EXECUTIVE SUMMARY
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Dear Fellow Investors,
Investing vs. Speculation
In chapter 4 of their seminal work “Security Analysis”, Benjamin Graham and David Dodd defined investing as:
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.“
To qualify as an investment, an operation must, at its origin, have a high probability of a reasonable return. That requires adequate study and margin of safety. Adequate study to understand the past, present and future of the business and assess its risks and conservative worth. Margin of safety, for protection against errors in analysis or bad luck.
Things that may not pass as investing
The following popular operations, often deemed as investing, may find it hard to pass the high bar set by the above definition:
- Chasing performance: Buying solely because price is rising, hoping that it will continue to rise (momentum/ performance chasing) regardless of fundamentals leads to crowded trades, frequent activity, and high transaction costs, and in most cases, inadequate returns. This applies to mutual funds as well (see Morningstar’s Mind the Gap study).
- Leverage: Using excessive leverage (loans, derivatives) to invest makes a portfolio brittle. Temporary price declines may force the owner to sell, converting paper loss into permanent one.
- Growth at any price (GAAP): The challenges with so called “growth at any price (GAAP)” investing are that the expected growth may not materialise, winners are difficult to pick, and without competitive advantage, growth leads to overbuilding or price competition pulling down returns on invested capital.
- IPOs: The timing and pricing of IPOs are selected to suit the seller and an enterprise dedicated only to investing in IPOs, history has shown, tends to underperform a simple index investing over a full cycle. Of the 1000 IPOs (including SME IPOs) listed in last 3 years in India, around half are under water currently (source: NSE, BSE).
- Free Advice: Most of the free advice comes with conflicting agenda (pump and dump, brokerage, etc.). Without self-study or professional help, it is difficult to gain conviction and navigate when prices fall.
- Crypto: Cryptocurrencies generate no cash flows, and their value depends entirely on what someone else is willing to pay next. This brings them closer to speculation than investing by the definition above. Regulatory treatment also remains uncertain across jurisdictions.
To be fair, this discussion is not to pass a judgement on what is right or wrong. There are multiple ways of deploying one’s investment surplus. Funnily, in short term, investing may not lead to desired returns, and speculation may create substantial returns. However, that is not the point. The point is an honest introspection about where in the spectrum of investing and speculation the proposed action lie. And then size the bet accordingly.
Ways in which we could slip
Let’s look inward. In our pursuit of buying a smart diversified portfolio of quality companies without overpaying, which we believe is investing, there is a risk of slipping into the realm of speculation if we are not careful. For example:
- Lack of understanding – We need to honestly ask whether our understanding of the economics, advantage, drivers, cyclicity, competitive intensity and risks of the business is superficial or adequate. Often in hurry, hope or action bias, we gloss over certain key questions about the business. There can never be 100% certainty and we cannot wait forever for all information, but going ahead without having satisfactory answers to key questions may lead to weak investment.
- Value traps –A stock at multi-year low is not automatically a sound investment. If the business is broken, disrupted or poorly governed, value may have fallen faster than price. Cheap can get cheaper.
- Quality at any price– The mirror image of a value trap. Quality deserves a premium, but there’s a limit. Beyond that point, the price already assumes future growth — leaving no room for error, and no margin of safety. Checking how much growth is already priced in is the best guard against this.
- Hoping for turnaround – Confusing a turnaround with a temporary hardship is a possible way to slip into speculation. In a temporary hardship, the business itself is sound but something external has hurt it, such as a down-cycle, or a one-off shock. Its market position, unit economics and balance sheet are intact, and its past cycles show it has recovered before. If nothing inside the company changes, the problem still fades. In a turnaround, the problem is internal or structural: management missteps, a broken model or an eroded moat. Recovery depends on the company changing, and culture and quality change slowly. Calling the inflection in advance is much harder than it looks in hindsight. Without objective evidence, it is hope, not analysis. Successful turnarounds exist, but they are hard to identify in advance, so we need to size such bets small or avoid them.
- Ignoring cycles: Growth rates, margins, and entire sectors move in cycles. Mistaking a cyclical peak for structural improvement and paying a high multiple on cyclically high earnings is a mistake. Studying the history and drivers of past growth and margins is the best defence.
- Business quality vs Management quality – Ideally, we want both. But forced to choose, we should choose the horse over the jockey: a great business run by ordinary management usually beats an ordinary business run by a great one. Polished communication and an impressive resume are easy to be swayed by; the economics and rules of the business are what actually compound value. Exceptions exist — but they are difficult to pick.
- Macro based investing – Interest rates, currency rates, inflation, fiscal deficits, monetary policies etc. can be supporting backdrop, but not the main thesis. Macro is hard to forecast, and macroeconomic indicators often offset one another. While some investors have built careers on macro calls, it’s a tough game and difficult to repeat for most including ourselves.
- Concentration vs diversification – It is tempting to raise the weight of winning position. But after a point, risk rises with a large position and confidence alone is not a safeguard against unlucky or unanticipated events. For every concentrated bet of famous investors that worked, we don’t see the ones that didn’t. On the contrary, overdiversification due to this fear is also not right because a small weigh to a potential winner will not make an impact on the portfolio. Lastly, we need diversification that smartly balances multiple exposures.
