes, you have three others who will survive and who will benefit in this. But when the cycle turns, this kind of company gives the most returns. I have seen this many times. The best company doesn't give it. But the idea is buying at peak pessimism level and when the cycle turns. So basically, we say, foot in the door. We put it at peak pessimism level. So as I was saying, we talked to another steel company. They said, what are you looking at in steel companies? We don't even have money to eat poison, and you people want to invest in the steel sector. That is what we got from one promoter of a company. They said, why do you guys want to get into steel? Meaning, the situation was so dire. For 7-8 years, the cycle was completely broken, such a bad cycle. So those are the times when we are a bit happy that, okay, now it is peak pessimism, meaning the price is best at that time. You get the stock price. Okay. But your risk is also high. And it can happen that you bought at peak pessimism, and for 2 years, nothing is happening. Can you sit through it? Do you have the patience? The price can fall further. All these things happen. So it seems easy by looking at charts, and I will give examples. But it is not easy to do. This, this is what I want to say. So the patience level needs to be very high in this. But if you have identified the right company, identified the right promoter, then you make money in this. So it has happened many times that for 2 years, zero money was made, it was negative, and in the third year, it directly became five times. This has happened many times with us and with everyone in cyclical stocks. Meaning, so those things happen. Meaning, the returns are not linear. So it is a game of patience, basically. So that's why I say patience is very important. So what we do to avoid that is, you are buying, so you put a foot in the door. When it is peak pessimism, I will buy 0.5%, 1% of the portfolio, and we will put only that much in it. We will monitor it closely. When the cycle turns, it becomes clear. You are invested, you are tracking, right? You understand that the demand-supply mismatch that was there is coming into equilibrium, etc. That is when you ramp up. Then that is when you make it 5%, 6%, whatever you want to make it. So for that 1%, we endure the pain for whatever it is. But when the inflection point, turning point comes, then you ramp up. This is what we follow. It is different. If you can follow without taking a foot in the door, even better. But with us, it is that we can track better when we enter at peak pessimism. And another very good signal is promoter buying/selling. So when do the chances of a cycle turning appear? Many times, the promoter understands that, okay, the cycle is turning now, so we will start buying from the market. So that is another very good signal for this. Not always true, but I would say 80% of times it works. So if the promoter is buying their own stock, so that is a good thing, that is a good sign. Yes, so that is very important because then it is understood that the cycle, yes. And promoter selling also, many times. So again, if you go into history, you will understand. If you see the promoter's buy-sell history, you will understand whether this promoter understands the cycle or not. Some promoters don't understand the cycle. Many times they do the opposite. So you can also find that from history. So you can basically see that this promoter's calls are correct. When an upcycle is about to come, they are buying, and when peak pessimism is there, and a lot of supply is coming, they sell. So you can gauge the promoter from past history. So that is also one good indicator and trigger for you to look into this. Do you have some examples of basket investing? That's also a concept that you usually apply. Like in the sugar or paper industry, any examples through that? Yes. So in 2015-16, we worked on the sugar cycle. Again, the fundamentals were, meaning, there are reasons for sugar. Sugar does well when the crop is low. Okay? One year, meaning, the rain decreased. Basically, a simple thing is, the rain decreased, so sugar is a water crop. It requires a lot of water. Right? So when the monsoon is bad, then sugar production decreases. Now, if it is bad for one year, maybe it doesn't happen. Because there is enough capacity, reservoir capacity, etc. So for one year, they draw from groundwater. But if it is bad for two years, that is always a very good trigger. Okay? So 2015 and 2016, two years, monsoons were below this. Okay? And so that was one big trigger that two bad years, meaning, now water will not be available, so production will decrease. So basically, supply will be lesser. Your demand for sugar is there, that 25 million tons, whatever it is, 25, 26, 27 million tons, India's demand is there. But if your production, which is sometimes 30, comes down to 22, then sugar prices will increase a lot. That is a simple construct. So in 2 years of drought, that was one trigger. Second trigger was, you also have to understand who are the big producers of sugar. So India being one, there is another, Brazil. Brazil