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In this post, I am looking to share how I think about the Equity Market and also the framework that I use for Investing.

In between, there are various other perspectives with which people play the Game of Markets. You might ask why do I use the term Game? Well because I believe that

Market is a Game Of Probabilities

I can explain this with something I call Probability Matrix.

So, in above matrix assume Stock A has 15% probability of delivering 50% return in 1-Month. Similarly, Stock-B has 30% probability of delivering 40% return in 1-Month. Further, Stock-A offers various other set of probabilities for different time-frames and so do other stocks.

The way I see the market is that, We have thousands of stocks listed on NSE & BSE; and each of these stocks has a possibility to deliver different returns over different time frames. Our entire job is to determine which of these possibilities to invest our money into.

There are two key elements to this Probability Matrix-

1. The Time Frame

Your Time Frame determines which area of the Probability matrix you want to put your money into work. It is a subtle form of Circle of Competence because not everyone can work with a 10-year time frame and not everyone can work with 1-month time frame. You have to decide which time frame is best suitable for you and there two key things that determines the best play area for you-

Your Temperament-

Deciding a strategy and executing it are two different things. Your mindset plays a key role in executing the strategy and if both are not aligned then you have a problem.

So, if say one decides that he wants to work with a 10-year time frame, which is good given that over a longer time frame, stocks generally go higher and has positive returns; but that would also mean that you have to be ok with waiting for many-many years wherein your stock does not move at all. Here the nature of capital also plays an important role, because such kind of time-frame would require you to have a very long term & patient capital. It sounds easy in theory to have very long-term horizon, but most investors are not able to digest even 1 year of underperformance.

On the other hand, having a very short time frame needs a totally different mindset wherein one should be comfortable with regular & quicker decision making and accept a larger uncertainty given that in the short-run anything can happen in the market. Ability to cut losses fast & move onto next stock is key to excel in short time-frames.

Repeatability of your Probability Edge-

To put this simply, if the process that you use to decide which probability to invest in is such that you get only 2-3 good ideas a year then a time frame of 1-2 years is not suitable for you, because over your entire time frame you will get have only 4-6 opportunities which are not sufficient enough for a reasonably diversified portfolio. In such situation, you will have to invest in less-than-optimal probabilities just to stay fully invested. Similarly, if your time frame is very long of say 10 years and your process is such that you get 5 ideas every year, then you will be in a situation wherein, either you will over diversify into extremely large number of stocks or you will be in a constant flux of choosing between existing stocks and new ideas.

And honestly, if one is looking for probabilities to invest with a time frame of 10 years and is able to get 5 such ideas every year, then your process is not good enough, because good ideas that can sustain for 10 years are very rare.

So, your process has to align with your time frame to an extent.

In my case, I look for probabilities that can deliver the best returns (risk adjusted) over a period of 3-5 years. Such time frame aligns well with my temperament, nature of capital and also my process. Even though I am also comfortable with slightly lower time-frame from the Temperament angle, but I don’t think my process is repeatable enough for such lower time frame.

So, if I go back to the probability matrix, within the 3-5 years time frame, Stock-F would be my top pick, given that it has high probability of delivering high returns in that time-frame. Whereas, if my time-frame would be lower to say upto 1-year, then it would be some other stock.

2. The Probability Edge

Probability Edge basically means the process/method through which you are able to determine probabilities and zero-in on the very best probabilities within the Time Frame of your choosing.

This Edge comes from Research & Analysis. And there are two type of analysis that one can do in the Stock Market. 1st is of the Business (known as Fundamental Analysis) and 2nd is that of the Stock itself (known as Technical Analysis).

I have seen that a large section of market participants focusses only on one of the analysis – Business or Stock; or atleast they try to show it that way. I can tell you from my experience that almost every person in the fund management industry uses Technicals in some way, they are just not upfront about it. The reason for this is that there has always been this stigma with investors that if you use Technicals then you are either trading or doing momentum or do not do enough fundamental analysis; and this is extremely wrong.

I believe that one should use whatever tools are available to improve their probability edge.

