Hey friends and well wishers,
as another month draws to a conclusion, I find myself back in the ring ready to write another monthly review of my views on markets and stocks. In a sense, I am somewhat blank with the markets now in good stream and thankfully the discovery and re-rating on several mid caps and large cap stocks.
Many of my friends or readers seem more than a little surprised with the market moves in the last several months. Of course they are delighted at the returns that they made but equally concerned about whether they should sell and take profits home. Some are simply holding not because they want to sell but because they want to remain invested and cannot find alternative investing ideas. This actually constitutes a paradoxical thinking where I say I should cut food as I am or need to be on a diet but at the same time wonder what dessert I can have for dinner.
i also do not understand the anxiety or worry, as each may have his own. In a recent book that I was reading I came across the historical examples of differences between relative and absolute facts.
Relatively our markets have have done well. We see portfolios, nifty, sensex etc rising and thus get somewhat in a sense of disbelief that this will be. Too good to be true is being assumed, even in a situation of the lowest equity allocation is history by the indian public.
In absolute terms however a different picture emerges. Our markets have in fact not done as well as is assumed. In July itself, barring Russia, we were the worst performing Asian market. Russia perhaps beat us in the last runner in the race due to a rather grim political and socio economical situation, quite contrasted with the situation in india.
let us try and go with a simple economic fact. If we take stock as a product or good, demand has to be more than supply to cause up word price movements. Demand could come from fiis, diis, LIC, HNI’s or retail. It can also come from promoters themselves buying their own stocks. The later though increases demand side mathematics is actually a welcome sign as usually managements buy into their stocks on value and knowing better than anybody else why the value is at a discount or is mispriced relative to any external buyer. It is for this precise reason that they need to followstrict disclosures.
the fiis, while have been extremely local to our country, remain at a disadvantage to domestic investors. The disadvantage emanates from the fact that the fii usually has a larger kitty of money and to make an impact on its portfolio needs to buy enough to make a mark. This concept f enough makes it rather centric on larger cap companies or mid cap cos with adequate free float. Now if a co has an available free float and is mopped up, usually the reverse also applies. That is the fii to off load needs a similar stimulus. In a market characterized by several thousands of listed companies, with most indulging in either cyclical, low margin, no moat businesses or in hands of managements that lack teeth, the choice to own is not as wide as is perceived to be by the sheer no of names of listed companies. In some reports, I have ready effectively some 200/300 companies in all categories constitute a basket to pick from.
let us assume that of these 200/300 cos many do not have sellers due to promoter holdings or non willing ness of sellers. That means while a co is good and should be added to an investment portfolio, it gets disqualified as a buy by the sheer liquidity in the counter unless someone offers a premium for a block.
A retail investor suffers no such block. He is free to buy a good co cheap and does not have to worry on its demand supply or market capitalization in the initiation of investment stage, if a company does well, the stock gets covered in top gainers by market cap or absolute or relative returns and that usually triggers an interest of bigger buyers to meet the managements, seek blocks or QIP or similar. Conceptually this means higher demand inevitably sets in and triggers a price move.
In the last several days, there have been very few companies that saw supply from promoters. The noticeable exceptions could be a few companies in the private sector like a bharti infratel or companies in PSU’s where the govt is obligated to sell to meet disinvestment targets. I have not been a fan of owning psu stocks for other reasons that I learnt from some wise men.
The supply in stocks has not come from fii’s as one they may not own many mid cap or small cap cos to generate enough interest to sell and do always keep moping up more and more in companies where the fii limits are opened. The fiis as a basket also have very recently upgraded india to buy or neutral and re adjusted some of their allocations to india by increasing weightage. In such a situation, it seems rather difficult to apprehend that they will sell unless cardinal issues crop up either nationally or internationally. The later is a bet with no known factors and thus more of a game of chance than skill. With no control on its probability or timing, it’s best to leave the same out. The former is a situation characterized by a new govt which is taking a slow but visible path to improving several indecisions. The bigger role is being played by the overall improving investment sentiment of corporates themselves.