is the biggest. Okay? So at that time, there was a drought in Brazil too. So in two big ones, there was a drought. And so you know, the prices of sugar are going to increase, you know that. So it was simple. Meaning, I bought five sugar stocks. Okay? I bought the best also, and I bought, meaning, mid-cap and one or two lower ones. Which ones were they? So it was Balrampur Chini. There was Dhampur Sugar Mills, then Dwarikesh, then Ugar Sugar. So the most money was not made in Balrampur. The most money was made in Dwarikesh, for example. Okay. A small stock like Ugar Sugar, even in that, it became 6x or so. So the whole basket gave X. Meaning, Dwarikesh, I remember it was a 25x in that cycle. So you don't know why I buy a basket is, you don't know. Because if I had bought only one, I would have bought Balrampur Chini. Balrampur Chini went only, I think, 2x or something. Okay? So the best stock gave the least returns. Because it happens that the best stock doesn't fall that much. Why did Balrampur Chini fall? Balrampur Chini is the gold standard in sugar. That's what people believe. It is considered the best company in the sugar sector. Okay? So when the down cycle comes, the best stock also doesn't fall that much. Because of that, when the good cycle comes, it will not rise that much either. Its valuation, meaning, it is less cyclical. Meaning, market cycle, it is less cyclical. But these mid and lower level ones fall so much in the down cycle. So when the good cycle comes, profits are to be made by everyone. Okay? Balrampur will make it, it has more efficiency. But its profits don't fall that much even in the bad cycle. So for that, the delta from lower to up is lower. But for these companies, their bad times are so bad that they are making losses. So from there, they see a big profit. So at that time, the market relates to it completely. So all this happens. You don't know exactly how good the cycle will be. Which stock will give how much return, you cannot figure that out. So that's why I always say that the basket approach is always better. Same, meaning, I gave the example of sugar. Even in transformers, I had at least seven stocks in transformers and capital goods. So the best company in the transformer sector, I also had that, which gave me a return of 10x or something. Which one was this? For example, Welspun, it increased 10-12 times from this. But a company like Shilchar, as I said, went up 80x. So these things happen. The best company might not give that return, but you also need the best company in your portfolio. Because it will provide stability, and if bad times come, at least it will fall less, etc. So that's why I do basket investing a bit. Again, person to person. Some people will want to bet on only one stock in the sector, which is fine. But for me, this has worked. And what about the paper industry? What happened in that? So the same thing happened in paper at that time. Meaning, so luckily, these two-three cycles coincided at the same time. Demand for paper came, and I think imports, imports were stopped, basically. So prices increased a lot here. And paper, I think it happened in 2016, and now in 2022-23, a very tremendous cycle ran. Same again. And companies made so many profits. But at that time, unfortunately, or this thing, these companies never got the valuation. That also happens sometimes. Meaning, you expect that at such good numbers, they will get valuation. But they didn't get that much valuation. So this also happens. So you will always find some disappointment. You think, oh, this stock should become 10 times, but it only becomes three times. So, but for a lot of people, three times is also very good. But looking at the numbers, the balance sheets have become so clean. Companies which were, are now surplus with cash. Situations like that have occurred. But they did not get the valuation they should have. That also happens. So, but as long as they are undervalued and all that, you stay invested and you wait for the next cycle. So yes, paper, I think, so now we are talking, so paper is one sector which I think should do well next year. That is one, what you say, takeaway from today's discussion, that you can look at the paper sector. Meaning, why is there bullishness on the paper sector at present? So again, worst is, worst times were going on, and I think the worst is behind now. And now some things have happened internationally. For example, import prices have increased a lot. So in paper, the biggest problem is imports. Okay? So imports are very cheap, so then domestic ones also have to match the prices, or their profits fall a lot. So imports mostly come from Indonesia. And now some action has happened in Indonesia, because of which imports, and also because of the war, actually, pulp prices have increased, etc. So paper prices are increasing now. And I think it is sustainable. Another thing that happened is that many companies have done backward integration and have set up many sapling plants, etc. All that will come into production from next year. Okay? Meaning, they will come, saplings. There is a period when you