The euphoria is unpalpable, The
anchors at the top TV channels have already printed T-Shirts of “Nifty –
21000”. The Nasdaq is about to finally breach (or atleast it was just a few days
ago) its life high in a few days and
there has never been a better time to believe that “This time it’s different”
I have been in markets since 1993
and like most 50 yr olds have seen a few booms, busts, scams and a few
financial crisis. As a fund manager – when sometimes my clients ask me –
markets are at all-time highs and making new highs everyday why are you not
investing our money and simply holding on to cash.
I give all my clients 2 choices –
Take Your money Back – Or be patient. But I ain’t changing my philosophy
because of the pressure of capital deployment.
Even though I am always fully
invested (personally), in markets (Levered to 120%) I am still almost always
fearful, as Socrates keeps knocking within me subconsciously with his words – “Fools are always confident and the wise are
always in doubt”
Perhaps I am a mad raging bull in
a bear clothing. The bull in me keeps me hopeful and the bear allows me to be
patient, cognizant of risks and to be non-greedy when everyone around me is
convinced that this time its different. Perhaps that’s why our portfolios have
been least volatile and have beaten markets with least amount of palpitations
for our clients over a long term.
But the 10 lessons that I have
learnt over the years and tried to imbibe in my investing style are as follows.
1. Be bullish not foolish
If the world is progressing and must
keep moving ahead (with inventions, technology, opportunities, AI et al)
markets will always go up over a long period of time. That allows us and
encourages us to be a perma-bull ala Rakesh Jhunjhunwala. Sensex at 60,000
seemed like an impossibility some 10 years ago. Today its 66000. So being a
bull almost always helps in the long run.
But in the short run becoming a
muppet in the hands of commentators is the worst punishment one can allow
oneself to be inflicted with. The narratives that emerge at the seeming peak of
the markets are always almost misleading and suicidal.
Lesson
When a stock, an idea or a sector
is being pushed feverishly – AVOID.
2. Breakout Stocks
Finfluencers are running paid
courses on breakout stock strategy and thousands of gullible retail investors
fall for this trap.
In the long run everything is
driven by fundamentals without an exception (or else Yes Bank wouldn’t have
become a No Bank and Suzlon would still be a blue chip) but in the short run,
everything is driven by operators and insiders. How else do most shares start
to perform or go down just before a major corporate announcement. Examples are
galore not only in Indian markets but US as well.
Stocks break out not because the
companies have become fundamentally adroit. They break out because too much
money and fear is chasing too little items available. And that can make any
s*** break out. Sub 1000 Crore companies that suddenly get new narratives built
around them, coupled with incessant peddling of ‘the new promise in the lala
land’ on social media and sometimes on business channels always prove to
be a trap and wealth destroyers. Its
surprising that almost all breakouts happen only when markets are peaking.
If Infy or ICICI or the likes of
it break out, its great and merits attention but when stocks break out because
of positive news (in most cases planted) while promoters are happily offloading
their stake, not only should you be fearful, but you should also contemplate
sitting out of the markets for a while. As Buffet famously quotes “Only when
the tide goes out do you discover who is swimming naked”.
Lesson
If you are a superman and can get
on a bullet train (thats running towards an abyss) and get off it – just in
time, breakout investment strategy is ok. Else you will almost always get
scorched.
3. Beating the estimates
When rivers start flowing above
the danger mark, the powers that be, worry little about the river or the impending
danger. They just raise the danger sign by a few feet so that the river remains
below the danger mark. Such is the story of the estimates by analysts. All
estimates are always beaten because estimates are not based on the FCF or
Earnings Yield. But based on a collective intelligence of sub optimal and mostly
clueless analysts who are experts in guesswork.
And sometimes estimates get
beaten because of a low base effect, one off income etc etc. For this one needs
to delve deep into the financial statements. But beating the estimates is one
of the most specious narratives to misguide the DIY and the gullible investor.
Imagine Nykaa listed at a peak
valuation of some 1,16,000 Cr (Nearly 15 Billion USD) and analysts hailed it as
a profitable company going into IPO while the Nayars privatized their profits
and socialized the losses. Its present EPS is some 7 ‘paise’ while its trading
at 70% below its listing price and still discounted more than 2200 times.
Over the long term there are just
3 things that matter for a strong stock performance that has any likelihood of
creating wealth for shareholders. Valuation, Free Cash and Management intent.
Lesson
Stick to the basic principles of
investment that have been in existence for decades. Analysts and their
estimates can be great entertainment not the bedrock of sound investment
strategies.
4. Feeling good about bad data
Bad data is bad and good is good.
However markets have started interpreting this inversely. Can you imagine that
if the US jobs and inflation data is good, markets react negatively and vice
versa. Eventually the reality will catch up and markets will realize that job
losses aren’t good in the long run as data leads the reality by a few months
and yet in the short run bad data almost always pleases the market till it
doesn’t.
Lesson
If data is correct then trust the
data and not the convenient interpretation of it. (eg. Bad data will lead to
interest rate cuts and party of excesses will continue). Eventually something
that’s good for the economy will manifest itself into goodness and something
that’s bad will manifest itself accordingly in not so distant future.
5. Discounting the distant future
in the present valuations
Decision of a Capital Expenditure
by a company, or establishment of a new factory or a newly acquired business
contract spread over multiple years almost always takes the stock price to
tizzy heights. And human mind is wired to feel bullish on news that has not
produced a single cent yet and no one really knows when it will – These traps
are best avoided as euphoria almost always fizzles out. Does anyone remember
the infra theme of 2006-2008? Most of those companies aren’t even listed
anymore. The present defense theme is no different. Be cautious when buying into
future stories.
