Memo 23 – 11,000 is Just A Number!

11,000 is just a number!

We will take the liberty to borrow a few lines from our June 2017 article titled “10,000 is just a number”, where we discussed at length that the Indian stock markets are headed much higher in the coming days. It’s almost a déjà vu as Indian stock markets made fresh highs and NIFTY crossed 11,000 for the first time. As in the past, only a few are celebrating this feat. Through this article, we want to specifically address the three reasons why folks like us are not celebrating:

Reason 1 – Disbelief that stocks are going up despite a million problems in India

Anyone who thinks that in India, there are more problems than opportunities and more despair than hope is relying too much on media for information! We may worry about Padmavati or KarniSena or Gaurakshaks but we should also make a note of these things in the past six months – highest ever number of cars, bikes, trucks, tractors, and airline tickets were sold. Milk production is at a record high and so is the investment in India by foreign companies.

It’s the government’s job to take credit for everything good that happens in the country, it’s the opposition’s job attribute every bad thing to the government and it’s the media’s job to amplify and sensationalize each of these things. But please remember, that as educated class, our job is to ignore the headlines and focus on areas where the country is making progress.

Reason 2 – Worry that stock markets are very high and will crash anytime soon

Over the last 30 years, there have been 13 instances where Indian stocks markets have crashed by more than 20% and 27 instances where markets have crashed by more than 10%. Despite this, the markets are up 12 times over this period. The simple answer to your worry is “you should be worried about a crash if your outlook is 6 months, but not at all if your outlook is 10 years”. Good companies manage to grow with time and the same will be reflected in its share price.

A lot of folks have been endlessly waiting for the markets to fall. Please remember that today is the first day of the rest of your life and there is no better day than today to start a good habit. Have reasonable expectations, a systematic plan and long term outlook.

Reason 3 – Fear leading to inadequate exposure to stocks

Even among the small minority that invests in stocks, the common trend is that they don’t have enough exposure to stocks. For most of them, stocks constitute less than 20% of their wealth and a large part is sitting in real estate. In our interaction with working professionals from North & East India, we realize that stock market is still a bad word and only a few of them are opening their minds and purses towards it.

At least for the folks who have their minds open, we can say that “Markets are at the highest point, but this is not the top”. Markets may take a pause or may correct a bit in the near term. But we will surely be at much higher levels in years to come. India is prospering and moving ahead and it will be a criminal waste of opportunity to stay away from stocks. Investing in stocks is not risky; in fact I will go so far to say that “not investing in stocks is very risky”

 Which sectors/ themes do we like?

Massive changes create massive opportunities and India had its share of changes over the past few years – cleaner governance, demonetization, GST, RERA, DBT, etc. One big area of opportunity is real estate developers. RERA has ensured the much needed clean-up in the sector and we can clearly sense that the small time builders are winding up and market share is shifting to reputed builders. This could be a multi-year theme and generate multi-bagger returns (though we are negative on real estate prices).

Other big area of opportunity could be commercial vehicles. As the economy picks up, demand for trucks & UVs is expected to improve. This can benefit the entire ecosystem – the OEMs, the component suppliers and the financiers. Apart from these two areas, consumer sector remains replete with opportunities – Dairy, Plywood, NBFCs, kitchen products and financial product distribution companies.

 Trivia – Futures & Option

We are sure that some of you would have bitter memories of this subject, which used to be taught in B-Schools. This subject was never intuitive, involved complicated mathematics and always sounded too esoteric. However, we recently met a man in his early 40s who had a very effective way of putting this concept of “options” into real life. Ramesh is a partner at one of the leading consulting firms, has a CTC of Rs. 60lacs. But the more interesting part about him was that he has already created assets worth Rs. 12crores.

We were very sure that such wealth could not have been made by salary alone, especially considering the fact that he started his career in 1992 at CTC of Rs. 96,000! Our inquisitiveness was visible on our faces, to which Ramesh asked me “what are you’ll doing today, that can change your life tomorrow?” Ramesh told me that since his early days, he dreamt of being wealthy but never had the emotional quotient to start his own business.

Hence he resolved that every year, he will put 20% of his salary into “options” which had the potential to become big in future. In the initial years, he bought stocks on advice of his uncle. Later in 2003, he used a part of profits he made from stocks to invest in a snack shop. Some of Ramesh’s stocks gave losses, but some of them become so successful, that his Rs. 80lacs of investments in stocks is worth Rs. 8croers today. Not to mention that the value of his shop has risen to Rs. 4crores and he receives monthly income of Rs. 60,000 from the snack business.

The moot question that everyone must ask themselves is “are we creating enough options?” For those of you who do not have many “options” in life, stock markets offer the simplest kind of “option”. With very little effort, you can partner with 10s of wonderful businesses that are getting created in India. Folks who are just starting out their careers should invest some money every month through the mutual fund route. Those who have managed to save a bit should find a good adviser, make a financial plan and stick to it.

Feel free to reach out in case you need professional help with your investments!

P.S: Names have been changed to protect the identity of the individuals. 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.