can cut wood from them, etc. So that is going to happen in many companies next year. So because of that, their raw material dependency with imports will reduce. So, so all those things are happening in the paper sector. Again, it is a peak pessimism sector. Valuations are very good now. So, so in the past, this has happened. Will it happen now? Let's see. In this, which four or five stocks are there? Now I cannot talk much about stocks because it is again on ongoing positions, or I might be taking some, so it would not be right to talk about it. Or fair, absolutely understandable. In March 2020, you took a bet on a telecom stock, where everyone had written it off. So what is its story? So if you look at the telecom sector, earlier when licenses were distributed. Absolutely. There were, I think, more than 24 players. Okay? And then all this Supreme Court action happened, this happened, and the economics became bad, all of them.

Companies started incurring a lot of losses. Whatever that 24-player field was, by the time it was 2020, I had come to 2.5 players. Right? It had come down to 2.5. Leave BSNL, because that's government-owned. But what else was left for you? Jio, Airtel, and half, meaning Vodafone Idea, was in a bad state already at that time. Right? So I would say it had come down to 2.5 players or 3 players. So when that happens, you know that that often signals that the worst in this sector is over. And if you see the government's intentions at that time, it was that the government, many ministers and everyone, said that they wanted to have at least a three-player market. So at that time, the bet was that they would try to take out Idea from this thing by keeping predatory pricing. But I think there were enough indications from the government that they did not want it to be a two-player market. So the government also did a lot of soft things, and eventually prices were so low that prices had to increase from here, and that directly heads to the EBITDA pricing, whatever pricing increases. And you see ARPU has been trending upwards. We were the cheapest, even now after all these rises in ARPU, we are still one of the cheapest, you know, data markets in the world. So even at that time, there were companies making profits. So when ARPU goes up, they are making supernormal profits. So that trigger was it coming from a 24-player to a 3-player, a complete consolidation. So and if they have survived all this, they are going to make more money. And data usage was going to increase. Again, we know that this will last for a very long time, the longevity. So that sector, in that sense, there was only one player because Reliance was a conglomerate. So it has oil and gas, Jio, retail. So that was actually not a pure play bet. So there was only one bet, meaning Airtel. So that is something which we had recommended to our clients at that time. And it has done very well. I think it went from 400 to 1000 over a period, and it has happened because of numbers, numbers are coming for it. We also do scuttlebutt investing, where before investing in any company, you do some quality checks and talk to vendors and suppliers. It is an integral part of our investing. We go to concalls. So with concalls and all that, then we don't even need to meet the promoter. When there are concalls, then we can always go into concalls and ask them questions. And if it is widely covered, then we don't need to meet the promoter very often. Okay. But for companies which are not doing concalls, companies which are smaller companies, SMEs, that is where we want to go and meet the promoter. Okay. Because from that, we understand. Now, see, the problem with a lot of these companies is they have huge ambitions. Okay. But they can get stuck in two or three things. One is, is there enough time? Is the industry so small that one company cannot become big? If so, then you invest, and it cannot become a big player. There is no time. So the market itself is so small. That is one. Second, scalability. If the promoters cannot scale it, meaning they cannot take revenue from 100 crore to 500 crore, 500 to 1000, if they don't have that capability, then over the years, by meeting so many promoters and understanding soft skills, understanding body language, we have kind of learned all that over the years. We can still go wrong, obviously. But by meeting, you understand whether these promoters have the capability to scale. And I will tell you, 90% of the companies fail on that parameter. So scalability is a very, very important criterion which a lot of people overlook. They will talk about doing this and that. But do they have the capabilities, the ability to build a team? Because to do all this, you need to build a team, manage them. Do they have those capabilities? All that needs to be assessed. And big money is made only when you go to that inflection point. Meaning, in a company with a market cap of 100 crore, 150 crore, 200 crore, no institution is going to come. Who will come? When it becomes 1000 crore, for its market cap to be 1000 crore, it will need sales growth. It should be able to do a reasonable