WHAT CAN BE A PROBABLE BOTTOM OF INDIAN STOCK MARKET?

Posted on March 28, 2020 by Jimit Zaveri under Investment Philosophy

We have seen a sharp fall in the market these days. Now, everyone has a question that what can be a probable bottom? where we should start buying? Bottom of the market already made? Should we buy or will we have missed out this opportunity? Yes, Nifty has reached to the fair value zone but pendulum never stayed at the middle zone it will go extreme to both the direction. So, we have seen upside extreme and now have to see downside extreme move.

Before starting answering the above questions, here, I am requesting you to read my old article which I had posted on 4^th August 2019. In that article, I mentioned regarding market fall. Please first go through that article because the current article is a continuation of that article.

THE INTELLIGENT INVESTOR – 3 – A CENTURY OF STOCK-MARKET HISTORY

Now, if we analyze current fall then we can say that Indian corporate and GDP has witnessed a limited growth in the past. Also, Covid-19 virus has disrupted the entire world economy. Majority of the economy has started giving a revival package but if we look at the speed of the spreading of Covid-19 and death of the people then it is very painful for us as well as the economy.

Our PM has announced with the 21 days lockdown to fight against the Covid-19. We have taken this step well in advance so that we can able to control the situation, because if the situation will go out of control then we do not have a proper infrastructure for citizens to cure.

I have taken a few data from HDFC Bank India growth outlook 2020, cost of lockdown.

By looking at the above data and havoc of Covid-19 in the world, it is essential to go for the not only lockdown but to declare an emergency in India. Now, let’s go to the economic impact of this mayhem. People can oppose that government of the majority of the economy has started announcing a revival package. But We have to think that it’s not a financial crisis where you pump liquidity into the system and things will start recovering. It’s taking the lives of people so what will change after the liquidity get infused. People try to save life rather use those liquidities. So, disruption can take time to revive. If this problem can worsen it will be led to a financial crisis which is still pending to come. It’s just my thoughts, don’t know what can happen but this thing looking worse than any financial crisis.

If the normal situation has come where growth remains subdued then the market can remain in range but here this difficult situation can hamper the earning badly. we have to understand that our states of India are equivalent of the many of the country where corona has done huge damage. Here, the world economy gets hamper, trade around the world hamper, supply chain get disturbs, corporates have to fund fixed cost, they only can manage variable cost through the lockdown.

Many of the articles and reports indicating towards global recession and as intense as the recession of 1929. I don’t know that will happen or not but I only can pray that such will not happen because it will take many further issues with many of the lives. Let’s not getting into the debate and do some number crunching which is always my favourite.

Current, Nifty EPS is ~Rs.444 so proceed with the calculation based on that. I am assuming current EPS will remain same for FY20 and all degrowth will account in FY21 and FY22 (if the situation will not come to the control then FY22 will also go for a toss).

I have taken the bank rate as an SBI FD rate after the rate cut.

Now, if we look at the earnings yield to bond yield ratio then it has reached at the 1.03x in the current period. If we take same EPS and take that ratio to the worst happen during the 2008 – financial crisis then it was 1.11x so nifty level come to the 8000 but Covid-19 will going to hamper earning growth and might be a new level of earning yield to bond yield ratio can come, which I have taken a range of 1.25 to 1.50 with a different scenario.

If things will be in control in coming few days then might be 5% degrowth can be possible and then market also maybe get stable at the old worst level of earning yield to bond yield ratio – 1.11x to 1.25x. But if things will get more worst then now and continue with coming 1-2 months then 10% degrowth in earning can be expected. I have made a study in S&P500 of USA and in that market earning yield to bond yield ratio has reached around 3x in worst level which I am not considering as of now. If we see that then past falls in the market have accounted for ~50% fall from the top so that that will also come to ~6215 level.

Now, another point is that earnings growth always essential for generating returns in the market. So that market can be remaining in the range till no sign comes for earning growth revival because, on the hope of earnings growth, the market has already run a lot.

I have posted an article on WHAT CAN BE A PROBABLE RETURN FROM SENSEX IN COMING 10 YEARS? a way back and where I have taken SENSEX level after 10 years on worst earning growth of 3.50% came at 43547 on P/E and 57678 on P/BV based. So, if earning growth cannot revive then the market can remain in range for a longer period. But from the current base, we can have a good chance of making a return in the range of 4-7% CAGR in the index overcoming 10 years. Tax cut reform will also aid in earning growth coming forward. We only have to pray that situation will not worsen from here and for that we have to stay at home, stay safe and fight against Corona.