Lesson
If a company is good it will keep
creating consistent shareholder wealth. And any prudent investor will make
money in that company’s lifecycle. (Buffet invested so late in Apple’s
lifecycle – And How – he didn’t miss any bus or opportunity). Don’t invest just
on the promise of a rosy future. Wait for your time.
6. The FOMO factor
History is replete with examples
– and I have experienced it personally. If one really is in love with a stock
and wants to create a position, the irresistibility upon hearing TV
commentators and news flow is intense. But almost always every single stock
that you want to buy today will almost always be available a bit cheaper few
weeks or months down the line – Even if it’s the HDFC’s or the Bajaj’s of the
world. All one needs is a bit of patience to wait and build a stronger
conviction while the target or lower price is achieved. If FOMO could be
quantified, its directly proportional to the level of indices. Most bitcoin
retail aficionados invested between 50000 – 68000 USD. If Bitcoin is really a
store of value why aren’t they doubling down at 20000 USD?
Lesson
Investments made in a state of
FOMO are never sound investments. Date your stock, understand it better,
observe it for a few Qtrs and then say Yes. You will never go wrong.
7. Recency Bias
Anyone who has vivid memories of
2000 and 2009 and remembers Pentafour Software, DSQ, HFCL, Global Tele and JP
Associates, would resonate well with the perils of recency bias. When most of
these shares fell from (approx.) Rs. 3000 levels by 20%, people rushed to sell
their family silver and real estate to capture the opportunity of owning these
blue chips of those times. Well eventually all of these companies got delisted
and JP is now at an unfathomable level of Rs 8.
The point to remember is that a
stock at Rs 1000 can well become a penny stock and the adage “how much more can
it fall” is stupidity.
Lesson
Not only should you never catch a
falling knife, don’t invest in story stocks. Companies that peddle stories and
not profits will always destroy their shareholders’ wealth.
8. Herd Mentality
Speciality chemicals was as
crowded a trade,
18 months ago as Banking is now. Finfluencers were allowed to blatantly push
narratives on TV Channels and the entire sector has destroyed a considerable
wealth over the last 2 years. Indian Banks are trading at reasonably rich
valuations while the CEO s of the same banks are subtly
raising red flags on growth and margins yet the BAAP (Buy at any price) brigade is relentless –
and while banking sector is the bedrock of economic growth of any country –
valuations do matter.
Lesson
When everyone is chasing the same
theme – it almost always spells trouble. DotCom in 2000’s, Housing in 2008’s
had the same fate. AI is the new darling theme. Lets see what happens to AI and
chip companies a few qtrs down the line.
9. Cutting the flowers and
watering the weeds
Peter Lynch famously quipped the
above adage. I know more than a dozen people who are in love with Yes Bank and
Vodafone rather than ICICI Bank and Bharti. A large number of DIY investors
feel that the chances of a penny stock doubling are far higher than a
respectable and a fairly priced stock. The ‘averaging on the way down’ brigade
of Yes Bank, Unitech and JP Associates will continue to sell their winners while
collecting mountains of trash.
Eventually such investors get
ejected out of the markets forever.
Lesson
The performance of a company gets
reflected in numbers and numbers get reflected in the Balance Sheet and the BS
gets reflected in the stock price. Stocks are where they are for a reason. A
red black on a roulette table offers a better probability of winning than
holding onto The Yes’s and Vodafone’s of the world in the hope of they
springing a magic.
10. Falling in love with stocks, promoters
or commentary
I recently heard a well known
fund manager mention in a podcast how he was in awe of Mr. Gosh and Bandhan
bank. This adulation towards a particular management clouded his ability to see
the turning fortunes for the worse at the bank and eventually he had to exit
the investment at a big loss to his investors.
It is easy to fall in love with
stocks/sectors which have given good returns in the past. But this should not
blind one’s rational thinking towards changing times. One key TV commentator
keeps peddling the idea that the next HDFC bank is the HDFC bank itself, while
the stock underperformed Nifty by a huge margin in the last 2.5 years and ICICI
snatched the mantle of growth and consistency in the Indian Banking space.
Positive Management
Commentary is another trap that most investors love to fall into. Bias clouds their
judgements and the performance as well. And most investors get sated by just
commentary. Which promoter will ever say that his future is bleak or give a
negative commentary?
Lesson
Don’t cling onto stocks where
data or price isn’t supporting or where the business model could itself face a
headwind. If at all – cling onto relationships, great friendships and emotions
– not stocks and commentary.
11. Checking the price and not
value
We all aspire
to upgrade our standard of living (Car, House, Holiday destinations, etc) and
happily pay a premium for superior quality and size. But some of the most
prudent investors and sometimes fund-managers as well, take refuge of substandard
– low priced stocks (penny stocks) in the hope of dramatic turnaround or a
story that’s likely to unfold in some distant future. The propensity to indulge
in this investment strategy is directly proportional to the index levels.
Lesson
If there is
1% chance that your investment behavior is vaguely similar to gambling, you are
most likely to get into trouble. The probability of landing a multibagger amidst
an ocean of crappy stocks is like finding a unicorn in a herd of donkeys.
If one could
just avoid stupidities in ones investment journey over decades, there is no
force that can stop you from compounding your wealth at an appreciable rate.
And compounding – the eighth wonder – is everything isn’t it?