amount of sales, right? That 300 crore, 400 crore, 500 crore, whatever it is. Every industry has a price-to-sales multiple. Whatever. But it has to scale. Then it will go up. And after that, your money will be made only when institutions come. So scalability is very, very important. And market size, meaning your opportunity size should be big enough for you to grow. Can you give an example of scuttlebutt investing where you did these quality checks, and through this, you gained confidence in the company and then invested? Any interesting anecdote or story that you have from your? So check, there is one company we met in 2017. It was an SME company. It is in water treatment and all. And I will tell you, in my 22 years of investing, and I have said that publicly also, in their concalls also, that I have never seen a more honest promoter than him. So the company was, what is the company's name? Jas Engineering. In 2017-2018, we went there, spent a day with them, understanding what they are doing. So they are into the water segment. And they had acquired a company in the US, Ranee Hunt, and all. So we met. The promoter told us all the problems in his company, that this is the problem, that is the problem. I have never seen such an honest promoter. And but he had a plan for everything. Like, this is what I have done, I have acquired this company, it is currently loss-making, how I am going to turn it around, and all. He always led it. And the company's performance is so good that they actually publish an FAQ where all your questions are answered. So when you find such a company and you understand that this promoter is honest and he has the capability to scale, then you make a bet. I am still invested in that company for eight years now. It has been a big multibagger, graduated to this thing. But that is a company where, you know, if I had not gone there and met the promoter, perhaps I would never have gotten that confidence. What happened like that? So much confidence, how did it come? As I said, a very honest promoter. We saw the products. The products they are making are irreplaceable. So they are into these valves, gates, knife gates, all these things that are used in the water segment. And this is a very long certification process for it. So the company they acquired, Broad, meaning they had it here, but Ranee, whom they acquired, they are certified across the world in all municipal corporations and everywhere. So that was a big company, but it went bankrupt. And they bought it, all that. Whatever. And they said, okay, now we have got all this capital. We have entry everywhere. We are certified everywhere. We also saw the products they are making, what quality of products. To execute that, meaning to make it here and send it there. With the promoter, there were times during COVID when he, such a good promoter, that he air-lifted parts. Because others were not able to deliver. His client needed it. So he actually committed to deliver. He made a loss on those deliveries because airlifting is so expensive. Something would go by ship, and he sent it by airlifting. That is the kind of promoter who sticks to his commitment with clients and all that. Why would that client ever leave him? So that is the kind of, you know, skills we look at in promoters, that integrity, that honesty, and that hunger to scale. And he has done whatever he said he would do, that he would turn Ranee around, he turned it around over a period and has done fantastically well. So this is one example of scuttlebutt. Again, no investment advice. I am still holding. So absolutely, I have not done anything with that stock for quite some time, but I just want to say that it is not investment advice. We are talking about how to judge management. All this geopolitical uncertainty that is happening, the war scenario that is going on, and even the tariff thing that was going on, what impact does it have on markets, and how much detail do you study it? I came across a very interesting tweet of yours. You said that the data speaks for itself, and below is the table of two-year returns from the three wars post-2000. And this was interesting because in March 2003, when the Iraq War happened, Nifty 50 gave a two-year return of 110.2%. Midcap 100 gave 218.18.5%. Smallcap 100 gave 248.1%. When the Russia-Ukraine war happened in Feb 2022, Nifty 50 gave a two-year return of 30.5%. Midcap 100 was 62%. And Smallcap 100 was 58.4%. And when the Israel-Hamas war happened in October 2023, Nifty 50 was 28.2%. Midcap 100 was 45.6%. And Smallcap 100 was 39.1%. How do you interpret this? And with the current war situation happening, do you think that two-year, three-year returns will be in these ranges? I don't know if they will be in this range, but I think in two to three years, we will make very good returns for sure. One of the reasons is that we have already had an 18-month downturn. The correction started from September 2024. So a lot of froth has gone. There are still sectors, some sectors still have froth, but broadly, a lot of froth has gone, and value has emerged in many places. So again, it is a stock