Apr 2025
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In times of market turbulence, simply being resilient isn't enough. As Nassim Nicholas Taleb eloquently puts it in his book Antifragile: Things That Gain from Disorder, "Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better." Our investment philosophy aims to identify and invest in such companies that embody this principle – businesses not just capable of weathering storms, but fundamentally positioned to emerge stronger from them. This requires looking beyond mere financial stability and considering a range of factors that allows a company to learn and evolve in the face of uncertainty. We believe, these businesses are best positioned to navigate economic uncertainty and generate sustainable long-term returns.
To identify these anti-fragile businesses, we first consider a foundational level of strength, which we believe hinges on strong financial health, specifically low operating and financial leverage. We generally prefer companies with low fixed costs – their margins are inherently more resilient when revenues dip. Furthermore, we prioritise companies with conservative balance sheets, reflected in low debt-to-equity and interest-to-EBITDA ratios, with a net cash position ensuring maximum financial flexibility.
Beyond these crucial financial indicators, we believe several non-financial attributes help us identify truly anti-fragile investment opportunities:
1. Diversified Risk Exposure: Diversification across customers and suppliers reduces reliance and vulnerability. We endeavour to avoid companies with excessive single-sector exposure.
2. Effective and Ethical Leadership: Experienced, ethical, and competent management provides the guidance necessary to navigate challenges and execute a clear long-term strategy.
3. Strong Stakeholder Relationships: Deep customer, supplier and channel connections and loyalty (or a strong B2B reputation) ensures revenue stability and pricing power, even in challenging times.
4. Proactive Evolution: A culture of innovation and the ability to adapt to market shifts are essential for maintaining a competitive edge and long-term resilience. The ability to adapt helps companies not just survive shifts but also capitalise on these changes.
5. Optimised Operations: Companies with efficient processes, supply chains, and cost management are better positioned to deliver stronger profitability and the ability to withstand economic pressures.
To illustrate, consider D-Mart's* real estate ownership model. While it might initially appear to depress Return on Capital Employed (ROCE), this model significantly reduces fixed costs in their low-margin business. Consequently, during volatile periods, D-Mart experiences greater margin stability and can even capitalise on distress among competitors with higher fixed cost structures, ultimately emerging stronger – a hallmark of an antifragile business model.
A similar principle is evident in Bharat Forge's* geographically diverse plant locations. While this might lead to slightly lower overall operating leverage due to replicated fixed costs, in our view, it provides crucial robustness against geographic risks. We believe that the redundancy, though seemingly less efficient in stable times, becomes a source of strength and continuity when unexpected events occur, preventing systemic failure.
By considering the financial and non-financial attributes outlined, we seek to invest in companies positioned to learn, adapt, and ultimately strengthen in the face of market volatility, generating sustainable long-term returns.
*These are investment ideas and there is no assurance that these will form part of client’s portfolio.
Disclaimer: Investments are subject to market risks, please read all product /strategy related documents carefully before investing.
