It’s been almost two years since the 1st part of this newsletter was written and over time, its scope has expanded to include views on equities, real estate, gold and personal finance. However, the primary aim of the series is to assist the average investor, who with his limited knowledge and time for stocks, can inculcate long term equity investing in his / her financial life. We are strong believers that there is immense wealth to be created in the stock markets over the next ten years and that is also the only way (apart from real estate) for working professionals to give wings to their financial aspirations.
The last series was written in August, when the INR depreciated 15% vs. the greenback; most debt funds lost 5 to 10% of their value overnight and stocks too lost 20-30% of their market capitalization in a short span. Much of this mayhem is behind us, almost miraculously! The miracle was engendered partly by the Indian Central Bank (RBI) and partly by the US Federal Bank. The Reserve Bank of India announced attractive interest rates for NRIs through a swap facility which resulted in net inflow of US$18bn in the past four months. Around the same time, the US Federal Bank delayed its previously announced program of slowing down the pace of printing money, thus allaying fears of massive outflows from emerging nations. A combination of both these actions aided in stabilizing our currency at 61-62 levels to the US dollar. An icing on the cake was Narendra Modi’s clean sweep in the state elections of Madhya Pradesh, Rajasthan and Chattisgarh. Markets have recovered 20% since the August lows and most stocks have re-bounded anywhere between 20-40%.
The zillion dollar question as always is – what now? The future is always hazy but one thing that becomes increasingly clear is that the worst for India is over. Obviously this is not to say that we should start buying stocks tomorrow or that India’s deep rooted problems are over. While we may not re-test the August lows for stocks, currency and the Sensex any time soon, economic recovery will be painfully slow and the journey will definitely have its share of volatility. Narendra Modi’s magic wand can push the stock markets up by a few hundred points from here but then it’s time for hard work; a lot of hard work! We need to get the power & road projects back on track, create employment, control inflation and stop the subsidy culture. Only then we will see a sustained bull market. In short, it’s still the time to be cautious.
While we never take a market call and continue to be stock specific in our investments, we have included some commentary on real estate, gold and stocks that can benefit from sustained economic recovery for the benefit of larger audience.
Which sectors/ themes do we like?
It’s still not the time to become reckless and buy real estate, infrastructure, PSU Banks, power, metals & mining stocks. Although the stock prices here have recovered 50-100% from their August lows, the underlying fundamentals continue to remain weak. As mentioned in the last series, FMCG & IT sectors continue to remain overvalued and investing in HUL, GSK, TCS, HCL, etc at current levels won’t help you beat market returns for the next few years. Better off taking some risk in the portfolio in the form of a small exposure to a basket of cyclical and turnarounds. The trick is to allocate a very small portion of portfolio to these stocks so that you earn decent returns even if two of the five stocks turn around!
Gold will continue to trade in a tight zone and should be bought only if prices decline to Rs. 2,500/gm. Pockets of Mumbai, Gujarat and NCR have already started witnessing corrections. Go out and bargain hard, you may get a good deal for your real estate investment in the next few months.
Trivia – the Skill vs. Luck debate
It’s a very common trait we have observed with most of the successful people we have met or interacted with – they are very proud of their achievements and they attribute their success to some sort of special skill they possess and undermine the role that lady luck plays in their success. On the contrary, most failures are attributed to lady luck or the unfavorable external environment. A tale of two brilliant techies who joined Blackberry and Apple Inc respectively in 2008 summarizes it very succinctly. Blackberry was the dream job at the campus, paid slightly higher in 2008. Five years later, one of them heads an application development team and the other is struggling with interviews to find the right job. Not that the skill levels of the two graduates were any different at the time of graduation! The guy working for Apple Inc attributes his success to his tech & people skills while the Blackberry guy attributes his failure to an external event called ‘the collapse of Blackberry’.
Jobs, marriages and investments – each of them have an element of luck and skill embedded into it. Being successful in them (or bouncing back from a failure in them!) requires a sound understanding of the role of luck and skill and reducing the role of luck and increasing the role of skill. You may have been plain lucky or a visionary to have bought a house in recession of 2009 or not to have bought stocks in 2008. Realizing what part of your success / failure comes from luck / skill will motivate you to work hard and reduce the roles of lady luck in your life. As for your financial dreams, leaving money in your savings account or bank fixed deposits is tantamount to leaving a lot to luck – you should pray that house prices or living expenses go up only at the FD rate! Or that you salary hike continues to be super normal! Remember that when there are one billion people competing with one another for resources, leaving things to luck isn’t the best idea. You will need to look at investing in real estate, stocks or a business! Sooner rather than later! And you may need to acquire the ‘skill’ of finding someone who has that skill so that you reduce your dependence on luck.
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.