The retail has hardly anything to sell.
With the demand and supply situation so placed, it appears that the markets are now placed to a path of discovery. Discoveries are not necessarily a function of PE in stocks but also a change of investment climate and of course of macro positions. We have a situation of fdi being allowed in defense. Today there was an announcement of fdi in railways and rail infrastructure. The govt is keen to allow fm Channels to carry news, some high ticket inquiries into psu banks etc are underway. Another set of discovery happens when confidence changes. Just before mr modi’s govt came to power there was so much talk on where the dollar would be with predictions or rs at 45 to 55. The irony of such guesses made many a few to skip buying IT companies until a TCS or infosys turned and gave better indications of order intake. Suddenly the sector reacted upwards. The same trend was seen in automobiles with rather positive management commentaries despite no change in interest rates. Tvs motors, Eicher motors, hero or even Tata motors were examples.
Discovery is also made when you find a company that is low key. Lying low due to its size, media shy promoters, working hard, increasing cash flows, improving margins and expanding capacities. The first reward a promoter gets is dividend and there are companies that make a new mark on dividend announcements with fruits ranging from their first dividend to enhanced dividend payouts. Much of this comes from increased cash flows and not capitalizing of some entry or extra ordinary cash from asset sales. In such companies demand for shares remains low due to inability of people to react to their low key mature, lack of analyst coverage and shy managements not driven by a desire to be on cnbc with an eye on the ticker. Such companies also see moderate supply as many investors like momentum rather than being seated in patient corridors. Usually an investor likes to make quick gains in lesser time than being told of the possibility of far bigger gains but in a slower take off process.
In identifying such ideas, one needs to also look at the size of opportunity before the company. The credentials such as education or experience of managements and sometimes a give away is the presence of a a few good customers with stricter quality norms as that endorses technological excellence of the product of the co and thus an inbuilt moat.
my focus currently is on identification of such companies. To identify them, buy them and hold them till the discovery of the companies reaches a level of high coverage, glamour, over zealous analysts and the kind of statistics cnbc’s web site shows by suggesting no of buy calls vs sell calls, that too of the very domestic public that is so underinvested.
the effort has given some clear winners. La opala, Relaxo, atul auto, Astra poly, bharat forge, Krbl, Wimplast, bata, Hindustan composites, next media, kitex, Hester bio, cera ceramics, Kajaria, ajanta pharma, auro pharma etc etc to name a few.
I am continuing to read on many such companies. It gives me happiness to learn that my efforts have not only financially rewarded but also own over many friends and even fans who out of their sheer love and admiration keep me going. It has also brought into limelight some disbelievers. Some rather insane thinkers who ask me if I own the stock that I write here. If I know that something is good and is going up year after year why would I close my eyes to its ownership? Even otherwise if I assume I don’t have the capital to own it, the point is many scrips have done between 2x to 10 plus x in this time and how did it matter? My advise to those who fall in this camp is enjoy life. Take it easy.
I also hear stories of how can I person own 40 odd companies? I am me. Every investor is different and should do what he knows best and works for him. If I can do better than the markets or other returns, how does it matter? This is like saying a guy reaches his destination first by traveling to the airport in one car, then taking a flight and then another car or taxi. How can he reach? Returns are a function of absolute facts or relative gains and not one view vs the other.
I have identified some new ideas but this time decided on sharing the same only with those who were true learners, well wishers, students, critiques with opposing but constructive views, knowledge builders or sharers and of course with believers.
Do wrote in your views/comments/ grudges everything except fast food take over orders. And enjoy investing as a passion as much as I do. I would respond to as many emails as I can or posts and thank you as always for the encouragement.
My final standard disclosure: I am not an investment consultant or a person writing a blog to entice investments. Please consult far more qualified consultants. The views expressed in the entire blog are personal.