The IEX saga ...
With the recent 20% fall in IEX still fresh in mind, I thought about writing about my own experience with it.
I first came across IEX in mid-2019 when I checked the holding of Mohnish Pabrai. I am in favour of thoughtful cloning (which means it’s ONE of the criteria for stock selection) for sure. { AUTHORITY BIAS} So I started studying business. And WHAT A BUSINESS?!
Simply mind-blowing. Energy exchange has a Monopoly with a 98% market share, excellent ROCEs & NPMs. Asset light model - requires only some office space, computers and few people. And it’s the perfect way to play the INDIA GROWTH story. It’s common sense - if India has to grow, its power consumption must grow. So traded volumes have to grow. In India, only 7% of power is traded on an exchange and you can imagine the enormous GROWTH POTENTIAL & the LONG RUNWAY when more power starts trading on exchanges. And the icing on the cake is - Whether it’s traditional ( thermal / hydro / nuclear / gas ) or Renewable ( solar / wind), energy will be traded on exchanges only. And on top of all this, it’s a small-cap stock. So EASY & FAST money. { GREED} And all this is available at decent valuations.
Of course, on the negative side, the energy transaction cost will be regulated by the government and being an exchange, the mandatory zero promoter holding.
But the positives definitely outweighed the negatives. To avoid biases, I did apply the “CHECKLIST”. And IEX did clear most of the points on my checklist. So it’s a DREAM girl, so why not marry? So I bought it around June 2019.
All was smooth sailing, but then COVID hit in March 2020. And this started falling. And BOY, it was a tough time. Seeing markets hitting lower circuits every day consecutively was a dreadful event. So sold most of my stock holdings. The logic was - बचेंगे तो और भी लढेंगे. But didn’t sell a single share of IEX as I had my own study & conviction in it. But didn’t add any more as I was kind of frozen by the sudden market fall. But once things started settling down, IEX started its slow upward journey. But the trigger came in Jan 21.
Few basics of the Energy markets to understand the background better.
In the Indian energy market, there are mainly 2 ways of energy transactions. The majority is with Long-term PPAs (87%) & they are for 20-25 years. The remaining Short-term (13%) can be bilateral / through exchanges.
IEX has 99% markets share in Short Term Trading & overall 88% market share.
Short-term trading has a huge runway due to the inconsistency of renewable sources like hydro, solar & wind. Volume growth in the short term through exchanges was 20% CAGR from 18-22. And this trigger caused the IEX share price to soar from 75 on Jan 21 to 295 in just Dec 21.
With this sudden up move, I got my first 5 bagger. It felt SO GREAT. And all over social media, only IEX was trending. Had a great feeling that at last I cracked the code and got better of the market.{ OVERCONFIDENCE BIAS}
But then it become 21% of my portfolio, which was making me nervous. So I did partial profit booking around 270 levels and bought its allocation down to 10%.
And IEX declared a 2:1 bonus and it again started zooming up. There was so much media frenzy that I again bought it at higher valuations ( PE of 100) and increased its allocation to 15%. { RECENCY BIAS, HERD MENTALITY, ACTION BIAS }.
But then, in the next quarters, the volume growth over IEX came down and so FIIs & DIIs sold it slowly and the retailers grabbed it all. So now it started its slow gruesome stage 3 downward journey.
I still held onto it { ENDOWMENT BIAS} The reasons that I gave to myself were - It’s a GREAT business and being asset-light, it will throw loads of dividends in my 20 years away retirement. So I can boast by saying that this is THAT stock which gave more dividend per share than its actual buying price!!! ( one more dream of Retail Investors) IEX के dividend पे retirement निकालुंगा.
But during this time, the Government’s announced the future Market coupling regulation. And also in 2022, a third new exchange Hindustan Power Exchange was launched in addition to PXIL. But I neglected both of these { Confirmation Bias, Status-Quo Bias}
Then in June 23, the stock fell nearly 20% in just 2 days. The reason - Central Electricity Regulation Commission aka CERC came up with a draft for Market Coupling. What maker coupling will cause is - Another central authority ( not the exchanges) will decide the final uniform Market Clearing Price ( MCP). So now the role of IEX will be kind of broker rather than an Exchange. And brokers will usually get fewer valuations than the exchanges. So the downgrade happened in IEX.
So now I was left with only a 10% overall gain in the last 2 years. Didn't have the courage to add any / lose any now. थोडीसी जो इज्जत बची हे वो लेके, मे बाहर पड गया IEX से.
So the lessons learnt
1 - GOVERNMENT REGULATIONS
ALWAYS ALWAYS keep an eye on the Govt. Interference in the business. In the case of IEX, energy being an essential commodity, Govt will never allow PROFITEERING.
And how so ever it can be a great business, IEX has to comply with government regulations. It has no choice of its own. So I have added “Government Regulations Possibility” as one more point in my updated CHECK-LIST.
2 - Never marry your stock.
How much a great business can be always keep an eye on the valuations. But I made the mistake of holding onto it even when it crossed PE of 100. And on top of that fell prey to the SM frenzy & added more on the top and averaged it up. So my overall returns came down drastically. So BAAP - Buying At Any Price doesn't work for sure. AVOID SOCIAL MEDIA FRENZY AT ANY COST.
3 - OPPORTUNITY COST
Never ignore the opportunity cost. With this overall saga, in the end, I had only a pathetic 10% gain over 3 years. So I missed a HUGE opportunity cost. If I had invested the profits from IEX in some other decent business should have definitely earned better returns over that period.
And end this blog post with this excellent quote by Benjamin Graham.