Memo 24 – Market View – Separating Men from the Boys!

After almost four years of steady rise, the past few months have been rather challenging for Indian stock markets. The thousands of whatsapp groups which were buzzing with new recommendations every day have become unusually silent; the newspapers and TV anchors are no longer talking about multi-baggers and public personalities are no longer boasting about their winning bets. Let’s take a moment to understand why the euphoria suddenly turned into fear.

The damage at the index level looks small (NIFTY is down only 5% from the peak it hit in Jan18) and hides the pain that is there in the broader markets. Let us provide some numbers so that you can grasp the magnitude of pain:

  • Large Caps: 

    Index stocks like Tata Motors, Sun Pharma, Airtel and LIC Housing are down by more than 25%

  • Mid Caps& Small Caps:

    Of the 500 stocks worthy of being tracked in the space, 438 stocks have fallen between 15% to 50%

  • Popular Caps:

    Rain Industries, 8K Miles, Kitex, Avanti, Bhansali, Sintex, IDFC Bank, etc have lost ~50% of their value

  • Dubious Caps:

    Stocks like Manpasand Beverage, Vakrangee, PC Jewellers, LASA, Gitanjali, Kwality Dairy etc are down by 50% to 80%

  • Popular Mutual Funds:

    Schemes like DSP Blackrock Smallcap, Franklin Smaller Cos, Mirae Emerging Bluechip, L&T Emerging Business are down by 10% to 15%.

What has led to such a sharp correction in stock prices?

It is never a single factor that can lead to such a swift and broad based fall in stocks, it is always a combination of economic & behavioural reasons. Some of the economic reasons include the levying of long term capital gains tax, the rise in crude oil prices and the rise in global+Indian interest rates leading to moderation in India’s macroeconomic position.

Too add to the above, the Indian regulator redefined the definition of small cap, mid cap and large cap stocks and this led to a lot of churning by the mutual funds. Another important development is the receding prospects of the current government winning majority in 2019, causing FIIs & DIIs to take a pause.

The last but the most important reason is behavioural – the twelve month long rally after demonetization created excesses at many places – ordinary stocks were touted as next multi-baggers, shady promoters gave over-optimistic outlook and investors bid up prices like there is no tomorrow. Winning streaks end up emboldening investors, who place higher and riskier bets. And when the party gets over, they scramble to get out and create massive downfalls in the price.

Was it easy to foresee this?

It’s never easy to predict the exact time and manner in which the party ends. However, signs of over exuberance were visible since as early as July 2017, and the same was mentioned in article dated 30th July 2017 – Memo 20 – 10,000 is Just A Number!

Newspapers, CNBC and TV experts are all talking about finding multibaggers and mediocre stocks are being touted as next multi-baggers. Thanks to whasapp, a lot of folks who are only superficially involved in the markets are advising other inexperienced people to buy them. It’s important to understand that stock market is not a magic machine and the only people who get rewarded are those who have a systematic plan” …..30th July 2017

However, an important aspect to note is that not all stocks have fallen. Few stocks in the real estate space, commercial vehicle space, NBFC and consumer space have managed to deliver strong growth and their stocks have made new highs too. In the long run, stock market is always about individual stocks, and their business performance.

What should you do?

For those of you who have started your stock investing journey in the past nine months, there is a high likelihood that your portfolio could be down by 10% or more. It is only human to feel worried about the low / negative returns but let us point out a few things:

  • Over the past six years of this email chain, there have been four instances where indices have corrected by more than 15% from peak.

  • Each time, good companies have bounced back and helped in generating high double digit returns over the six year period. This holds true for India’s 30 year history too.

  • Ups & downs are inseparable part of the stock markets – this is not the first or the last time that your investments will decline from peak.

  • Market is kind enough to the long term investor but can be very cruel to the short term investor. We should be on the right side of Mr. Market J

The short term looks uncertain, especially in the light of upcoming elections. However, this uncertain period will give opportunities to invest in great businesses at reasonable prices. You should stick to your long term plan – invest regularly, have reasonable expectations and have a long term outlook. The rules of investing in stocks are very similar to that in general life – if you give up during the worst times, you will surely not live to enjoy the best times.

Which sectors/ themes do we like?

While some re-balancing of the portfolio is inevitable given the changing macro variables, the long term business prospects of most of the sectors we have discussed in the past. India remains the fastest growing economy in the world and we remain excited about positive developments happening in the rural, real estate development, NBFCs and dairy sectors. Debt heavy companies again enter the avoid list. Buying a residential property on loan continues to remain the most unattractive investment.

 Trivia – The Losses of a Winner

Do winners never lose? We all know the answer to this, but let us answer this question through a recent encounter with Narsesh, a small time manufacturer of spare parts for watches. He entered the stock markets in 2005 with very limited knowledge about stocks. Being a conservative guy, he made his largest investment in Titan Industries, a company which he knew because of his watches business. He bought 10,000 shares at the price of Rs. 30 per share in 2005. As on today, the value of his single investment stands at Rs. 90lacs. This was clearly a winning investment but let’s look at the journey a little more closely:

2007: Stock hit high of Rs. 78, Naresh resisted the temptation of selling

2009: Lehman crisis ensured stock declined to Rs38, Naresh lost all his gains

2009: He continued to hold despite 3 years of zero returns.

2012: Stock price made a high of Rs. 320, Naresh continued to hold.

2014: Stock decline to Rs1. 90 due to uncertainty surrounding gold procurement. Naresh could digest this 40% fall and continued to stay invested.

2015: Stock hit high of Rs. 400

2016: Stock hit a low of Rs. 310 due to demonetization and gold jewellery scare. Again, this was the same price which the stock touched in 2012! So four years of no returns again.

2018: Stock hit a high of Rs. 1,000 and Naresh’s investment become worth 1crore!

Naresh was neither highly educated, nor did he know how to read the balance sheet or the economic outlook. Anyone could dismiss Naresh as a lucky individual and not give due respect to the patience & persistence that he displayed during emotionally challenging bad times. Intelligence can take you few steps ahead (highly over-rated), but beyond that, its patience and persistence (highly under rated).

Similarly, your long term success in wealth creation will depend on your ability to “identify the right advice” and stick to the plan for long term. The temptation to time the markets, the disappointment on seeing temporary losses, the urge to invest in the things that are the flavour of the day are all factors that break the discipline.

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.