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Interesting, thought provoking thread.
In a lecture at Ashoka University a few weeks ago, titled Practical Utility of Seven Math Ideas (bit.ly/2Wm2AlZ), while speaking about the need to hold multiple hypotheses in one’s head, I had cited the example of India’s two wheeler industry.
It’s fascinating to see that India’s two wheeler industry has grown and grown over more than two decades. And I asked why should this continue?
In developed markets, auto industry is one of the most cyclical industries. But in India, for a long long time, the two wheeler industry has not shown any significant cyclicity.
Why would the Indian two wheeler industry, at some point, not become cyclical as is the case with developed markets?
If the hypothesis (which in my mind is still a hypothesis) that Indian auto industry is moving towards becoming a cyclical industry is true, then the way investors should value it must also change.
But before a high growth industry becomes a cyclical one, it becomes a low growth industry.
When high growth stocks become cyclical ones, or are on their way to become cyclical, then this change takes time, but the mistake people make is that they continue to assume that they are high growth stocks and value them accordingly.
It’s a mistake we (including me) make because we are unable to notice this change which is ever so gradual.
One way to fix this mistake is that when one encounters a slowdown in an industry which one thinks of as a high growth one, is to ask: Is the evidence that I am seeing more supportive of my pet theory (that things will soon go back to normal) or is there something else happening?
Learn more about this technique in this awesome video:
