Tag Archives: equity

Dealing with Valuations

 

Podcast Transcript

When we find valuations at extremes, it usually is at the most difficult time. We struggle to decide how to deal with them. Mostly, amongst us, the risk averse find it convenient not to deal with them. We find it natural to do nothing. We avoid them. Our natural discomfort with difficult decisions stops us from approaching them. So, we simply stay away.

Alternately, if we are risk takers by nature, we may actually deal with them wrongly and end up hurting ourselves. Risk takers believe it is their will that brings outcomes. But that is completely dependent on the context. Most risk takers fail to acknowledge that when the going is good. We believe more in our risk taking that we ignore the context. But, the context is so important. And, how we deal with the context means everything to the outcome.

But the moment tends to overwhelm risks takers. We don’t want to be left out of a moment. So, we simply stay put in the game when we should have withdrawn to safety. We often fail to take a rational view of things.

Here, our understanding of risk and our acceptance of the limitations matter.

Firstly, risk taking is more of an art. It is a personality trait. It is an attitude. It is a way of life.

It rarely comes easily to anybody. So, in the world of investing, most of us seek the wrong kind of risks around the wrong hour. And, we then live through the excruciating pain of time. Seeking the right kind of risks at the right time requires a definitive personality.  It is the personality that causes one’s investing to be fashioned in a particular way.

So, when valuations rise to stratospheric levels, selling can happen only if we have the personality to do it. Or, if the decision is made by someone with that kind of personality for us. If everybody is into risk taking when it is the wrong hour, the situation will lead to an “All fall down”.

Strangely, we are in a market where indices are at all time high and most portfolios are down. The active risk takers are clearly badly down. This situation can lead us to an even more difficult place if we don’t deal smartly. A smart mind will not show excess in risk taking now. It may be a while before risk taking will work well again. An intelligent investor must seek the right risks, avoid the higher risks, and strive for return of capital.

Return on capital may anyway not be all that great in the coming months for risk seekers. Pragmatists would rather seek return of capital now. When valuations are not really in favour, one must deal with investments in a clinical, pragmatic, and decisive manner. The time to do it is now.

Making SIPs Work

 

Podcast Transcript:

When markets reach all time  highs we are always told SIPs are the best way to invest in equity. Just starting an SIP is seems as a formula for success. Initially, this works extremely well. But, when markets peak out, the problems begin.

While all of know SIPs are a Great way to deploy money into equities, not all SIPs end up  being successful. The SIPs started in tech in 2000 and infra in 2007 never really did well. They failed to earn positive returns for years and actually may not have compounded enough to beat long term inflation. Investors who stopped them in sheer vexation never returned to markets for many years. What went wrong? Afterall, a good number of investors did well with SIPs during the same phase. What makes some SIPs tick?

While SIPs are good, choices are critical. Choosing in which part of he market your SIP must run is very critical. While it looks simple, it is not easy. The reason is the manner in which we arrive at our choices. We mostly choose the funds which show the highest returns over he recent past.  This often leads to our buying SIPs into funds when their peaking out and then continuing them when they lose sheen. But, does this happen only to us?

Strangely, around market peaks, most Indian investors choose to start SIPs only in the wrongly chosen funds. This Makes them easily disheartened.. Often, investors drop out midway never to return again.

What cause the idea of SIP To fail ? One needs to understand that while SIP is a healthy way to invest, choices must be extremely carefull. We should choose funds that will do well over very long periods of time.

At the time of choosing, you are likely to see several better performing funds. This will tempt you heavily to invest based on past performance. Often, funds chosen this way tend to fade away  conceding most performance gains easily. Often we see these SIPs even dipping into losses.  It is chooses funds which provide a sustainable long term performance. While looking at them we must choose with the intent of ensuring a long relationship and enduring faith.

Placing faith in your investment  is crucial. Placing  faith in the right choices  is critical.

Stay Ahead of the Cycle

Market cycles tend to constantly throw challenges at investors. When markets are at cyclical highs, it is extremely difficult to sell and exit. When markets trade near cyclical lows, taking a bold investment call is near impossible. When the markets trade on an uptrend, we tend to keep buying more as the trend grows to its strongest point. Most buying happens around the strongest point and buying momentum refuses to slow down for a while.