picker's market, obviously, that in every market, stock picking is very, very important. You cannot take a blanket call on the market. Because there are still stocks in the market which are very overvalued. If you take those, your returns will not come, perhaps. But if you are value-focused, and we are talking basically from a value investor's perspective, then value has emerged. And I had also made some tweets with a very simple parameter of how many stocks are above PE 50, how many are less than 15. So I have been running that thread for about a year and a half. I have given three or four updates. So over a period, you would have seen that the less than 15 bucket has kind of increased over a period. So that tells that value is emerging. Okay. This can go further for another quarter or two, I don't know. But the fact is, there is enough value there now for you to invest. So over a period, froth has reduced. And how much more return will come, I don't know. But as they say, best prices and best times don't come together. You get the best prices only when times are bad. That is the only way. And as they say, when we see red, we get disappointed looking at the red on the screen, the red portfolio. But in hindsight, when you analyze, whenever this period comes, you will always see that that was the best time to invest. We have seen this in so many sell-offs, so many downturns over a period. Okay. Now, is there more pain possible? Yes, it is possible. What is your view? Your view is for two years, three years, five years. It is a great time to invest, as simple as that. But the problem is we all want to buy at the bottom and sell at the top. Which I think is an unjust quest, which is not possible. It just cannot happen. So if you are doing it, you should start deploying periodically. Absolutely, you should do it in such markets. And history tells you that your money is made when you invest in down markets. Big money is made then. So would you recommend now that this is a good time to invest? Yes, absolutely. And what's your view on international markets? Do you track that too? Not much, US China. In the US, the market has reached a peak, and the rest of the market is being ignored. And again, a lot of these stocks are, and especially with all this AI capex which these guys are doing, which I am not comfortable with, to be honest. So I would not look at it. That is for me, I am not qualified enough to give too much knowledge on that. But personally, because of all this capex which they are doing, which I think will not generate the returns, that is my view. Still, because AI, being a software engineer, I do understand all this. I think AI will disappoint a lot of people. It will disappoint the optimists. It will disappoint the pessimists also. There will be some impact for AI for sure. But not as much as the optimists say. And those who discount it, that will also not happen. It will be somewhere in the middle. There will be some resets which will happen. But a lot of capital will get burned in AI, that is what I am sure of. So do you think that is negative for the stock markets? It will be negative for the US markets, is what I think, because they are doing more of it. The kind of capex, and we are seeing this circular trading, which means one company is buying chips from another company, investing in that itself. All this that is going on, I am actually not comfortable doing that. Meaning, there is no money, but they are doing everything in a circular way, from each other. Meaning, you buy chips from me, I will invest in you. All this is going on. So that is not prudent, in my opinion, it is not right. And you talked about position sizing in your previous example. So how do we retail investors do our position sizing properly and approximately, like how to take conviction that okay, I should allocate this percentage to this stock? How to do it? So again, I would say generally for most people, a 20-stock portfolio is good enough. I think 15 to 20 stocks is good enough. So you can then do equal weighting, so 5% in each stock. But obviously, there will be somewhere you can do 8% or 10%, somewhere you will be 2-3%. It can happen like that. But generally, what I would suggest is a 15 to 20 stock portfolio. So that you have enough diversification. Because a lot of people will say, and you will see a lot of examples of where people were invested in one stock, two stocks, and made huge returns. But those are survivor biases. If a black swan event happens to one of those two stocks, you are out of the market permanently. So I don't think that risk should be taken. Again, person to person. So I would say 15-20 stocks is a good portfolio to have for most investors. For somebody like me, it will be a bit higher because I do take a basket. For example, I like sugar. So maybe earlier I used to do seven stocks. Now I might do three or four. But I will still have that. So you will think, oh, there are only four stocks. So in the next cycle, there are four more stocks. So you will think, wow, they have so many stocks. But for me, that is one position. Okay. And these four