Overview

Celebrating its 10th anniversary on December 31, 2023, the Fermi325 Portfolio has delivered an impressive 26.23% CAGR over the past decade, significantly outperforming the NIFTY 50 TRS. This performance is divided into three distinct phases, each reflecting unique learnings and market conditions. In this article, we look back at these 10 years and highlight the key principles and lessons learned.

Performance Snapshot

• ₹1 lakh invested in 2014 grew to ₹10 lakhs by the end of 2023.
• Comparatively, the same investment in the NIFTY 50 TRS would be ₹3.89 lakhs.

The Three Investment Phases

1. Phase I (2014-2016): High Volatility and High Returns

   • Portfolio returns: 48% CAGR
   • Standard Deviation: 30%
   • Volatility was acceptable as it leaned more towards upside movements.

2. Phase II (2017-2019): Subdued Returns

   • Portfolio returns: 8% CAGR
   • Standard Deviation: 12%
   • A period where returns and volatility both lagged the market.

3. Phase III (2020-2023): Recovery and Consistency

   • Portfolio returns: 25.98% CAGR
   • Annual volatility: 25.8%

Key Learnings from a Decade of Investing

1. Focus on Downside Protection

• Avoiding significant losses is crucial. For instance:
  • A 33% loss requires a 50% gain to break even.
  • A 50% loss requires a 100% gain.
• Managing downside ensures long-term survival.

2. Valuation Matters

• True valuation isn’t about multiples alone but answering:
  • Is the market expectation different from ours?
  • What IRR can this investment generate?
• Stress-test securities under multiple conditions.

3. The Importance of Variant Perception

• Value is created when you have a viewpoint different from the market consensus.
• Frameworks like ROIC and expectation investing (inspired by Michael Mauboussin) provide clarity.

4. Diversification Beyond Numbers

• Diversification isn’t about holding many securities but uncorrelated risks.
• Example: 100 metals stocks aren’t diversified; 10 companies in different sectors are.

5. Agility in Updating Belief Systems

• In an uncertain world:
  • Bayesian decision theory and game theory help adapt strategies.
  • Flexibility in updating views is essential.

6. Multidisciplinary Thinking

• Success in uncertainty requires diverse perspectives:
  • Tech expertise helps foresee innovations (e.g., GPT-4).
  • Epidemic knowledge aids in navigating global crises like COVID.

7. Overcome Behavioral Biases

• Recognize and avoid common biases:
  • Herding: Following the crowd.
  • Loss Aversion: Avoiding psychological pain.
  • Lottery Effect: Chasing quick wins.
  • Hindsight Bias: Rationalizing past outcomes as predictable.

8. Read and Think Deeply

• Building mental models requires:
  • Reading extensively.
  • Revisiting insights and learning from mistakes.
• “Thinking” helps refine ideas, much like practicing one skill repetitively.

9. Seek Diverse Conversations

• Inspired by Anekāntavāda (the Jain philosophy of multiple perspectives):
  • Discussing opposing views helps avoid blind spots.
  • Collaborate with people having different experiences and expertise.

10. Simplicity and Nuance

• Balance complexity and simplicity:
  • Use multiple lenses (financial, business, regulatory).
  • Distill ideas to their simplest forms for conviction and communication.

11. The Power of Stories and Narratives

• Stories influence markets and investments:
  • Persistent narratives can narrow the gap between price and valuation.
  • Identifying strong narratives early provides an advantage.

12. Client Communication

• For concentrated portfolios, permanent capital is key.
• Clearly explain:
  • The investment strategy.
  • Risks and drawdowns.
  • Why both buyers and sellers act on the asset.

Final Thoughts: Embracing the Elephant

The ancient parable of the blind men and the elephant reminds us of the importance of a holistic view. Each investment is a part of the larger picture, demanding nuanced understanding from different perspectives.

As we look forward to the next decade, the Fermi325 strategy will focus on:

• Mispricing and misunderstood securities
• Agility and adaptability
• Megatrends shaping the future

By embracing uncertainty, diversifying risks, and continually learning, we aim to stay ahead in a dynamic and ever-changing market.

For inquiries: Chaitanya Kekre
Managing Partner, Fermi325 Investment Advisor
📧 chaitanya.kekre@fermi325.com
📞 +91 8806587498