Is equity investing itself speculative? : Given that equity investing involves the future and nothing is certain, you may reasonably ask: are equities themselves speculative, and should we stick to risk-free assets like fixed deposits or government securities instead? Unfortunately, forgoing risk completely also means forgoing excess returns. The advantage of public equities is that human emotions create mispricing on upside as well as downside, increasing the odds of satisfactory returns.
Due to human nature and wishful thinking around quick riches, it is possible that investors get influenced by envy, greed and FOMO and instead of relying on base rates, probabilities and humility, switch to hope, halo or hubris. The definition of investing by Graham and Dodd is safety against this human folly around money. It is also a reminder that the sole responsibility for unsatisfactory return from speculation lies with the speculator, not any external event or agent. As Mark Twain said: “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can.”
A. PERFORMANCE
A1. Statutory PMS Performance Disclosure
| Year Ended | CED Long Term Focused Value (PMS) | BSE 500 TRI^ (Benchmark) | Difference | ||
|---|---|---|---|---|---|
| Return | Avg. Cash Eq. Bal. | Return | Trailing P/E | ||
| FY 2027 YTD | 10.4% | 18.0% | 8.1% | 22.6x | +2.3% |
| FY 2026 | 14.1% | 19.6% | -3.1% | 21.7x | +17.2% |
| FY 2025 | 10.3% | 21.0% | 6.0% | 23.4x | +4.3% |
| FY 2024 | 29.2% | 26.1% | 40.2% | 26.2x | -11.0% |
| FY 2023 | -4.3% | 30.0% | -0.9% | 22.3x | -3.4% |
| FY 2022 | 14.9% | 38.5% | 22.3% | 25.0x | -7.4% |
| FY 2021 | 48.5% | 29.0% | 78.6% | 38.0x | -30.1% |
| FY 2020* | -9.5% | 23.0% | -23.4% | 18.3x | +13.9% |
| Since Inception(7Y) | 14.5% | 26.3% | 14.1% | +0.4% | |
| ^TRI=Total Returns Index (includes dividends reinvested in addition to price movement); *From Jul 24, 2019; ‘Since inception’ performance is annualised; Note: As required by SEBI, the returns are calculated on time weighted average (NAV) basis. The returns are NET OF ALL EXPENSES AND FEES. The returns pertain to ENTIRE portfolio of our one and only strategy. Individual investor returns may vary from above owing to different investment dates. Annual returns are audited but not verified by SEBI. | |||||
We look for quality companies that can grow their earnings at or higher than 15% p.a. over a long period of time AND whose share prices are building in much lower growth due to temporary hardship or inadequate attention. If we are right on the above combination more often than being wrong, our long-term returns will be satisfactory with low chance of permanent capital loss, even if they are temporarily volatile.
The timing of occurrence of such combination (15%+ earnings growth not built into share price) is not in our control. But we are confident they will occur – human nature, economic cycles and temporary shocks will drive that. What is in our control is to be patient and disciplined till they occur, and act boldly when they do. We have designed our operating structure around this.
We see the above combination arising in some pockets today. The world is paying inadequate attention to India due to absence of direct AI themes. West Asia crisis led crude oil inflation is creating temporary hardships. This has created some attractive pockets and we are investing there. Stance remains AGGRESSIVE.
A2. Underlying business performance
| Past Twelve Months | Earnings per unit (EPU)2 | FY 2026 EPU (expected) |
|---|---|---|
| Jun 2026 | 12.81 | 11.8-12.83 |
| Mar 2026 (Previous Quarter) | 12.5 | 11.8-12.83 |
| Jun 2025 (Previous Year) | 10.0 | |
| Annual Change | 28.0% | |
| CAGR since inception (Jun 2019) | 15.6% | |
| 1 Last four quarters ending Mar 2026. Results of Jun quarter are declared by Aug only. 2 EPU = Total normalised earnings accruing to the aggregate portfolio divided by units outstanding. 3 Please note: the forward earnings per unit (EPU) are conservative estimates of our expectation of future earnings of underlying companies. In past we have been wrong – often by wide margin – in our estimates and there is a risk that we are wrong about the forward EPU reported to you above. | ||
Earnings per unit – When you invest, you are allocated notional units and NAV. For Rs 50 lacs of investment you are allocated 50,000 notional units of NAV Rs 100. We track the earnings performance of our aggregate portfolio companies by dividing normalised earnings accruing to us (number of stocks held x earnings per share) by outstanding units.
Trailing Earnings: Trailing twelve months earnings as on Jun 2026 came in at Rs 12.8 per unit, a growth of 28% over same period last year (including effects of cash equivalents that earn ~5%). This healthy growth was due to higher-than-expected earnings growth at three major positions.
1-Yr Forward Earnings: Having reached the upper limit of FY 27 guidance within the first quarter of FY27, we are tracking ahead of our guidance. We expect lagging effects of the West Asia war and rising interest rates to make earnings volatile and therefore retain the guidance nonetheless. We will update the FY 27 guidance in the next quarter.