Legendary investor Stanley Druckenmiller explains this very well,

“When it comes to investing, I like a multi-disciplinary approach. My first boss taught me technical analysis. So, I use fundamental analysis and technical analysis. If there are 1000s of securities out there and my portfolio is only going to have 15-20, I’m never going to buy something that doesn’t have a great chart and fundamentals

What he is trying is explain is that, if we have so many stocks to choose from, why should we restrict ourself to stocks that have either good Fundamentals or good Technicals; why not choose stocks that has both- Good Fundamentals and Good Technicals.

And just to clear the air- YES I DO USE TECHNICALS. (Side Note: It does NOT involves using indicators like RSI etc, I don’t even know what an RSI signifies)

According to me, A Stock’s performance does not straight forward equals to the Business it represents.

A Stock = The business It represents Adjusted for Market Dynamics.

Market dynamics is simply what value the market is ready to give to a particular business & When.

Even though it is true that a good part of value is result of the underlying business itself, but an equally good part of value is a result of all sort of things like whether there is a bull market or a bear market, themes that are focus area in the current market, perception/narrative about a company, factors like Liquidity etc

Most of us have read about how 2000-2010 was a lost decade for HUL, how IT stocks did not really catch-up to their 2000 highs for nearly 6 years and most recently we have seen something like this playing out in ITC as well, wherein the narrative has shifted to ESG & Capital Allocation concerns. ITC’s business was never really ESG friendly nor the capital allocation to business like Hotels is something new, but market’s narrative has changed such that these have been the focus points over last few years. And such change is narrative is only known in hindsight. Even though these are some major examples, but one can see such dynamics play out in nearly all stocks over varying time-frames.

Over a very long term of say 10-20 years or so, it might be true that Business performance equals to Stock performance, but for the rest of the part, market dynamics plays a big role in translating the Business performance into the stock performance. Like the saying goes, a good business does not necessarily mean a stock good.

I’ll discuss in detail how I use Technical Analysis to account for the market dynamics. But firstly, let’s talk about the business analysis, which is the primary part of my investing framework.

Business Analysis-Fundamental Analysis

In this part of the Research & Analysis, I think I derive my edge primarily from the business models that I focus on. My larger interest lies in Niche, Unique & Differentiated businesses. I always have this thing wherein I am interested in reading about businesses that are kind of new, less known and were delivering strong value proposition. I would always find it pale and hard to read & work on other businesses or companies. So, if you will ask me to research say an auto ancillary or Industrial companies, it would be kind of an effort to do it. (Nothing against such businesses and companies)

And I never truly was able to understand why is it so, till I read this statement from David Gardner of The Motley Fool-

Make sure your portfolio reflects your vision of the future.

Further, I recently came across this statement from Soumil Zaveri of DMZ Partners, wherein he said,

I’m very quick-footed to initiate research projects on technology-enabled platform companies whereas my enthusiasm would be muted in case of a capital-intensive mining business, as experience and the heuristics it arms us with, has taught me that the kind of companies I can own without disrupting a peaceful night’s sleep, are rarely found there.

This made me understand even better the true reason behind this behaviour of mine, that one cannot force oneself to do work on something that he/she is not truly excited about and expect to do as great a work as he/she might be able to do when one is really interested about the work.

In a previous post, I had discussed in detail my framework of Investing in such Niche, Unique & Differentiated businesses; would highly encourage you to read that in order to get an even comprehensive understanding of my thoughts.

In this post, I want to talk about the importance of Strong business / business models in my process.

Primary goal of Business/Fundamental analysis is figure out the Growth of the Business. And, growth has two parts-

  1. The absolute growth rate- say 10%,20%,30% or whatever.

  2. The quality of growth- In order to assess the quality of growth I look at Secularity, Volatility & Longevity of Growth. And Strength of Business / Business model is what helps me establish this quality of growth.

A strong business model according to me is one wherein the dynamics of the business model is such that the existing level of business is secured, your long-term profitability is secured and you have a given base growth with possibility of an even higher upside; and that too for years to come.

