Time to Defend like Dravid is a safeguard that investors are better off prioritizing capital preservation over return maximization. The margin of safety fundamentally reframes investment decisions from trying to be right all the time to humbly preparing for the worst. It provides multiple layers of protection. “Those who survive the bear, live to fight another day”.
The Pendulum of Market Sentiment
We believe that Return of Capital is more important than Return on Capital. Howard Marks in his memos explains that the market pendulum spends very little time at its midpoint (fair value), instead constantly swinging toward and away from the extremes. Every investing cycle goes through period of boom and bust, we must be cognizant that post a boom, there can be a period of bust. Most investors, after seeing the returns of the last decade, should have a clear sense of which side of the pendulum we are on.
Investors should demand a margin of safety in valuations in our view, so they have room to be wrong. Current valuations may not always align with underlying growth expectations. Research across market cycles indicates that long-term investment outcomes are inversely correlated to their starting valuations levels.
During periods of heightened optimism, the use of leverage in financial markets has historically increased, which can amplify both gains and losses. This creates a fragile situation, as any negative/black swan event could create a vicious forced selling. Such events could arise from global macroeconomic shifts, policy changes, market dislocations, or other unforeseen developments.
The problem with forced selling is that investors end up liquidating across the board with little attention to company fundamentals. Investors sell whatever can be sold at prices, often at prices that are far from favourable.
Market history shows that extended periods can pass with limited aggregate returns, even after phases of strong optimism.
In our view, an investor who does not participate in late-cycle optimism may still encounter opportunities at more reasonable valuations at later stages.
The IPO Paradox: Funding Debt, Not Growth
The last 5 years have seen one of the strongest waves of IPO’s. This is usually a sign of excessive market buoyancy due to strong investor appetite, abundant liquidity, and euphoria.
Many IPOs have been launched at elevated valuations without clear visibility on sustainable cash flows. Interestingly enough, some of the IPO’s don’t even have a foreseeable path to cash flow reality. The old saying of sales is vanity, profits are sanity and cash flows are reality will always hold true.
Most of the IPO’s aren’t even raising money for expansion/new projects, they are simply looking to retire debt/ fund working capital. While we all learnt that equity is costlier than debt in corporate finance. This clearly isn’t reflecting in the IPOs, as companies are using inflated equity valuation to service of debt/ fund working capital.
New shareholders may be disadvantaged, as their capital is being used to retire debt or to provide exits to existing investors, rather than being deployed toward business growth, which is generally expected to align with long-term value creation objectives.
The Generational Gap in Risk Perception
With the steady increase in demat account penetration over the past decade, a large proportion of market participants are likely to be under 35 years of age,
most of the investors in the market would be like me, below 35 years of age.
We as a group have never seen a bear market and have unfortunately been accustomed to Buy on Dip, regardless of valuations/ growth of markets.
The problem with that trend is that these trends work, till they don’t work. We’re going to learn about the true tenets of investing, that keeping downside safety is as important as chasing upside returns. With a peak of the demat account’s entering the system recently, it’s tough to say if they would be patient to override the storm or would look to exit after a few years of frustration.
Every investor has some investments which are narrative based/moonshots/theme based, and many a times bereft of any fundamentals. (Yes, exactly the ones which came into your mind for your portfolio while reading the past statement). To err is only human, however the time in the markets to hold these is most likely behind us.
The core thesis of the letter is that investors should be wary of holding these positions given where we are in the cycle. We believe that the worst investment decisions are made in the best of times. Investors start believing that there’s no price high enough for a company; Irrational expectations for a certain theme, Potential moonshots basis a certain narrative and Fear of Missing Out.
Following the Oracle’s Caution
Warren Buffett’s Berkshire Hathaway held cash of approximately $381.7 billion, as per publicly reported disclosures in mid-2025. Buffett has explicitly stated: “Be fearful when others are greedy.” His massive cash represents him living by this mantra precisely when market sentiment has become euphoric.
Since 2024, Berkshire has been a net seller of equities for 10 consecutive quarters. This is indicative of a cautious approach in the context of prevailing market valuations and margin-of-safety considerations. Buffett mentioned that they are looking to be very, very, very opportunistic.
History across global markets illustrates that even fundamentally strong businesses can experience prolonged periods of muted returns when valuations are excessive at the time of investment.
As Mark Twain stated, “History does not repeat itself, but it does rhyme.” We would be better served in ensuring capital preservation instead of capital returns.
There is business merit in the companies but there might not be valuation opportunities for the same.
We believe that focusing first on the “Return of Capital” rather than “Return on Capital” creates a strong base from which future growth allocations may be undertaken more selectively.
In our view, an investor should prioritize companies with strong balance sheets and reasonable valuations rather than chasing momentum-driven stocks which may help manage downside risk across market cycles.
Low returns are generally observed if bought into an extreme pendulum swing.
‘Those who survive the bear, live to fight another day’. Ensuring survival is key, as higher returns should present themselves in the future at attractive valuations, if we are alert to the opportunity, with some cash reserves available.
Maintaining liquidity enables investors to acquire these opportunities, as preserving capital in unfavourable conditions is as important as deploying capital in exceptional ones.
Disclaimer:
Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Dhananjai Bagrodia is a seasoned investment professional with over a decade of experience at leading firms like Alchemy Capital, Blackstone’s ASK Investment Managers, Enam Holdings, and Rare Enterprises, where he established a proven track record in equity investing across market cycles. Consistently generated differentiated investment ideas by evaluating companies across sectors and business cycles, identifying undervalued opportunities to maximize fund performance.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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