Memo 36 – A good entry point!

In one of the recent social gatherings with friends, the discussion drifted to a familiar territory – is this the right time to enter the stock markets? In the past, the standard response to this question would have been “Nobody can time the market again & again and it is far easier to have a systematic approach towards investing, where you invest small amounts at regular intervals”. But this time, did not give the standard response, partly because many recipients of this response have hinted to this advice as boring & preachy, and partly because we have begun to appreciate that the human mind is sub-consciously programmed to “time” most of the major purchases.

Despite most of us having steadily moved up the economic ladder, we still wait for a mega sale to buy our cars & TVs, morning show to get a discount on pricey multiplex movies, off-season stay at Taj Hotels and, the “sabse sasta” day sale to buy grocery & fashion items (I was forced to spend a few hours in an overcrowded mall this Republic Day & this experience probably has a role to play in today’s memo). It’s only logical that this behaviour percolates into investments as well.

Breaking this urge to “time the investments” requires deep thought and training. Talking from my own experience, it took me six years (2004-10) of first-hand exposure to the stock markets to realize & internalize this myself. Therefore, while I continue to have more than 100% belief in the standard response that I used to give in the past on “timing the market”, I am going to attempt and give a different answer the question “Is this a good time to invest more money in the market?”

A lot of froth has cleared in the last 13 months!

In early 2022, there were many pockets of froth globally as well as in India. We are all well aware of the burst in crypto, global tech stocks, and Indian new age stocks! Memes like “Zomato is now cheaper than Tomato” or “2 share de do aur Nykaa ka lipstick le lo” or “Paytm karo par invest kabhi mat karo” describe the enormous wealth destruction in a lighter note.

Beyond these obvious pockets of euphoria, many lesser-known pockets of excesses have also been cleared. For example, pharma & chemical stocks like Divis, Laurus, Gland, Strides, Dr Lal, Deepak Nitrite etc have corrected up to 50% from top. Concept stocks like Dixon, Amber, IEX and IndiaMart too have come to more realistic levels. Even the high-quality stocks like Bajaj Finance, Dmart, Asian Paints, Dr Lal, Voltas, Whirlpool, Jubilant Foods and CDSL have seen considerable correction. And last but not the least, Adani group of stocks too have started correcting.

Collateral damage from Adani Group, if any, will be limited

Since this is currently the most talked about topic, it deserves a separate mention. Adani Group has acquired a lot of assets like ports, airports, gas stations, cement plants and electricity distribution rights over the last few years. In the process, it has accumulated debt to the tune of INR 2lac crores. Now, it is trying to deleverage its balance sheet by selling shares of one of the group companies.

Whether Adani is successful or not in the deleveraging endeavour, it doesn’t materially alter the overall trajectory of India’s economy or stock markets. This is because all Indian banks together have an exposure of less than 1lakh Cr to the Adani group and most of it is secured. Also, most mutual funds, PMS and investors have kept away from Adani stocks given the political risk involved. We find lot of similarities between Adani’s methods and that followed by Reliance & Birla’s in 80s & 90s or Korean giants like Samsung, LG and Hyundai in the last century.

Stable macro set-up; Budget can prove to be the turning point

Indian market was outperforming all the global markets until Dec’22, despite the constant FII selling. But since Jan’23, we have corrected a bit while the Chinese & European markets have done significantly better than us. Since India offers much better long-term stability & opportunity, there is a likelihood that once FIIs make money in China & Europe, they will come back to India. Also, it is a big relief for India that the oil, gas and metal prices have cooled-off since the Ukraine war.

Budget is usually a non-event for the markets, unless the government resorts to populist spending. The current government has made it clear multiple times, through their words & actions, that they would like to spend on infrastructure creation rather than distribute freebies. Experts who look at market technicals tell us that markets are very light before the budget (people are sitting on good cash levels) and any significant down move looks unlikely.

The banking sector is in fine fettle as can be seen by the good operating results posted by them and the optimistic commentaries about future. The infrastructure & industrial & energy sector is getting a lot of attention & resource allocation not just in India but globally as well. Companies in this space too are reporting good results and strong order books.

What can the investor do?

There is an old saying in investing that the best answer is never in terms of yes or no, but always in terms of probabilities. We are hoping that the above three paragraphs have done some justice to the possibilities of “is it a good time to invest more”!

One should not infer from the above analysis that there is absolutely no euphoria in the market. The pockets of euphoria (tech, startup, pharma, concept stocks etc) of 2020-21 may continue their downward journey for a few more quarters; the start-up balloon still has a long way to deflate; investors in the US stock markets may be disappointed for few more years; inflation will remain a factor to reckon with for a few more years. But the pertinent point is that many pockets of the Indian market are very healthy and investors in these pockets can expect decent returns over a period of time.

Trivia – Intelligence vs. Wisdom!

All of us have heard about the ills of gambling either from the ancient stories of Mahabharat or tale of Nala & Damayanti. The modern mathematicians too have highlighted the high probabilities of losing at the casinos in the famous quote “the house always wins”. Thanks to the cultural barriers & the awareness drives, large proportion of today’s educated youth do not indulge in traditional gambling. But like every other vice, traditional gambling evolved itself, re-packaged itself and caught the fancy of the youth in the recent years.

Yes, we are talking about the Futures & Option trading boom that gripped India since the start of pandemic! Crores of Indians opened trading & demat accounts on platforms like Zerodha, Angel, Upstox, etc. Most of them were lured by the low initial capital requirement and the “heads I don’t lose much, tails I win big” option strategies sold by the platforms and various influencers.

Anyone who has spent more than a decade in the stock markets, will know either from personal experience or from various study reports that majority of investors lose money in F&O. But looking at the frenzy, I consoled myself that maybe the educated younger generation is savvier & intelligent; that since the knowledge is easily available on internet via influencers & tutorials – they may not do as bad. However, a recent SEBI study highlighted that 95% of the ~40lac active traders suffered a net loss over the last 3 years and the average loss per person was 1.1lakh. The other 5% who made money, made a meagre 1.5lac on an average. Over the same time span, “the house” made handsome profits (Zerodha’s profits increased 4x to 2000cr, NSE’s profits increased 3x to 5000cr)!

This brings us to the debate between intelligence and wisdom. It is really easy to confuse the two. When you are young, intelligence generally ends up getting the better of you – reading success stories of few traders and attending few webinars make you feel that you can beat the house. The 14-year younger me could fully empathize with the enthusiasm & loss of the youth, but the slightly wiser me would think of two things – that these losses are “tuition fees” paid these youngsters to the markets for attaining some wisdom. And a wise investor should always invest with “the house”!