a good journey is not bad just because of a speed breaker

hello bloggers.

When a person sits down to write, after a gap, usually two situations surface before him.

Either a person meets with a writer’s block or has so much to say that where to start and how becomes a bigger issue.

I happen to be in later state.

I have been busy spending good time in multiple activities ranging from advising brands to investing to reading more books and blogs on human psychology.

Everything in this is driven more by a passion rather than a trusted regime.

Passion at times is nothing but a belief.

After all even God is a belief.

Sometimes beliefs are weighed by circumvention or intrigue.

For example, in the context of markets, by a questioning: what can go wrong, how much capital will I lose, is xyz right when he writes a gloom report or is abc the one to believe given his just recent record of a smart report and resultant stock rise.

My personal experience borrows from a simple learning slightly twisted from a well known saying. If “to err is human, to believe divine”.

In a recent presentation I attended I was fortunate to chat with mr raamdeo agarwa and mr bharat shah. A day later, Raamdeo gifted me his latest signed book on investing in which, he makes an elaborate and historically backed case of value creation and elaborates how many times the market itself has gone up since the formulation of the first sensex almost 29 years back.

All of this, notwithstanding gloomy situations of sub prime, dot com boom and bust, Greece, euphoria over BRICS and then fall out of Brazil and Russia and many more such dooms. The simple fact has been the market has continued to rise and give exponential returns over time more by belief and discipline and most importantly by concentrating on signals and not noise.

Each of the doom scenarios has proven Very little ability or even absolute inability of several experts and investors to predict or even to insulate their portfolios as most of such black swan events have fallen within the domain of “unknown unknowns”.

The recent Maggi controversy is yet another example of how an excellent company can get it against the wind and be blown away without an inkling or reasonable apprehension despite even having a highly acclaimed management and despite an excellent history of corporate and consumer governance.

The effect of NESTLE now seems to be impacting gsk consumer and ITC.

As against these unknown unknowns which extend to several complex and usually difficult to trace factors ranging from global overnight sentiments, fed moves and expectations or worries on rate hikes, Greece settlement or failure, quantatative easing or hardening, some bank in some part of the world goofing up on some sub prime like situation or ending up paying exorbitant fines, every now and then adjustments on MSCI or what have we, RBI interest cuts or no action, political consensus or its absence on reforms and many more similar jargon, there are far easier known knowns.

I call them far easier in a relative sense although I won’t be surprised someone argues this too against me. So be it.

The most known known that hipster and facts support is that good companies bought at decent prices and held over a prolonged or relatively longer phase usually end up creating huge wealth.

I used the word ‘decent’ price instead of ‘reasonable’ price to better reflect a “range” of buying rather than at a point price, duly understanding, that in a true live sitaution what is precise is far tougher than a decent range.

I hav come across several reactions by friends, colleagues and connects on the market falls as also on market rises. Some even argumentative and some rather disbelieving almost as if it was engraved in stone.

The sitaution of market rises reflects a scenario where more people talk on the lines of my (theirs not mine) xyz stock went up so many times and I (they) knew it all. A situation where people attribute more to talent or luck than skill or the overall rally.

The situation of market falls (rather corrections) reflects an imposed feel bad judgement when everything is suddenly bad, not happening or Bound to go bad. Almost like a cursed day without a look in to the fact that every day is a new day and historically markets rise with time not on time.

I recently came across a pun tweet by mr samir arora on Twitter which aptly sums this up:

“remember when your portfolio goes up, it’s because you chose good stocks/ quality etc. When it goes down, it’s because of RBI, Greece, budget….”

As soon as the market corrected from 8900 to 8100, the same typical and now much expected noise took over…we told you it was overvalued, we told you the market had risen without fundamentals, we told you QE is hitting indian markets, we told you it’s best to book profits than see the fall, we told you the clock strikes one and the mouse comes down, humpty dumpty (investor) sat on a wall (sensex), humpy dumpty had a great fall….God knows what all.

