Relativeness Vs Absoluteness: 20% Net-worth Test (‘Indigo’)

While I wrote about the aviation industry being under stress and subsequently asking, how long can this hyper-competitiveness continue? Obviously not long!!  on December 8, 2018 Aviation: Hyper-competitiveness @ loving it!

With increasing propensity to travel, price of crude abating a little, the aviation sector could see some signs of improvement, provided the players start eliminating the temptation to make people airborne at any price, simply to maintain cash flow, which is a major problem faced by many companies.

With Jet Airways almost at the verge of financial collapse, more about it in Train to notice what one sees – Jet Airways fiasco!!!; the only players remaining are Spicejet, Indian Airlines and Interglobe Aviation (‘Indigo’).

While the first two are under tremendous financial stress, Indigo is the solo airline which has the propensity to have incremental pricing power, thereby enhancing its bottom-line. With approximately 40% India’s aviation market share, the company was available at USD 5.60 billion on December 8, 2018 (Stock price – INR 1,021)

As Howard Marks had said: “The safest and most potentially profitable thing is to buy something when no one likes it.” This is the time, where two of my friends, Ram and Laxman (names changed) bought Indigo. Within 4 months, the stock price moved from INR 1,021 to INR 1,421 (as on March 22, 2019) – 39.3% price appreciation

While, Ram’s total portfolio increased by 8%, however, Laxman’s portfolio increased by a mere 2%. The sole reason was Relativeness, in other words – Allocation. Ramallocated 20% of his original portfolio in the captioned stock, while Laxman allocated a mere 4%.

In an absolute sense, the stock performance was the same for each of them: 39% (D), however their relative performance showed a remarkable variation (F). Ram’s portfolio increased by 4x as compared to Laxman’s.

As Ramesh Damani, the celebrated investor talked about some of his billionaire friends, Rakesh Jhunjhunwala and Radhakishan Damani of D-Mart stating that they became billionaires because they “backed their trucks”. While each of their trio’s stock selection process and performances was almost the identical, the only difference which made his friends’ billionaires unlike him, was that they invested heavily when opportunities struck.

As Charles T. Munger (Warren Buffett’s partner) very succinctly puts it: “…and then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past”

Next time, you get a wonderful opportunity, start with a question:

Can I invest at least 20% of my net-worth in this stock / opportunity?

Just by asking this question alone, a lot of your one-night stand thoughts will go away. It would also mean that you as an investor would have done your job thoroughly; more prudence would get exercised, thereby enhancing your relative performance, even with identical absolute performances.

Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action. 

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