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Understanding the “Muddy Waters Investing” Philosophy

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Inspired from the Chinese Idiom:

Clear waters have no fish

Ancient Chinese Idiom

The idiom compares fishing in muddy waters with that in clear waters, concluding the latter to not bear fruit.
Probably in clear waters, birds and fishermen could see the fishes and hence there aren’t any more. Similarly, since in muddy waters no one can spot the fish with ease someone who would be willing to get his hands muddy could probably get more fishes.

Comparing the same with stocks we believe investors willing to venture where not many investors are, could get higher and better value investing opportunities.

What we take away from the proverb is something that has been reiterated by pro-investors through the history of investing.

To Buy from the Fearful and sell to the greedy

Warren Buffett

We believe across the investing universe more often than not, subsets of the universe get crowded by people looking to make a quick buck. As investors while we have tried to advocate against such mindlessness, we too would be mindless not to benefit from the opportunity it brings.

To explain what I mean combining both the quotes from above-
A crowded subset of stocks are probably trading expensive and hence brings fewer value investing opportunities (fishes)

We believe muddy waters are commonly available around

Fundamentally, with respect to valuations

  1. Industry Specific
    More often than you think industries become “unfashionable”, usually because they have under performed the market for quite a while.
    Pharma Last Year ;Finance most of this year
  2. Stock Specific
    Stocks unlike commodities are bounded by 0. While, stock prices that crash to that low owing to fundamental reasons- but few rebound harder and stronger
    Example-#Daawat at INR 25- (December’ 2019)
  3. Broad Market
    My favourite of all a circumstance when the entire market becomes “unfashionable” like during the crash of 1987, 2000-02, 2007-09 and most recently March-June of 2020.

And, very uncommonly around stocks making consistent ATHs.

You would be surprised to know how uncommon it is to buy stocks that have been consistently making Life Highs, though not all “Run Away” stocks make for good investing but then again not all cheap stocks are good value investment opportunities.
Unlike, how most people look at stocks running away with regret of having missed out on that hot stock- we look at them with much more vigilance to understand exactly why money is chasing such stocks-

for example from December’ 2019 to January’ 2020– we bought GMM Pfaudler, HDFC Life, Berger Paints and Tata Consumer (then Tata Global) as they kept making new highs and courtesy of the Covid-19 sell off we were able to buy more at cheaper valuations.

The idea of The MWI– Muddy Waters Investing Philosophy is to dig deep into stocks where no one is looking.
As stern believers of the EMH Hypothesis, we believe great opportunities can not be where everyone is looking.

What if our stocks get crowded

Market wisdom has always highlighted the importance of selling, our philosophy covers that too- since we fish in muddy waters- if a stock we “reel in” gets too crowded as most stocks are bound to.

We are the first to rush in to sell to the greedy what we bought from the fearful

This blog has been expressly created by Team Craving Alpha to spot such opportunities as and when they arise across the Indian Bourses.


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