In the field of investing there are different types of people who have a different style of investing. If we talk about people, there are Intra-day Traders (very short term investing), Technical Investors (short term investing), Fundamental Investors (long term investing) and many more. If we talk about investing styles, it can be based on technical charts, growth-based investing, value-based investing and many more.

There are various strategies followed by fundamental investors like Margin of safety, contrarian, QGLP (Quality, Growth, Longevity, and Price), etc.

Recently CFA society India in the month of November, 2019, had its 3^rd Value Investing Pioneers Summit where one of the speakers Mr. Utpal Sheth (CEO of Rare Enterprise) talked upon one of the strategies. The topic is focused on the same strategy i.e. looking for megatrends and leadership skills. I got inspired by it and couldn’t wait to write about the same. These things are important drivers for long term wealth and value creation but usually overlooked by people. Leaders in these megatrends create most value across sectors for many cycles.

What are Megatrends?

Megatrends are powerful, transformative forces that could change the global economy, business, and society. These are more of a structural shift which is long term and irreversible. If one wants to identify megatrends, he/she must have a broad perspective with a narrow focus. Megatrends can change rules and give some new opportunities and threats to industries, leading to a situation where one can find new winners and losers. Awareness of Megatrends can help a person in building the investment process too. There is a quote by Bill Gates stating “We always overestimate the change that will occur in the next two years and underestimate the change that will in next ten years”.

Two factors that are critical for fueling megatrends: RoCE greater than cost of capital for an extended period with growth greater than GDP growth for a long term. Other than this, factor such as the size of opportunity, scalability, and quality of leadership is necessary for an industry to outperform. These things can help industry to grow even after facing economic sector-specific issues. For example, the IT industry trend was able to grow with issues like dot com crash and financial crisis.

What is Leadership?

Leadership is the art of motivating a group of people to act towards achieving a common goal. It is more of an intangible attribute than tangible. It includes various qualitative and quantitative attributes.

Qualitative attributes:

Quantitative attributes:

If we take tenure of last ten years from October 2009 to October 2019, top three Market Cap company in various sectors has outperformed other players within the sector. For example Private Banks, Cement, FMCG, Consumer Durables, etc.

All in All, if Megatrends are blended with Leadership skills there is a high probability that the company would grow and create wealth for an individual.

How to inculcate these megatrends into your portfolios?

Let’s say person X is going to build a new portfolio for the next ten years purely based on megatrends and leadership while building a portfolio one must diversify their portfolio.

• One should focus on 3-5 megatrends in which they have conviction. This depends on one’s ability to take a risk.
• Now after this in each megatrend identity and focus on 2-3 players who are showing leadership attributes. It won’t be necessary for them to be clear leaders but should demonstrate this quality.
• Among these leaders classify them as Clear leaders (Company showing most of the leadership attributes. They form bulk of portfolio). Near Leaders (Company which is not a clear leader, but has quite a few qualities. They form an aspirational component of the portfolio). Emerging Leaders (starts possessing qualities. They form low component and increase over the period with high conviction and risk-taking ability).
• Make sure Market Cap is not the criteria for identifying the company, it should be a framework based on leadership skills.
• Portfolio allocation should be based on high conviction of megatrends and leadership.
• These companies become sell only if the hypothesis one has built on based on megatrend and leadership is at risk. Simply moving in and out of them on a temporary basis won’t be a good strategy.

It can be difficult for people to value these leaders in megatrends because when valuation is done to calculate a price that we are willing to pay today for whatever value we are going to get in the future. These companies might show so high terminal value that no matter what number we put in valuation today would be trivial in the future. Such companies usually don’t revert around the means, so it gets difficult for any individual to value them by the typical valuation framework.

In the end I would like to thank CFA India Society for keeping such amazing sessions where various people with high experience come and share their knowledge with everyone. I would also like to thank Mr. Utpal Sheth, who talked about Megatrends and Leadership at the Summit, because of him young mind like us can broader our thinking capability. It was an inspiration for me as I can worry less about the macro economic uncertainties and focus more on long term big picture.