How to be a winner in stock investing?

I had written an article on who is smart, the FII’s or the DII’s (https://bravisatempletree.com/mid-cap-stocks-are-stronger-than-their-large-cap-peers/) a couple of months back. I did not expect that so soon we will get back to square one. In one of the recent data on how the investments have been happening post China crisis, it was sad to note that again our retail investors have caught the tiger by its tail.

HerdMentality Holdings.19.10.15

The public participation had helped the DII’s to have larger exposure into the Mid Cap space which was the performing segment in the current bull rally. FII’s got their fingers burnt with their large cap exposure. Now, the retail data that comes out shows a sad story. FII’s were smart again, they learnt from their mistakes, changed fast. While our retail investors are still in the same swirl.

To be successful in stock market investment one has to be invested in companies that are big growth stories, both fundamentally and technically. The list of stocks that the FII’s have bought as per September data shows that they have placed themselves perfectly in those companies that have strong price patterns. Whereas, our retail investors have made perfectly wrong decisions by buying into stocks like Amtek Auto and Aban Offshore. These are companies that the FII’s have discarded from their portfolio.

Why people have bought into these stocks?

When we experience something good, we invariably want to experience it again. While doing so we naturally get carried away and take the experience in face value. Same thing happens in stock investing, when we see the price of a stock at a particular price and decide to buy into the stock, while it keeps rising not giving us an opportunity to buy, then one day suddenly it corrects and drops to some extent from its high. For us, it is a cheap stock and we load it into our portfolio. Little do we realize that the stock price has fallen for a reason?

For example, AMTEK AUTO is down because it has defaulted on its debt, a very big 15000 Crore debt default is staring large at them, it is also brought sleepless nights to fund managers in JP Morgan who have large exposure in this company’s debt. Similarly Aban Offshore is down because of crude price drop, will it regain its glory, is not known for now. When such impulsive investments are made, it is obvious that these investments will either stay flat or drop further. And when it drops, we tend to add more to our holding in the thought of averaging our losses without realising that, when we add investments into an already losing investment, we immediately add to our losses.

Over a period our investment will end up in a loss and what we talk about our experience to the outside world is that the stock market is GAMBLING.

Some of the exits from the retail segment like KEI and DEEP Industries too are wrong, these are stocks that have good potential for growth.

Be invested into good stocks, your investments will naturally be profitable. If the investment crosses 5 years, you’re down side risk is absolutely zero. And the profits will be the highest.

6 out of 11 top earners in our portfolio

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The second quarter results are likely to be subdued and will impact the markets in the coming weeks as results get announced. The list published in ET on 9th October 2015 shows some companies that have the potential to outperform the current quarter on the growth front. Among the 11 companies that are listed above, our portfolio have 6 of them.

As we can see in the list of expected top performers, the highest concentration is from the Pharma sector followed by the NBFC sector. In our portfolio too, we have increased exposure towards Pharma and NBFC segments a couple of months back & this happened as a dynamic process.

In 2014 our portfolio had more exposure into Auto Ancillary companies, as months passed the stock price movement of these stocks began to slow down, showing signs of tiredness. About 2 weeks before the Volkswagen issue came to light, almost all of our Auto segment exposure began to take exit. When Volkswagen issue got reported and the market collapsed, where most of the ancillary companies having presence in Germany took a big hit, out portfolio sustained lower damage. Just about that time the₹15000 Crores,  Amtek Auto default got reported, which shook the debt Mutual Fund market where JP Morgan fund had big exposure and they had to split the fund and bring controls on redemption. There are many PSU Banks which are likely to take a hit from this default.

Following our exits, the overall exposure in stocks got reduced to 75% of the capital, thus protecting the portfolio from the negative bias the markets had prior to RBI policy announcement reducing interest rates.

RBI decision came as a surprise, which Raguram Rajan has made us accustomed to since September 2013. Markets began to rally; mostly short covering, took the market to higher ups, while the strength seems to be waning now as the expectations from result season is tepid. Following results announcement, if there is going to be any weakness; our portfolio has got fairly protected due to our lower exposure and having investments into companies that are likely to give out good results. While the market began to gain strength, a couple of new stocks like BEML, Deep Industries, India Bulls housing have got added to our portfolio.