stocks, even in the case of sugar, so these four, meaning the best four stocks, top four by market cap, or any four, how do you select them? Again, so I think one thing we haven't talked about, which is important to me, is the promoter. Okay. And the promoter is very important. So it's not necessary that the promoters of all the top four are good. Okay. There could be down the line, let's say there are 25 stocks in that sector. The 20th one by market cap, maybe that promoter is also very good. Because maybe he came later, he didn't have capital, or for whatever reasons, he is 20th. But does he have potential? Is that promoter good enough? Can he go into the top five? I think that's where the most money will be made. If you can identify that. So it's not necessarily by market cap. It is more about the promoter and valuations, in my opinion. But there are certain sectors, I won't name them, like in polyfins, there are certain stocks which I will not invest in, even if they are very large or at the top, but if the promoter is not good, then I will not invest. And there are examples. I can't name the stocks and all. But so I have given you the sector, polyfins. In that, there are some in the top, meaning out of the top five, you will find two promoters who are not worthy of investing. So you won't invest in them. Then you have to identify the others. And in this, like you have another rule, that there is a 25% cap per commodity theme. What does that mean? Yes, that is, you are not exposed to one sector too much, because when will the cycle turn? And see, there are some investors who are very nimble. I am a very lazy kind of investor who buys seeds for a long time. I am not that nimble that, oh, it has turned, so I will exit immediately. I don't do that. I generally like to hold for longer periods of time and all. And my exits, many people say they go to 100% cash. I can't do that. I can't. You have to understand yourself also. What is the average holding period of your stock? I think three to four years, easily. And what proportion of your wealth would you sit on cash right now? How much percent? No, I have very little cash. Okay. So you are fully invested? Invested. How is your asset allocation? All equities or fixed income? No, I don't have fixed income. I have some arbitrage funds, but that is basically for the next three years, whatever money I will need, that is all the money, basically for my spending. Okay. Whatever I need, maybe for education, or for a wedding, that money I have kept aside. Okay. And a certain amount that I will need for the next three years, even if I do nothing, so that my household runs properly, that money is kept aside. Apart from that, everything, almost everything is invested in equities. I do have real estate, this thing, because we do have, I have a real estate business also. So maybe I think 10% of my assets will be in real estate, land, a little bit of property, whatever it is. But 90% would be in equities. That is how I am. I have no, you know.

It is not in gold, it is not in silver, no precious metals, and I am in equity. If I have to do precious metals, if I am bullish on them, I will buy stocks in precious metals. If I get them, I will consider commodities. Any commodity will look good. In special matters, I would want to play it through the equity markets rather than the specific commodity. And I have noticed this, like the sugar one, which we were talking about in 2015-16. So the underlying commodity was sugar. So sugar went up by only 40%, but my basket of those five stocks gave me a 7x return, 700%. So a commodity, it, it cannot give that return. So even I think in gold, currently in India, there isn't much of a play for me. But we see international players. Much more than gold increased, gold mining companies would have given you returns. Okay? So you can be bullish on a commodity and play it not through the commodity but through underlying businesses in that. Yeah, what would be examples of gold mining companies? Not here, I am not invested in any here. I haven't found any. But outside India, outside India, there would be. I don't invest too much outside, but I had seen some. I don't remember the name, but there was some company which gave tremendous returns. Absolutely. And if you want to do that, then instead of commodity, for example, you can buy gold ETFs or silver ETFs. [clears throat] You can take those, so that is also an option. That is, in a way, equity, or mutual funds, basically ETFs. Through ETFs. So in 2026, what do you think? Like these sectors that are there, I ask about sectors one by one. So what do you think, is it in an upcycle or a down cycle? So if I talk about paper, so paper is in a down cycle, but I think the worst is over and it looks like it will improve from here. There are signs. Sugar. Sugar. I have almost stopped investing because what has happened is, over the last few years, government intervention has become so much in it, that sugar is no longer, it is a political commodity now. Okay? And the situation has become such that at good times, the government will not let you earn much, and