#Stayhomestaysafe #Stayhomesavelives #Fightagainstcorona

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Quality Investing can be a Contrarian Investing….

Posted on November 28, 2019 by Jimit Zaveri under Investment Philosophy

I am going to write something different which is not easily acceptable to our investment society. But if we analyze it thoroughly then we can understand it and able to accept the reality.

So before going forward with the core discussion, let me start with some basic concepts.

Let me first mention what is contrarian investing?

“Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.” – Wikipedia

“Contrarian investing is the ideology in which an investor attempts to make profits by making his decision against the popular understanding but only when the conventional wisdom appears to be wrong.” – Trade Brains

After reading the above definition, we can come to know that contrarian means going against the herd. If we perform a task that is not performed by anyone then we fall into the category of contrarian person.

When it comes to an investment then What people usually do as a contrarian investing decision?

People run a list of 52 week low, the stock price has fallen a lot, low in valuation, companies having some problems & not with good financial but available as penny stock prices, etc. These things the majority of people are doing. I was in interaction with many of the clients and all those seek an investment idea with all the mentioned criteria earlier. In addition, they seek investment ideas where stock prices are below Rs. 5, 10 or maximum Rs. 100

A common myth in the market is catching a falling knife, turnaround, beaten-down stocks, etc. work as a contrarian. But if we check ground reality then the majority of people focus on those factors so if all want to do the same then how it can remain contrarian.

In addition, people average quality when stock prices start falling, the majority like to average at lower and booking profit when stock prices going upwards territory. They don’t have guts to book losses. Thus, lastly, they remain with the losers as they have booked out winners.

So, if the majority are performing in the same way then how it can be a contrarian investing?

I have taken a few examples of the companies which are having lower quality and prices have fallen. And as prices have fallen people have started accumulating those stocks. I have taken the last 10 shareholding patterns for reaching to a conclusion. All these people who have tried to catch a falling knife, those all have ended up with the losses.

Low Quality Public

We can see that people have to keep on buying as prices have fallen, book value bargain, try to catch a falling knife, averaging lower, etc.

So, what can be a contrarian investing?

When I asked people to invest in XYZ company and stock prices trading near 52 weeks high then people tell me that it’s already run up, give me something which has not run.

Also, stock prices are above Rs. 1000, 5000, etc. then they fearful and ask for a penny.

Means buying stocks which are traded at 52 weeks high then people tend to stay away from it. In addition, when stock has moved upward and things have improved with it then we never have to hesitate by averaging upward. We need to book losses if things are not happening as per our assumptions and keep running profitable ideas.

“Cut the losers and stay with the winners” – it’s the only formula of staying with a portfolio of winners.

So, these all can be a contrarian where the majority of people don’t focus.

Mr. Nooresh Merani has twitted a few days back –

Nooresh EJUfFtgU4AALLTc

Similarly, I have taken a few examples of the companies which are having a decent quality and prices keep on rising. And as prices keep on raising people have started booking profit in those stocks. I have taken the last 10 shareholding patterns for reaching to a conclusion. All these people who have to try to sell out their positions, all have ended up with the regrets.

High Quality Public.jpg

We can see that people don’t like to average upward when companies having a quality, they run for booking profits when the stock price has moved up rather keep holding a winner. So that what the majority are not doing that only can provide us with an above-average return.

It is not always one asset class; one investment style remains contrarian forever. As particular assets or investment styles generating above-average returns then that will attract more and more participants which convert contrarian style to general style or asset class. When equity becomes popular among the participants then it having a good probability of underperformance compared assets class which is relatively lower popular. So that we require to shift from asset class as it moves in the pendulum of unpopular to highly popular.

This is the only concept of contrarian investment that teaches us. But the majority of investors have taken this in a different way. And they try to hunt for the lower value, falling knife, etc. Yes, this can be a contrarian investment style but we have to compare that when the majority of the people interested in such situations then that will not remain contrarian any longer.

The majority of the time, investors avoid higher value, quality, keep upward-moving stocks and that can be a contrarian investment strategy for us till people not getting attracted to such quality companies.

