Typical Investment LifeCycle
How we approach investing through the cycle
Over our investing journey, we have learnt that every investment we make typically follows the cycle as shown above
ZONE 1 - After our purchase, (T0), the stock price may go down for some time (say 3- 9 months) due to momentum trading continuing to depress already depressed share price. Since the share price is lower due to some near term headwinds, this news compounded with momentum trading takes the price further lower. We have to bear this period by either buying more or simply absorbing the bumps. It is ideal to have some dry powder for such situations and not go in full size positions in such zone.
ZONE 2- There will be certain period of time when the share price will stabilise and stay in the narrow range for some more significant time (say 1-2 years) till the improvements in the business (even if visible qualitatively) are shown in the earnings. We use this time to add to holding when such improvements are being discerned by us even if not visible in earnings
ZONE 3- Then the period of share price appreciation starts when the earnings are showing improvement in line with our investment thesis. This period will increase share prices quickly in a short interval and the speed of the price increase could be quicker due to momentum traders adding in . Due to reinvigorated excitement, the share price may get ahead and this may lead to pullback to a lower level where the price stabilises before it continues to make higher highs as the business compounds in the long-run. Or in majority of the times, the company makes 2 steps forward and one backward, even if long term it is in the right direction, such volatilities are to be expected in the duration of multi bagger.
As an investor, it is folly to time the advent and duration of such zones. But it is comforting to know such phases in an investment cycle are common and one should be expected to endure them. That is why, a typical investment bet will take 2-3 years to show some improvement in prices and 3-5 years to get to desired outcome. In rare lucky cases, the share price will start appreciating right after you bought. But these are rare anomalies, and must not be expected.
So, at all times, our portfolio would consist of a handful of good businesses which we have owned for long periods of time and firing returns , a bunch of investments where headwinds have dispersed and they are about to deliver strong visible improvements in near time frame and the last bunch of bizs which are early in the investment lifecyle and will take 2-3 years to show progress.
We try to stay calm through the process by assessing where we are in the investment cycle of our companies and adopting the strategy in line with the cycle to maximize the return on invested capital.
Jumping the ship to buy a newer name at wrong times may lead to selling a business which is about to show material improvements in favor of a business undergoing strong near term headwinds. While it may be worthwhile to do so, but the time value of returns must be taken into consideration. Impatience at the wrong time can nullify your returns . Hence, when one makes a bet, one should expect the long journey in its lifecycle and be committed to hold it and see through the entire investment lifecycle.
Akhil D.