in bad times, the government will also support you. This is happening. So if you see that the prices of ethanol, how many years have they been saying that they will increase, increase? But they haven't increased at all. So for them, it doesn't make sense to produce ethanol. For example, so it is very much, you know, controlled politically. That is why, you know, in an upcycle or down cycle, not much money is made. So sugar is one commodity which I have kind of given up on. So I am not invested in sugar right now and I have no intention till these things change. We, you know, you will see that absolutely, SAP, FRP, those are all increasing. But sugar prices are not able to increase. The support that is needed, at good times, you know, they should let you earn money, that is not happening. And bad times, you know, it wasn't that bad, but if bad times come, the government will also support, this is also certain. In the past, they have supported also. But then, you know, your money doesn't grow in it. If good times come and you don't get the prices, and this year, sugar production is very abundant anyway. Transformers. The worst is behind, I think. But from here, you can get compounding returns. The sector will still do well because there is huge demand. Perhaps one or two years look good, and beyond that, I can't tell. Okay? Okay. But, but yes, there is still demand in the sector. Chemicals. Yes, chemicals can be very interesting. So chemicals, as we know, post-COVID, after that the downturn came, and after that Chinese dumping, and this, you know, to be honest, I also went wrong in that sector. I thought that it will turn now, it will turn now, but it didn't. Eventually, because Chinese dumping continued. Now, one thing has happened, the anti-inflation drive has started in China. They have brought it for some 249 products, etc. So I think that is happening, that the Chinese government, which is supporting them, and which is, you know, giving them rebates and whatever else, they are going to withdraw it, they are withdrawing it. Because what happens is, these people are making so much stuff and doing this, but they are not making any money. So somewhere, there is some realization that, hey, it is a race to the bottom. So this anti-inflation drive has started. We have to see, if this happens, then Chinese dumping will reduce in many places. I think so, and prices will increase. So then chemical prices can become better, and their profitability can improve. Okay? So it's a very interesting sector. You have to watch what China is doing closely. Capital goods. So in capital goods, I, I think it will do well, obviously. You know, transformers are one of the sectors, you know, within capital goods and all that. So capital goods will do well. Financials. I am very, so financials is something where I have the highest weightage right now in my portfolio. I think there is enough value available, a lot of stocks available at very decent valuations. Since I am invested, I will not be able to name too many, but a lot of banks, a lot of NBFCs are at very, very decent valuations according to us. A lot of them, there are a few turnaround companies, capital market players, which I like. And so that is one sector I like a lot. And plus, the MFI crisis is behind us. So that, that's microfinance. What was that crisis? So basically, NPAs had increased. Absolutely. A lot of that GLG model, it completely broke down, etc. Sorry, which model was it? Joint Lending Group, what do they call it, which was basically, so a group of people come together, they lend to them, etc. So, so that model, it broke down, basically. Now, and what has happened is, so one more thing has happened. MFIs, now, the customers of MFIs, because of all these things happening, where NPAs rose, these companies pulled back. So loans, you know, their books also shrunk, actually, the MFIs', because if they lend and don't get money back, then why would they lend? So obviously, a lot of things happened over the last one, one and a half years. A lot has happened. So this has happened. So now, all these MFIs, they are actually a sector where a lot of growth has come. Which is gold loans. So these people, the gold that they had, these people are taking gold loans now, many MFIs. So in MFIs, but I think somewhere, this will happen, that the NPAs of MFIs also, you know, the worst is behind. From there, there will be improvement. Now, will there be that much growth? That I don't know. What used to come before, etc., because a lot of these guys would have actually moved to gold loans. Or but yes, there will be people with high credit scores, who are there, they will be in demand again. Their business will increase a little, but that much growth, which used to come in between when cycles turned, 40%, 50% growth used to come in them, that I don't think will come. Because a lot of their clientele would have shifted to gold loans, actually. Yeah, amazing. That was a full conversation. One, one last question that I ask all my guests. It's a tricky one. If you are in the shoes of Kushal Lodha, if you are interviewing Mr. Jiten