As the result season unfolds, there would be more clarity about which companies have greater strength in performance and those companies will automatically get added to our portfolio, from where, we will be prepared for our next big journey in the market rally. Being invested into the best businesses gives great confidence about the performance. In the last 3 years since we have been tracking the portfolio performance, we have achieved 68.50% gains, whereas in the same period the SENSEX has grown 38%. We have managed to achieve twice the return provided by the benchmark.

 

Volkswagen emission crisis..

On22nd September SENSEX reeled down above 2%. This was not a big tremor to the public because they got used to such shakeouts since the Volkswagen LogoAugust 24th fall post China crisis. This time the story turned towards the other part of the globe, EUROPE, where there was a mostly calm situation apart from the known fact that the European economy is almost a stagnant economy. Volkswagen has cheated the US authorities by using a faulty emission test norm to sell about 11 million cars fitted with a poor performing diesel engine. Whereas, the company had been advertising across the US stating that their cars come with the cleanest diesel engine.

Now, the company is recalling 11 million cars from the market to fix this issue and it has earmarked more than 6billion euros to meet the crisis. The US government has filed a case against the company claiming damages to the tune of $18 billion. Its CEO Winterkorn, admitted to have screwed up the company for good. Volkswagen stock loses 48% value in 2 days since the issue got reported. The company being the beacon of engineering excellence in Germany, an automobile behemoth controlling most of the prominent brands under its ownership like Audi, Skoda, Porsche etc.,

The impact of this scandal to the global markets has been multilevel. Due to Volkswagen’s huge exposure in the auto sector and the prominent brands it owned, there are a number of companies globally, who are vendors to the groups businesses in Europe as well as across the globe. All these companies will get affected. Germany being the hub of Automobile engineering, there are a lot of Indian companies who own facilities in Germany and across Europe. Some of the big names are Motherson Sumi, Amtek India, Bharat Forge. All these companies have already taken a big hit on their stock prices.

Amtek is into a bigger default, already faltered on a 800 Crore debt and has about 15K Crores which are not likely to be serviced. This issue is going to take many of the PSU Banks and some Mutual Funds into hardship.

At a time when the world markets are under pressure due to the commodities meltdown, this issue added fire. The beauty here is that, the Beetle carautomobile industry segment was the leader in the last year’s market gains. There were many companies in the Auto Ancillary sector that gave very high profits to their shareholders. Now, within a year the same sector has become party to huge loss of wealth. This makes us realize that, anything that shines cannot shine for ever or at least cannot continue to hold the strength regularly. If someone has been invested in the auto stocks by virtue of their understanding of the industry growth, they should have already moved out of the investments, else will suffer losses now. The damage that is being played out is pretty huge and will take a lot of time to recover.

In our portfolio, we had big time exposure to auto stocks, mainly in the ancillary segment. A couple of weeks back our system had helped us move out of them to a larger extent. When auto stocks were in rally mood we had more of them, now as they enter into troubled zone, the exposure has got reduced by a natural process.

Debt Market: In for a spin.

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There have been 2 new developments in the debt market which has been doing rounds with more seriousness. Amtek Auto Group is staring at a ₹17500 Cr. Debt due to over leveraging and Jindal Steel & Power have got its debt papers under rated. Following these developments SEBI has summoned Mutual Fund Houses having big exposure in these Corporate Papers for evaluation. JM Mutual has gone into scrutiny, Franklin has been asked to give the data since it has exposure of more than ₹4500 Cr’s in Jindal.

Banks like Axis, Corporation Bank etc., have big exposure in the Amtek Auto lending. Any further negative development will bring shock waves into the market which is already reeling under pressure of Global consolidation.

The assets that could get affected are Fixed Maturity Plans of fund houses and to some extent all their short term schemes. If the confidence of the investors in these secure assets is shaken, the overall markets will move into a prolonged sideways consolidation.

Automobile sector which was the leader in 2014-15 market rallies has slowed down; Amtek has mentioned it and have been experiencing the same in their investments in buying out larger businesses across the globe.

With a couple of days left for the Fed Interest drama to pan out, this week is going to be a serious one at the markets. Fed decision making is planned to be done over two days, 16th and 17th September. Our markets are to be closed on 17th following Ganesh Chathurthi, which will add to more pressure.

As people pray to Lord Ganesh asking “GIVE ME MORE YA”, it has to be seen what will be more, pain or pleasure.