So that there is not a single investment style or asset class which remains contrarian forever. It will be unpopular and will moves to popular and then again once in a while return to the unpopular. We have to identify it and that helps us to create and protect our wealth.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Interest rate cuts: Does it provide long-term benefits?

Posted on August 11, 2019 by Jimit Zaveri under Investment Philosophy

When rate cuts happen, people think that the economy is weak so that it required a rate cut. The reduced rate provides stimulus to the economy which resulted in the stronger GDP, higher corporate profits and higher stock prices. This is the first-level thinking.

Rather second-level thinker thinks that –

Why do rate cuts happen?
The economy is weak or weakening?
What damage can occur if rate cuts not happen?
How much worse it is?
Does this rate cut help to revive things?
Shouldn’t we need to take rate cut as a worrisome scenario?

A very nice example quoted by Mr. Marks that when we visit a doctor for our weak health and then he works on healing us through higher treatment, should not this worrisome for us?

First level thinker takes it as this treatment heal us and we will get all right soon

Whereas second-level thinker take it as –

how much worse it is that such high treatment is required? Or the situation is worsening highly?
Does it resolve the issue?
Is this treatment sufficient?

We need to think that the doctor has to bring a higher treatment that means simple treatment does not go to work for healing us. This means either issue is big enough or it is on the way to becoming bigger. So that when we have a bypass that means chest pain is not because of a gas problem but actually, we have a heart attack.

What can lead to growth at a lower interest rate?

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Lower cost of borrowing – lower interest on EMI – more savings leads to more spending on the consumer front and that resulted in the GDP growth
Lower cost of borrowing – encourage businesses to make an investment – lower cost leads to more cash left with businesses to make further Capex – earning starts growing – more dividends or stock buyback enhance cash inflow to the investors – more spending – that increases GDP
Consumer spending increases – demand increases – encourage businesses to invest – more employment opportunities – more wages – increase consumers spending – GDP increases

The most important thing is that when interest rates go down then we reduce discount rates also. So that lower discount rates resulted in the higher assets prices. And lower rates encourage investors to take more risk to earn more return in the low return world.

Rate cuts provide hints for future rate cuts. And the above cycle keeps repeating.

There are many situations where lower rates are undesirable –

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Low rates increase the inflation (some inflation is required for the growth but excessive can kill) – too much inflation increases cost of living – it makes hard for people to spend more money – lower rates reduces the return on the cash, money market investments, high-grade bonds so that people make an investment into the risky products to earn more return – people take more leverage to make an investment – this creates an assets bubble & some point of time it will burst.

Due to the lower interest rates, we provide lower discount rates to the assets which have increased the price of the assets and when the bubble burst interest rate increases which creates huge damage to the prices of the assets.

This is like painkillers which cure pain for now but harmful to health over a longer period if we continue with taking painkillers frequently for immediate relief then it can destroy our health in the future. So, we need to be careful while taking a painkiller for curing pain at the time.

We need to focus that whether growth is natural or artificial stimulating growth. If growth is not natural then central bank and government have to take measures to boost growth. Such kind of growth does not survive for long without stimulation.

As current slowdown is not only cured through rate cuts but the government need to bring further measures which can provide long-term domestic growth without any temporary stimulation. Temporary stimulation brings future demand in the current period or till the stimulation remains in the force. After that demand starts getting dry up. Such a stimulus can be more harmful and lead to huge damage to the economy at whole.

Inspired from Howard Marks memo – “On the other hand”

Avengers: Endgame and Investment

Posted on May 19, 2019 by Jimit Zaveri under Investment Philosophy

Previously I have written a post on learning investment lessons from movies such as “Chal Man Jeetva Jaiye”, “Dangal”, “3 Idiots”, “Rajneeti”, “Sanju“ and “Badla“. Now, I am going to write a few investment lessons from another movie Avengers: Endgame. Avengers: Endgame is not only a movie but it’s an emotion.

Accept the reality and don’t lose temperament

Extract from the movie – At the starts of the movie, we have seen that Tony Stark stuck in a space and going to die. During the time, he has accepted death and didn’t lose his temperament. He has keep environment live.

Co-relation in real life – We face similar kind of events in our life and investment journey where we do not get any clue about what to do. We should not lose temperament and work on the acceptance of reality.