Parmar, what is one question you would like to ask him? Towards the end, I would ask, you have gained so many years of experience, you must have made so many mistakes. So now, what things would you tell new investors so that they don't make the mistakes that you made? What things would you tell new investors so that they don't make mistakes? I think you have already told us in the last one and a half hours, quite a lot. [laughter] So, so we, basically, so one thing is, two things I think are very important that people do. One is, there is a lot of loss aversion. Somehow, every investor, including myself, has this thing that to sell at a loss, you know, it hurts our ego. This is a fact. Okay? Selling at a loss is the most difficult thing. It is across the board. You will see that selling at a loss, even for big investors, it is like, hey, if it comes back to my price, I will sell. So loss aversion, I also learned it the very difficult way, that hey, it's a mistake, or there's a disruption, even if there are two cases of loss, still sell. Don't look at the price. So that is very, very important. You have to do that, because if you don't want to take losses, you can never become a complete investor. Every investor makes mistakes. The biggest investors, including Warren Buffett, make mistakes, but they exit. So basically, there is only one way to make money in the stock market: make your winners big, and cut your losers as soon as you can. That's how big money is made. So, loss aversion, and when will you do this? When you, otherwise, you will have so many stocks, the losing ones, you will sit, sit, you won't sell, so you won't be able to buy new ones, right? So you should be able to take losses. The second is FOMO. Don't invest in FOMO. Often, we say, right, it was good at 100. Someone told me, I didn't buy. It went to 120. Oh man, it has increased now. It will come down a bit. People, it went to 150. Oh man, I missed it. I was told at 100. Then when it went to 200, you will say, man, this has gone. Let me buy now. And that turns out to be the top. Okay? So if you do something out of FOMO, and when is the street most excited about any stock? When it is near the top. Okay? Highest volumes, you will always find at the top. So you should not have FOMO. Respect valuations. That, hey, I will not buy. If it is not in my valuation range, only then I will buy. Otherwise, patiently. You won't believe. So I told you just now that financials is my highest weight. I think three or four years back, a sector like financials had zero weightage in my portfolio. Okay? Why? Because the cycle was not good, and valuations were not good. I will sit it out. I waited. So we, you know, I will tell you that we recommended companies. We had a service. So we actually waited, even on Capital's service, there were zero, zero stocks in financials. But when the time came, we recommended five stocks in financials. Okay? So you have to wait. We waited for two, three years for the right price. So they come sometimes, sometimes they don't, so leave it, man. There are so many, you know, in the stock market, there are so many buses. If you miss one bus, you will get another. It's not necessary to board that same bus. It's not necessary to make money from the same stock. It's not necessary to make money from the same quality stock, the best stock, as they say. It is necessary to make money from good stocks. Where the valuation is good, more money is made there. This is my belief. What is that one quote that always keeps you motivated? So investing should be peaceful. You should be able to sleep at night with your portfolio. We, many people lose sleep when investing, when the stock market crashes. That is very important. Peaceful sleep. Once you are, you know, nothing should come at the price of your sleep, right? Amazing. Thank you so much once again for doing this. It was a lot of fun, learned a lot from you. And I think today was a complete masterclass on cyclical stocks, plus market cycles, business cycles. Keep up the great work that you are doing on Twitter as well as at Aurum Capital. And we look forward to your tweets. And thank you so much for educating all of us and my audience who is watching this. Wish you the best and thank you so much. Thank you so much for watching this video till the end. Before we end this video, I would like to thank Groww for being our title sponsor. With support like this, we can deliver actionable finance content to our audience. So go ahead and download the Groww app today and tell us in the comment section which guest you want so that we can invite them. Also, what are the questions that I should have asked? What are the questions that I should not have asked? What are the parts that you think we should have trimmed? Let us know in the comment section so that we can give you the most value-additive content. Thank you so much once again for watching this entire podcast and stay tuned for more amazing episodes of Conversations with Kushal. Investments in securities markets are subject to market risks. Read all the related documents carefully before investing.