Consider CRAMS (Contract Research & Manufacturing) as a business model. The business model here is extremely strong-

1. Your partnership with the client is extremely long term. Drug development takes about 10-years and then there is another 5-10 years wherein the drug would be commercialized on exclusive basis. A CRAMS player can play an active role in the substantial part of this 15-20 years project of client.

2. The profitability for a CRAMS player is secured given that the Big Pharma company’s primary requirement is that of quality development of product and not pricing; and thus, all CRAMS players make 30-40%+ EBITDA margins without having to worry about pricing pressures.

3. The scope of work increases overtime as the drug development progresses and thus growth is in-built into the business dynamics.

4. Further, the CRAMS player has a share of any success that the Big Pharma company achieves in the development of drug. Thus, a possibility of a higher non-linear growth.

5. The opportunity size is huge at over $100 billion and the competitive intensity dynamics are also good. Being a research driven business, it is not that anybody can come up tomorrow and start the business, so the new competition is low and further within the exiting players the competition is not direct given that each company has its own skillset and Big Pharma companies work with multiple players allocating projects depending on the capability requirements.

Consider another business model- Gold Finance

1. In a Gold Finance business, your entire loans by backed by Gold as collateral, so the loss on account of defaults is near 0.

2. Gold loans are high yield loans with yields on loans in excess of 20%; and with cost of capital at less than 10%, your spreads are very high 10%+.

3. Such profitability results in a situation wherein your return on equity (ie. company’s own capital) is very high at ~25%; and thus, Gold Finance is one of those lending businesses wherein you do not have to raise more capital to grow.

A lending company growing at 20% with a return on equity of 15% would need to raise new equity every few years because the incremental equity capital that is required to grow is higher than what the business is generating. Whereas, in a Gold Finance business, since the ROE is very high at ~25%, the company can grow at 20% or even higher, without needing to raise more equity capital.

4. So, Gold Finance as a business model does not needs to worry about the two biggest pain points of a lending business- Loan Defaults and Capital Raise.

Further, since people have to deposit their gold as security, the brand value of the company is very important. No one would like to deposit their gold with some new player just because they are offering loan at a cheaper rate. So, the profitability is also secured to a good extent here. Such strong business models ensures that you have a relatively high probability that the business would grow sustainably for a considerable period of time and that you do not have to worry about things like reduction in profitability. And the simplest way to establish the strength of a business/business model is to understand the value proposition that a business offers.

But such strong businesses are rare and I have found it difficult to construct an entire portfolio out of such kind of investments. And so, there is another set of investments that I look out for.

These are companies wherein the business model might not provide you high probability of sustainable & profitable growth; but has some trend/catalyst that would result in high probability of sustainable & profitable growth for next couple of years.

A good example of 2nd Bucket type of investments is Dixon.

So, Dixon is basically a contract manufacturer of electronics. Now the business of model of Dixon is decent with high ROCEs, but it is not great. Because the way business works is a brand like Samsung or Xiaomi would come to Dixon, give Dixon the product design, tell it which supplier to source parts from and all Dixon has to do is assemble these parts on a scale. So, the value proposition that Dixon offers is extremely narrow, the Brand controls the large part of business dynamics. Dixon’s entire value proposition is managing large number of employees and supply chain to carry out assembly of products. And this limited value proposition is very well reflected in the profit margins that Dixon makes, which is just 3-5% and this margin is always under pressure given that companies like Dixon are largely competing on cost & scale.

But Dixon has a big catalyst in the form of PLI Schemes. For a company like Samsung, the cost of getting its product manufactured is ~3-5% of total cost of product, which is what Dixon earns. Now if the government is going to give 4-6% of the total cost of product as incentive, which companies like Dixon will pass onto brands like Samsung, the cost of getting its product manufactured for Samsung becomes nothing and thus brands would surely look to give business to companies like Dixon, who has PLI approval. Within the Mobile PLI scheme itself, Dixon can generate annual revenues of ~10,000 crores in a couple of years. So, the probability of growth in Dixon for next couple of years is quite high.

One important thing to consider here is that, for such type of investments as well, the business model needs to be decent/good enough. Sugar Industry also has a strong trend/catalyst -Ethanol blending. But the sugar business is such that the government basically controls everything from price of raw material to finished product and thus it is not something that I would consider for investment.