A3. Underlying portfolio parameters
| Jun 2026 | Trailing P/E | Forward P/E | Portfolio RoIC | Portfolio Turnover1 |
|---|---|---|---|---|
| CED LTFV (PMS) | 20.8x | 20.8x-22.5x | 38.0%3 | 0% |
| BSE 500 | 22.6x2 | – | 18.7%2 | – |
| 1 ‘sale of equity shares other than liquid funds and client redemptions’ divided by ‘average portfolio value’ during the year to date period. 2Source: Asia Index. 3Portfolio Return on Invested Capital (RoIC) is on core equity positions. For BSE 500 index we share the RoE (Return on Equity) | ||||
B. DETAILS ON PERFORMANCE
B1. MISTAKES AND LEARNINGS
We did not discover any new mistakes this quarter.
B2. MAJOR PORTFOLIO CHANGES
Bought: We added to three existing major positions
Sold: We did not sell any position this quarter.
B4. FLOWS AND SENTIMENTS
Rise of leverage in equity investing/trading
There are broadly two ways in which a participant can take equity exposure without paying the full price. The first is a loan from broker, bank or non-bank. While direct loans for investing are called as margin trading facility, or MTF there may be hidden loans where personal or other loans are used to invest in equities. This latter is not required to be reported by banks and non-banks but they may not be zero. Second is using derivatives such as futures and options where only a part amount is paid for similar exposure. We need to look at net speculative exposure excluding hedging positions.
Loans as a percentage of India’s free float market capitalisation have increased from 0.19% in 2021 to 0.74% currently, a 3.9x increase (source: RBI, NSE, BSE). Net speculative derivatives positions, though difficult to quantify due to presence of hedging positions, have also increased multi-fold especially due to weekly index options (mostly speculative).
We can say with reasonable confidence that, taking loans and derivatives together, the use of borrowed funds for buying equities has risen sharply in India. While using borrowed funds to invest magnifies returns when prices rise, it also magnifies losses when prices fall. In worst case, it forces participant to exit markets altogether, often at a loss.
Zerodha’s Nitin Kamath recently posted on X that roughly half of the MTF (margin trading facility, or loans for buying stocks) at Zerodha is in non-derivative stocks (i.e. beyond top 200 stocks, mostly smallcaps). These stocks have circuit limits i.e. trading gets stopped if the stocks are down 20% in a day. And then the limits go down to 10%, 5%, and 2% gradually.
Juxtapose this rise in leverage with the rapid rise of AUMs in smallcap mutual fund schemes (Rs 4.5 lac crores, 5x in the last 5 years) and high valuations of smallcap space (over 30x trailing P/E). If markets were to fall sharply, margin calls will force individuals to redeem both stocks and mutual funds which will lead to dangerous loop of circuit filters in many smallcaps, with investors unable to exit. That may lead to pressure elsewhere such as exit from large-caps or default on borrowings.
C. OTHER THOUGHTS
The rush for international investing – geographical diversification or commissions encashing the FOMO?
As per RBI data, Indians sent more than $456 Million abroad to invest in equity & debt in June 2026, the highest ever. There is a palpable rush from Indian investors to invest in global stocks especially the US.
There is merit in geographical diversification. It balances country-specific opportunities and risks. Many leading business models such as AI are not meaningfully present in India. However, like any diversification, geographical diversification needs to pass the same two preconditions to benefit the portfolio:
- Low or negative correlation with other constituents, AND
- Margin of safety (low valuations)
The international diversification rush today, which mostly is US stocks, may partly pass the first test of low correlation with India, however, it fails to pass the second test on valuation.
The US tech stocks have run up sharply and valuations of US markets are not cheap. The rush towards them is more driven by past performance, fear of missing out and to some extent, irresponsible push by advisors and fund managers. On the last bit, consider that a mutual fund distributor earns commissions that are 50%-150% higher when they recommend an international fund in GIFT city from the same investment fund instead of recommending their domestic fund.
The current narrative—that US exceptionalism and AI will deliver superior growth indefinitely—is powerful, much like the internet boom of 1999-2000 or the decoupling narrative before the global financial crisis. Narratives turn into bubbles when too much capital chases too little underlying fundamental growth. Same happened with gold and silver last year. Mutual fund inflows in to gold and silver ETFs peaked precisely at their high points leading to subpar returns. Diversification among such expensive asset classes raises portfolio risk instead of lowering it.
The right way to diversify is to own smartly uncorrelated asset classes without overpaying so that an external hardship (AI meltdown for example) does not pull the entire portfolio in one direction.
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As always, gratitude for your trust and patience. Kindly do share your thoughts, if any. Your feedback helps us improve our services to you!
Kind regards
Sumit Sarda
Partner and Portfolio Manager
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Disclaimer: Compound Everyday Capital Management LLP is SEBI registered Portfolio Manager with registration number INP 000006633. Past performance is not necessarily indicative of future results. All information provided herein is for informational purposes only and should not be deemed as a recommendation to buy or sell securities. This transmission is confidential and may not be redistributed without the express written consent of Compound Everyday Capital Management LLP and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Reference to an index does not imply that the firm will achieve returns, volatility, or other results similar to the index.