Be choosy

The concert season is a time when the herd mentality will be on full display. Everybody would want to attend the same concerts. Tickets for a few concerts would be at a premium. Scarcity would prevail. The names that draw the crowds will be very familiar, popular and widely discussed. A cult following for a select few will be the order of the day. At the same time, there will be budding artists and emerging performers who will be singing to empty halls. Their concerts wont even be priced. They will be singing for free. Yet, there will be little interest in them among the elite. The elite wont be caught dead in a free concert. To them, it has to be marquee names. Only, those names that everybody knows and are sounding politically right when mentioned in gatherings. The story is no different in equity investing as we see it now. Marquee investors have their own marquee stocks. These are greatly in demand, widely discussed and much loved. Buyers flock to the same basket of investment of ideas and their flocking is leading to frothy valuations. Nobody wants to sell a stock as the scarcity is just too good to be ignored. Reinvestment in similar popular stocks is a challenge. On the other hand, we find neglected stocks in other sectors which are struggling to find takers. There is little light in sight for them. They need a structural recovery in the economy, recovery in capital goods and much more. But, the valuations of the neglected stocks are a stark contrast to the favored ones. They aren’t even remotely factoring in any good news they could land up with in the future. They are selling at abysmal valuations with little or no interest. Investors aren’t interested in their problems or the prospect of them getting solved. The crowds are too busy to even notice them. But, one thing is clear. Tomorrow’s stars will always be among today’s neglected pack. And, the challenge before an investment manager is to find ways of playing them for their clients.

The successful investor is usually an individual who is inherently interested in business problems. 

Be grounded

An investor’s mind is influenced by what gets in. Essentially, if he watches business TV all the time, his thinking will meander along with its flow. Given the shifty and short term orientation of Business news, he will also be driven by the immediate. Thinking beyond the immediate will be a constant challenge. So, how can an investor be objective and mindful? Let us understand how investors, who actually manage to be mindful, do it. Firstly, they cut out the noise. Secondly, they decide how to receive information. You will often find that iconic investors keep emphasizing the importance of reading. Essentially, reading helps an investor greatly cut out the noise. Next, an investor must learn the art of constantly putting his ear to the ground. To be mindful, this is the most important thing. Putting ear to ground helps gain lateral insights and literally be grounded in thought. An ear to the ground, feet firmly on it and being mindful helps an investor steer away from the madding crowd and tread the road less traveled to creating wealth. What influences an investor matters greatly in noisy times like the present.

“There is only one way to describe most investors: trend followers.”- Howard Marks 

Waiting is an art

The investment activity of the average investor is inversely proportional to the level of fear in the market. When fear is low, investors are seen very actively making investments. And, when the markets are gripped with fear, the average investor takes to masterly inactivity. Even those with the best of advisors usually follow the same rhythm. Even the investment industry solicits business most aggressively only when there is little fear in the mind of the investor. History has ample evidence that investments made during the complete absence of fear have not really worked as well as those made when markets were gripped by fear. Investors need to learn to prepare their capital for the times of fear. While individual stocks or sectors may be periodically gripped by fear, the whole markets experience that phase less often. Channeling capital into investments where there is fear all around is hardly easy. Investors need to do just this- channel their capital sensibly and use the phase of fear in individual stocks, specific sectors and the whole market. Each present a specific investment opportunity and mixing them up will also not help one’s investment deliver. To achieve this, every investor must keep his money in a state of readiness.

Fear is overdone concern that prevents investors from taking constructive action when they should. – Howard Marks


Focus on value

Trading around an event is something our markets love. The budget is an annual event. But there are other lifetime events like VAT & GST which usually fuel great market interest. The passing of GST seems to have gone off rather softly. Markets didn’t show much impact the next morning. And, the coming weeks could well see global events drive market direction. This in a sense, is a reflection of the maturity displayed in our markets. Gone are those hyper-exciting times when markets stayed high on an event for weeks together. Today, the contrarians walk out mechanically and this virtually ends the excitement that an event generates. GST is the most important tax reform in Indian history. Nobody can differ or dispute that fact. But, it is likely to hurt business and government in the near term. The enormous benefits from GST will accrue in a gradual, systemic way over the long term. Black money which is the scourge of our economy will certainly reduce. Overall, GST may not create much hype in the near term and the markets seem to have already discounted its impact. Now. It is back to global cues.

“I don’t like stress and prefer to avoid it, I never focus too much on market news and economic data. They always worry investors.”- Walter Schloss.

Strike a balance

Liquidity has the power to intoxicate. The combination of negative interest rates and liquidity is a potion whose impact we don’t know. There is no precedent of how it will work. This is the perfect setting to reimagine conventional economics. The top down club feels that it is inevitable for valuations to remain high. The bottom up club gladly accepts this premise as a TINA factor. So, with both schools of equity investing converging on higher valuations as an inescapable necessity of our times, the focus shifts to which market will be preferred. India is a Nation on a slow, protracted recovery. But, the stock market seems to reflect an emerging resurgence. The lack of global alternatives is a reality that won’t change anytime soon. Investing in a more ebullient market mood requires a balanced approach. One can’t ignore the lack of alternatives. One must not get too carried away. The need of the hour is the right balance between optimism and caution. That is hardly easy.

You never get the high and you never get the low- Walter Schloss.


Time to be in the deep-end.

How would a public swimming pool look like in summer? It would be crowded with people jostling for space and trying to move forward only to hit into each other. The current market seems to be like such a pool. The experience would be ordinary and competitive factors would be intense. The current markets see intense competition among investors to find winning bets. There is little room for maneuver.

However, not all parts of the pool will be crowded. The deep end of the pool will usually have fewer people than the shallow end. People hesitate to go where there are fewer people. And, there are fewer people only where people hesitate to go. This applies as much to the stock markets. A few stocks, themes and sectors have hogged the limelight while much larger and stable businesses have been ignored by the market. In a world where growth is shrinking, investors have shown a tendency to aggressively price growth.  There is a competitive tendency to do so. This should be held as a warning.Investors must now invest where others are not willing to crowd and channel their monies into. Essentially, undervalued businesses look more lucrative than the outperforming ones. Valuations always have a tendency to mix things up. Staying invested where the crowds are absent is hardly easy. But, going there and finding their merits  should be happening right now.
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” – Warren Buffett