Once I have analysed these companies/businesses, I move onto the analysis of these company’s stocks, which is where the Technical Analysis comes in.

Stock Analysis- Technical Analysis

I use technical analysis to Ensure that my Business Analysis is in Sync with the Market Dynamics

I had discussed earlier that a Stock’s performance does not straight forward equals to the Business it represents. A stock = The business It represents Adjusted for Market Dynamics. And market dynamics are not so straight forward that they will perfectly sync with the business performance.

As a principle, I wait for stock to start moving and make new highs before investing. Stock making new high is the simplest indication that market is valuing the business.

No matter how upbeat you are about the business, if market does not agree with you, you will make no money. And remember, we are playing the game of stocks and not the game of business.

One would argue that if you have put in efforts to carry out business analysis and have already determined a high probability on the business side, why don’t you buy early under the assumption that market will eventually value the business, rather than buying at new high and in process also get lower prices? This is right, but there are other aspects to it as well, firstly there is the opportunity cost wherein if the stock does not move for a considerable period of time, your investment is sitting idle, which you could have used for other opportunity. Secondly, between your buying and the time when the stock really starts moving, there could be unfavourable events that could happen either on the business side or market, which opens up your investment to downside risk.

Consider the example of IEX,

This entire process helped me in three ways-

1. My capital was not Locked into a stock that was idle for nearly a year.

2. I avoided a drawdown of nearly 35% that happened between my initial interest and final buying.

3. I invested with an even better understanding and more conviction, as for this entire 1-year of waiting for stock to move higher, I was constantly tracking the business which helped me refine my understanding.

And the cost of these benefits was- My buy price was ~20% higher than the price that I could have got in 2019.

I believe that if a stock has to go 5x from its lows to its ultimate highs, it will make multiple new highs in between, one new high does not necessarily mean that it is the ultimate high. And even if I am buying little higher and I am able to get even 3x of its 5x move, then I am very comfortable with it because my whole idea is to maximize the probability and not necessarily catch the bottom.

The entire concept of Market Dynamics that I discussed above also works in reverse,

To address such situations, I use a long-term moving average as a signal.

Based on my experience in the market and observations of past stock movements, stocks with strong business trend rarely go below such long-term moving averages abruptly; the only time they do so is when the Reverse Market Dynamics are at Play.

Even though a good understanding of the business should allow one to anticipate a slowdown in business trend and its possible impact on market’s willingness to value the business in most cases; but adding another tool at your disposal adds to the Probability Edge. In such situation, I want to get on the side-line and re-evaluate my investment. If everything checks out on business front and market again starts valuing the business, I can always re-invest once stock starts moving again. Obviously, there is a cost attached to exiting and then buying again, but the angle of Opportunity cost and Downside Risk also comes into play.

And finally, Technical analysis also helps in screening stocks for business analysis. So even though primary flow is to keep looking for good businesses, but given that there are large number of stocks, it is very difficult to know about all stocks and what is happening in those businesses. So as a secondary screening process, I look for all the stocks that are making new highs to see if there is some interesting opportunity that I would have missed, but the market is looking to value the same.

So, this is broadly how I think about markets and participate in it. I would not say that this is the best way to play the markets, but it is something that works for me. I also think that quite of number of people reading this would have serious reservations about some aspects of my framework, especially the use of Technicals, which is fine.

In the end what is important and I believe should be the key learning from this post is that- It is very important to define the way you want to play the game and figure out the framework that suits your temperament. And this is not only for people who are looking to invest by themselves, but also for people who take professional help of advisors, funds etc. You have to choose someone who’s framework is something that you can relate to and are comfortable with. No one can say that their way is the best way and that they would outperform everyone all the time, every framework has its up & down periods. One has to stick to a framework to truly realize its potential and unless you are not fully comfortable with someone’s framework, you would not be able to do so.

To Summarize: There is one Mantra that I live by in Markets

In the Game of Stocks-

If you go with the trend (Business+Stock) Manage your Risk and Diversify It just has to Work.


Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

This blog was originally published on my personal blog-


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