Picture this:

a) unless you are a trader with a small gain bias, you normally would not buy a scrip for 10 percent gains. Inversely why would you be so perturbed if it fell 10 percent at all?

b) if you knew before the fall that the “most” the scrip could rise was 10 percent, was it that you owned a wrong company in the first place: one that was driving a fast car against an inevitable wall waiting for a certain crash. In which case, do you own companies that have very limited shelf lives? For if you do, every market is a worry for you for a man who invests is also known by the company he keeps. Literally.

c) if QE is the cause of a market fall in india, is it that india is playing the perfect host? Is it that india is a Samaritan who says “world markets, you need not worry. Go on keep rising. I am there to fall in case QE slows down as if I was the most to rise when QE happened

d) if you believe markets are falling due to bad earnings, picture the earnings with a few exceptions: Tata steel, cairn, sesa sterlite and such few companies that have truly run into a financial chaos. Factor that there is no case for markets to “surely” fall when earnings are bad or to “surely” rise when earnings are good.

the markets are futuristic and behave well over time but in shorter phases are usually wrong and irrational. Actually more than markets, scrips.

The question to ask should be: is the earning cycle likely to be better or get worse.

On the contrary markets typically fall when earnings are at the highest and at the end of a rising cycle since then there is euphoria, capital dilution with several takers in private placements, rights, iPos, when bad companies rise in Blind rush with good companies and usually draw more attention as the new hot things that cannot even be benchmarked on valuation. Usually on replacement cost theories, eye ball count valuations or other non traditional matrices that defy even an understanding by good companies.

Of course there can be a sitaution when the current earnings get worse before getting better but the best test of this can be had from some simple observations.

When things are really bad, any change is looked upon as holding a miraculous promise. This was duly manifested itself when Mr. Modi announced he would contest. The markets took it as a catalyst simply because things had gotten really bad and anything from there could only improve. The market then rallied and there was huge talk of real estate, metal, infra and capital intensive sectors reversing. People (as distinguished from investors) flogged into these counters just looking at 52 week highs or lows just as they did with psu banks.

What people forgot was a cardinal rule markets reward growth and beyond growth consistent growth. That’s why good companies compound and time spent in owning them adds up to wealth as against short term gains or income.

I am not at any moment saying all companies in these sectors are bad or anything close.but many are in the realm of unknown unknowns with greater exterior influence than their own doing.

If I feel I have my appetite under control by being fed (invested) and yet am hungry to believe in my stocks and have my eyes on a more certain longer term than a shorter unknown ride, there is more reason to be bullish than bearish. Do also remember this: in good times two things work in good companies, their own managements and the exterior environment. In bad times, good companies continue to have their managements work even against the grain.

Poor companies do well in good times as part of an external uplift but in tougher times have the double whammy of poor management and poor external support.

I have used the current fall to enhance most of my holdings. The exception has been some over the top valuations where either I have done nothing more out of indecisiveness or lure of not being able to ride on again or have simply sold to buy good companies at reasonable valuations.

While I do not want to name stock ideas not being a registered analyst with Sebi, companies in the following sectors look good to be. Stick to the best names or to absolute cash bargains with growth for maximum impact.

A) paints
B) indian Pharma that has a credible generic pipeline and is focussed on international markets. Don’t get too hyper with off and on USFDA issues. They sort out with time if companies have good managements and history
C) mnc agro chemical companies that are a play on indian land efficiency improving through patented technology or branded products
D) housing finance cos: ignore the noise of too much worry on land price falls. You are not buying real estate companies but companies that fund an inevitable dream for some and a feat for most to own better homes.
E) non banking financial companies: history supports them well if they are large and run by credible managements some of whom are most respected business groups.
F) private sector banks. Anyone can see the wealth hdfc bank or Kotak bank by examples have created
G) small Caps that have market caps less than sales, pay dividend, don’t have promoter dilutions but stake increases, don’t have equity dilutions by placements and have profits in a range of market cap far more commensurate to their sector leads. if you look well there are companies with growth, good managements and even good dividend yields that I feel the market is mispricing.
H) strong brands including in what the markets call as cyclical sectors such as autos, auto ancillaries and tyres. Just look up historical facts. Most defy cycles.
I) companies that are growing albeit a bit slower but where historical growth is favorable and that too in a scenario where others have been hit by degrowth or falling market shares.

Some people may say oh look who’s talking, a guy who himself keeps an active check on markets. Passion is self indulging though all passion is not poison. Do what you enjoy and enjoy what you think has worked for you.

For life will give you many teachers, some rewards but few sponsors.

Remain pragmatic and believe in your thoughts and ideologies even more if they sound too simple.

Happy investing.

(Do pardon errors. Wrote this sipping some delicious tea overlooking the alps both with passion and with good intent).