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.

Mid Cap stocks are stronger than their large cap peers.

FIISelling TableThe interest rate hike fear has come again this year after it had created a tantrum in 2013. A comparison of FII selling in our markets against what was in 2013 has been marginally higher. In 2013 they had sold to the tune of 22639 Crores, now it is 22693 Crores, just surpassed the previous numbers.

The situation now is entirely different from what it was in 2013. This time when FII’s were selling, we have had the Domestic Institutions (DII) buying, from 13K Crores in 2013; they have increased it to above 21K Crores in 2015. Domestic buying was possible because there was money available with the Mutual funds, which means there has been good retail participation in the markets. Indian public’s contribution to mutual funds.

Even though there were good amount of purchases made by the domestic institutions, the SENSEX has taken a bigger hit this time. The dynamics here was totally different. FII investments were mostly into the large cap stocks, while the domestic purchases were from the mid cap space.

Now, who is smart among the both?

I have been tracking MF purchases for the last 5 years, and all this while the domestic participation will always be on the wrong side. While, this time it is different here too. FII’s have been caught on the wrong foot. Their investments have largely been on the frontline stocks. There is a reason that the large cap stocks are not performing.  It is both they have a bigger base and growth from there is a challenge or there is de-growth visible in their balance sheet.

For example: Banking stocks do not have any kind of growth visible in them, this was more clearly known last year itself. Banking has hit the highest impact in the current downturn. FII’s splurged heavily by being invested in these stocks.

So, when they sold out, there was no saviour for large caps, hence the fall is 8.77% on the SENSEX this time when compared to 5.77% loss in 2013.

Have the MF’s become smarter on their own or the retail participation made them do it, we do not know. The inflows into mid cap mutual funds were higher compared to large caps and hence, the DII buying was concentrated on the Mid-Caps. It springs about good news; the retail investors of India have gone smart. This is news to celebrate.

I used to always think about, why foreigners are taking away all our wealth through stock market profits, while our people being the creators of this wealth are not enjoying it? Now, there is relief. People of India are enjoying the benefits of their growth.

The Rupee has also been strong when compared to 2013 Taper Tantrum, now it is down only 2.29% as compared to the 9.70% drop in 2013. Thanks to Raguram Rajan’s wonderful policy decisions.

All these data numbers throw out some predictable moves in the coming months.

  1. 1.       Currency is strong, so, the bounce back is going to be strong for India.
  2. 2.       Mid-caps show more strength, they are going to outperform in the next rally.
  3. 3.       Large Cap investments will take time to pay returns.
  4. 4.       FII’s cannot do much damage from here. They can only multiply the bullish effect.

If tapering of interest rate is happening in the US, FII’s will take time to come to India. There is no fear of big sell out, as they have already moved out considerable funds from our country.

In case the situation is opposite and the FED postpones tapering, the FII’s will rush back to our markets and this time they will buy more into Mid-caps as they have already burnt their hands on the large caps.

FII buying into Mid-caps will take the stock valuations to levels one cannot imagine off. The reason behind this is that Mid-caps don’t have the float that large caps have; which would simply mean that there will be very high demand for quality Mid-cap stocks while the supply is going to be minuscule. Unless the DII’s get into a selling spree, there cannot be much liquidity available for the FII’s to absorb. And it is unlikely because it is the public who have to decide on moving the funds out of the Mid-cap funds to provoke selling pressure.

What a beautiful situation we have come into?

Investors, sit tight with your mid-cap exposures, you will see astronomical valuations coming in a few months from now.

Out Bravisa Templetree portfolio is loaded with the best of quality Mid-cap stocks, which is likely to take us to the moon….. I suppose.

Let’s laugh all the way to the bank, enjoy our money growing in a super-fast manner. A speed that we have not experienced so far in our life.