Don’t lose hope and identity due to failure

Extract from the movie – We have seen that initially, Tony has denied helping Ant-man and Cap for time travel. But later on, he has worked on the time travel mission. He has made it possible to do a time travel.

Co-relation in real life – Similar way in our life and investment, if we faced failure then we should not stay away from our actual identity. Rather we should work on it and turn out our failure into success. If we lose our identity then we cannot get back success and we stuck with the failure for a lifetime. It is obvious that we face failures in our life, our assumptions go wrong, the market takes more time than we have assumed to recognize the value of our investment.

Wait for the opportunity

Extract from the movie – We have seen that Avengers got an opportunity after the 5 years also. They had never think about it. But when the opportunity comes they have captured it and take benefits of it.

Co-relation in real life – In the investment field, we get very limited opportunities to make an investment. We need to wait for the opportunity while we are not getting it. We should not accept failure if we do not get an opportunity for a huge time. We should always wait for the opportunity.

Accept the failure but do not give up

Extract from the movie – We have seen that Thor was not able to accept his failure and he slipped into the depression. He was not ready initially for help to the Hulk but later on, get ready.

Co-relation in real life – Similarly, we should not slip into the depression when we face any failure but we should accept it and work on the turnout our weakness into the strength. If we slip into the depression then we cannot able to capture an opportunity when we get it.

Accept the uncertainty which can change all the scenario

Extract from the movie – Thanos got aware of the plan of the Avengers and he came from past to the future for capturing all stones from Avengers. Avengers has believed that they collect all the stones and provide lives of those who lose life due to Thanos in infinity war. But Thanos also came to the future and he had attacked the Avengers.

Co-relation in real life – Similarly, we should accept the uncertainty while we make investment decisions. Anything can happen into the investment journey which we do not have assumed. Uncertainty is only certain to happen.

Accept that we cannot control fortune

Extract from the movie – We have seen in infinity war that Avengers cannot able to stop Thanos and Thanos has completed his task. Avengers has made a huge effort to stop to Thanos but Thanos has given death to half of the population of the earth with few of Avengers also. This proves that we only can put efforts but cannot control the fortune.

Co-relation in real life – In the investment field also, we can just work on the company identifying, analyzing, allocation, risk management, etc. But we cannot control our return. The return will be not into our control. It’s just our fortune which we cannot control.

Put entire efforts when the opportunity comes

Extract from the movie – When the opportunity comes to bring back the life of half of the world then Avengers has put entire efforts. Also, when it comes to again protect the entire world by Thanos, they have put their entire efforts and in which we have seen that Tony has lost his life. Hulk got injured and the black widow had sacrificed her life.

Co-relation in real life – We does not know that when the opportunity comes to us. But we have to be ready for the opportunity and when it comes, we must have to put our entire efforts. We do not get investment opportunities on a daily basis so till the time, we are not getting an opportunity, and we should start working on making us stronger and stronger. And when the opportunity comes to have to build up a position.

Accept the disconfirming evidence

Extract from the movie – During the infinity war, we have seen that Dr. Strange had mentioned that they have one chance to win from the 14 million chances. Same into the Age of Ultron, when Tony wants to build a protection shield, then nobody got agreed with him. They said they fight for any uncertainty and either win or lose but that will be together.

Co-relation in real life – We should not think that if we have a good track record of making an investment then we will win the game. But we have to accept the disconfirming evidence and be prepared according to it. We should not negate the disconfirming evidence and prepare for upcoming uncertainty.

Fight with own emotions to win

Extract from the movie – Tony was not ready to help for time travel when Captain America has approached him. He was fearing for losing togetherness of family. He feared because he has faced death very closely. He knows that he can help with the time travel but his fear was stopping him. When Pepper Potts had explained to him that he can help others and he should then Tony got ready to help for time traveling.

Co-relation in real life – Similarly, we also have a fear of losing what we are currently holding or what we can lose from our past failures. We should not keep our past memories to hold us and keep on drain us. We should control the emotion and fight with it. Otherwise, we cannot able to achieve what we want. If we have made an investment mistake in past and those memories holding us and stop us from making a new investment or we are holding an investment which we do not want to lose then we may not able to perform a task which is the demand of time.