Having dealt with too much of market volatility during the week, I decided to start my Saturday in a lighter way by spending some time on Facebook. To my surprise, the Facebook updates were not the usual “happy couple, happy family” types but were replete with opinions on newly coined fancy words like REXIT, BREXIT and NEXIT.
While it’s only natural to worry about or have an opinion on popular subjects, we doubt if any one of us has the capability to comprehend the short term or the long term implications. For example, the experts told us that currency and stock markets will tank and there will be huge losses. But look at what happened on Friday – Indians lost $30bn in stock market decline but made $40bn due to gold price appreciation. So in the short term, Indians are actually better off from BREXIT! All this highlights the same point again and again – look beyond the headlines and focus on stock specific ideas.
What’s our market view?
India markets are at a very interesting juncture – never have the expectations been so close to reality. Let us illustrate this in a little more detail. We went from a complete despair in FY14 (under the Manmohan Singh led government) to a complete euphoria in FY15 (election of Narendra Modi as prime minister). This was followed by disappointment & skepticism in FY16 (Modi Government’s inability to push crucial reforms like GST and land acquisition bill). Slowly but surely, we have got out of that and entered a stage which can aptly be described as “reality and action.”
The multiple initiatives taken by the Government over the past two years have started to add up – India has transformed from coal importing nation to a coal surplus nation; banks have begun their clean-up act; road construction activity is picking up; DBT has successfully plugged leakages in the subsidy system; crony capitalists are crying foul; guilty contractors and builders are being punished by the courts; global interest in India is at the highest levels.
These conditions are favorable for businesses to flourish in India. Add to that the strong macro-economic position of our country – current account deficit is under control, forex reserves are at all time high, currency has been relatively stable. India never looked so good. BREXIT, REXIT or NEXIT can make us fall some more at the index level, but that should be used as a buying opportunity. RBI is a capable institution and will do a good job even after Raghuram’s departure. Similarly, BREXIT will not sound catastrophe for India (UK contributes only 3.4% of India’s overall exports).
Once can use the volatility to build a portfolio of good businesses. India is a country where 100s of small businesses are becoming bigger by the day and investing in them can make a serious difference to your wealth. Some areas where you can look at are companies that can benefit from lower commodity prices, companies that can benefit from government orders, and companies that are re-inventing an old product or service.
Which sectors/ themes do we like?
We will continue to avoid large companies like TCS, Tata Steel and Tata Motors of the world. We will also abstain from investing in the metals, banking and debt heavy infrastructure and real estate companies. We remain excited about specific opportunities in tiles, plywood manufacturing, pens & stationary, real estate development and NBFC space.
Trivia – Sidecar investing
Whenever we talk about wealth creation, we often end up talking about the Reliance’s, Flipkart’s, and Snapdeal’s of the world. The newspapers are replete with articles about how much wealth their owners have created for themselves. At the other end of the wealth creation spectrum (much less celebrated), there are lucky people like my father’s friend who made 15 crores by selling his ancestral land or my friend whose father has left him a 3BHK at Malabar Hill. Most of us fail to correlate with either of the two camps. Beyond these two camps, there is a small camp of ordinary people that has got wealthy through the process of ‘sidecar investing’. Let me give you a few examples of what sidecar investing is all about.
1) SahilNandurkar hailed from a small town called Amalner in Maharashtra. He saw the progress made a vegetable oil manufacturing company in that area and asked his friend in Mumbai if he can invest in this company. His Mumbai based friend did some quick check and found out that the company was run by extremely smart young chap called Azim Premji. Sahil promptly invested Rs. 10,000 in the company in 1992, which grew to Rs. 36crores in next twenty years. For your information, the name of the vegetable oil manufacturer is Wipro.
2) NiketHariharan had just passed out from NMIMS and seen a lot friends aspire for Royal Enfield. He inquired about the product and realized that this product was owned by a company called Eicher Motors and it was run by a talented young man named Siddharth Lal. He found his vision so impressive that he promptly invested Rs. 200,000 in the company’s stock in 2011. His investments in Eicher Motors alone is worth Rs. 70lacs today
Sahil and Niket are both salaried professionals and lack entrepreneurial capabilities. But they were smart enough to identify people who had the entrepreneurial talent and ride with them. This is precisely what “sidecar investing” is all about. India has hundreds of such Sahil’s and tens of SiddharthLals. All you need to do is identify them and get into the “sidecar” and ride with them. Stock markets give you an opportunity to ride along with these SiddharthLals of the world and create passive wealth, while you can continue to focus on your career.
P.S: Equity as an asset class in extremely rewarding in the long term, however only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.
Names have been changed to protect the identity of the actual beneficiaries of side car investing.