Fishing where the fish are

India is the market I know best. It’s also where I’m most comfortable investing. Unfortunately, 2024 and 2025 were a time of peak valuations in the Indian markets, especially compared with other markets that have similar growth outlooks. Rather than compare valuations with industry peers (usually even more overvalued) or with historical valuations (half of a silly valuation is usually still silly) to justify investing decisions in India, I was forced to look elsewhere. While that took me out of my comfort zone, it allowed me to understand just how expensive India is relative to companies overseas. I could find companies with great growth prospects, net cash on the balance sheet, buying back shares, at single digit multiples.I still love India as a growth story, but a great investment is very different from a great business. HDFC Bank investors will know what I mean.

𝗔𝘃𝗼𝗶𝗱𝗶𝗻𝗴 𝘀𝗰𝗿𝗲𝗲𝗻𝗲𝗿𝘀

In his 1999 annual meeting, Warren Buffett was asked how one could generate exceptional returns on a small amount of capital. He answered, “If you start with the A’s and go through everything, …. there is an opportunity to earn very high returns.”Most funds use screeners to reduce their investable universe. I went through thousands of global companies without one, and it quickly became clear why the great man was right. The bigger issue isn’t just overlooking companies that miss your criteria by a few points — it’s that financial statements can be misleading. Take BMW AG. Its debt-to-equity is currently ~110%. Seems high, and it wouldn’t show up on any screener for low-debt companies. But this debt is taken on by its financial services (FS) business, which has lent this capital out to others for a good spread. The auto business actually has a huge net cash balance. Very different from an indebted business, but going by screeners, you wouldn’t give it a second glance. The other issue is contrasts. It’s only by going through thousands of average companies that you appreciate how rare a great company is. Bessembinder et al. showed that just 2.4% of companies globally account for all of the net return (over treasuries) of the stock market between 1990 and 2020. If you’re lucky enough to have one of these compounders in your portfolio, it’s only knowing how rare they are that makes it easy to hold on as it inevitably becomes a larger and larger part of your portfolio.

𝗥𝗲𝗳𝗲𝗿𝗲𝗻𝗰𝗲𝘀: Bessembinder et al. (2023), ‘Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks,’ Financial Analysts Journal

𝗗𝗶𝘀𝗰𝗹𝗼𝘀𝘂𝗿𝗲: Stocks mentioned here are not recommendations. Do your own research before investing.