What we have seen in early 2018 typified this behaviour. As we are seeing now, the trend slowly changes or breaks down, but investment behaviour refuses to change or adapt as quickly. When the trend breaks down completely, we usually struggle to adopt newer strategies. Our liquidity may be low and the scope to reorient portfolios is also minimal.

The sensible approach would be to gradually reorient portfolios as the trade turns. The markets will give enough time and there would be enough liquidity to buy as well. When extreme lows are hit, the exercise would be near complete and the portfolio will be forward-looking. Investing strategies need to change towards the future and gradually align portfolios with the emerging scenario. This can work well only with a graded approach.

The Crossroads Are Here

The sharp comeback in pharma stocks, the buyback announcement by TCS, and the sustained weakness in midcaps send out clear signals. The markets are at the crossroads. Liquidity and its power to sustain equity valuations have been overestimated. You may wonder why this is happening. As a performance hugging universe, mutual funds have been caught off-guard on defensives.

This is a double whammy as they have already spent two quarters coping with their earlier misjudgment in midcaps. The lack of anticipation and the tendency to avoid risk cut both ways. When one refuses to move away from the herd, it can be costly as the market trends tend to shift away very swiftly. The sharp rally in IT stocks in Q1 caught the MF’s off-guard. Now, it seems to be pharma’s turn.

Clearly, overall capital flows towards defensives is gaining momentum. This puts the growth stocks at the risk of seeing outflows as performance chasing public investors will be left with no alternative but to buy defensives. The coming weeks will see more churn. The markets don’t seem to have the liquidity to even enable requirements of this churn.

Clearly, a lot of public investors seem to be caught off guard right now. The crossroads are approaching at a time when they aren’t ready to quickly decide which way to go.

Take Positions

The week was eventful and that is putting it mildly. Globally, we saw the Iran deal getting called off by the US. Oil prices predictably spiked. Several domestic banks reported their worst numbers in recent history. Provisioning norms enforced by the RBI seem to have taken a toll.

The political fever reached a high almost touching the point of delirium. The polarized media lost its emotional bearings at the very thought of an inimical electoral verdict. Defensive stocks became all the more expensive. Small caps and mid-caps got further sold down. Bad news and rumours were brutally punishing stock prices. But, there were silver linings too. The early pre-monsoon showers were generous and well spread out. The south clearly is going to have a very good monsoon. Sowing will probably be the highest in Indian history. Agriculture seems to be in the middle of a great phase of change.

How does one bet in the middle of all these trends? A simple approach would be to step aside, focus on industries, sectors and companies which are set to benefit from the way the world is changing. Ignore past performance and focus on how the performance grid is moving. Take positions where performance will soon emerge. Lie in wait. Easier said than done, right?

The Tables Turn

Just four months ago, the markets were showing consensus on the end of the extended market run enjoyed by tech stocks. “Where is the growth? What will happen to Indian tech if automation and Artificial Intelligence take off?”. The cynics were having a field day.

People were clearly mixing up job creation and profitability. The fact that Cognizant had guided positively did not convince analysts, fund managers and investors alike. As TCS came out with its annual numbers, there was a numbing silence among all three sections. Few fund managers had bet on the stock.

We could well see a similar state returning in a bluechip company from another sector. The surprises may recur in more sectors. Writing off a great company will always force us to write back our judgements. In the end, Mr Market is the third umpire who can overrule, recall a dismissed player, and change the fate of your investment game.

As this results season progresses, we are not going to stop being surprised. Many judgements may be tested badly and need a quick revision.

Capture Emerging Opportunities

India saw the most number of economic reforms in 2017-18. It was a year when the GST was implemented, the IBC gained momentum, the NCLT saw resolutions getting nearer. More bad loans were moving towards resolution than even before. The government decisively moved on, ensuring Make in India works and DBT gained momentum across services.

Yet, we found that few investors were actually betting in sectors which would see greater traction from these reforms. Instead, markets mostly focussed on companies which were agnostic to government policy and showing steady performance. We focussed more on growth and refused to see turnarounds.

With capital goods, construction, steel, agriculture and infra likely to recover sharply on the back of sustained reforms and public investment, the market seems confused about whether it should shift its strategic outlook. The prediction of a normal monsoon has further reinforced the economic recovery theme.

It remains to be seen how market strategies are redrawn to capture emerging opportunities.