Markets cracked, was there an indication?

Post the killing of Iran’s Army Boss Quassem Soleimani, markets world over went into a jitter and so was it for India. We tanked 2% & continue to be weak.

Was this a surprise for the markets, were investors caught unawares? Not at all. It is just that this incident was a coincidence. Market was already showing signs of weakness from the last week of December.

After the up trend that began in September post the Corporate tax cut announcement, market had a 10% upside. In the course of 3 months that this up trend lasted, it began getting weak.

Any move for that matter, whether it is up or down, will come to an end after some time. It was the same with the markets this time. In this chart shown here, we can see as the price climbs 12k, indicators have begun showing weakness.Weakness on the index first showed at the end of November, while market did not give way, it kept pushing higher, testing patience of investors and traders. By end December, there were 3 attempts to move past 12K, each time it was only able to muster small strength.

On 1st Jan, Nifty tried to move into a new high, it lost strength as it approached close to the recent high and from there it could not manage to hold on further.

Soleimani’s death came only on 3rd Jan, it only added more fuel to fire. Else if not for this incident, some thing would have come and taken the markets down.

Almost always charts show up signs of weakness before any major events. It has happened in the past and will happen in the future. Those who had followed the indications, had the opportunity to protect their investments, either by selling the holdings, move into cash. Take a hedge with a short on futures or options. Or just be prepared that there is going to be a small move downwards and that needs to panic.

Even better option is to add to investments as these kind of events, I am not talking about the death, the correction in the markets, provide opportunity to take investments at a bargain.

Top 30 losers of 2018-19

As markets turned down from bull to bear after the 2018 budgets, along with good stocks that gave up in price to adjust for extended valuations, there were some big names that have collapsed in price.

Here is the list of top 30 wealth destroyers of 2018-19.

It is sad to see that stocks have lost about 67 to 98% of their price in just 1 year. Among them here are some very poor quality names that had shady or unethical promoters like the Reliance Adag group, DHFL, McLeod Etc. Promoters who took advantage of their corporate presence to grow personal wealth. In some places greed made them use liquid assets to own illiquid assets, which turned out a nightmare to them when they had the need to repay the borrowings that they created pledging shares of their companies.

DHFL, Yes Bank CG Power, Coffee Day, McLeod, most of them bet their greed on real estate and lost badly. Poor corporate governance got added to their greed. We have some very prominent names like Yes Bank losing almost 85%.

It is said in the markets that, when a stock loses 20% in a very short span, chances of the stock getting back to normal is bleak. Here we have stocks giving away more than 65%, which means all of these stocks have kind of completed their life cycle.

Among the above names we did have exposure to some of them in their hay days like Graphite, HEG, IBull Ventures and even DHFL. In all of these exposures we have booked minimum 100 to 300% profits.

On hindsight, when we look back, it is the process that helped us get the best out of any stock that we invested. For example, DHFL, we picked it at 340 levels when the company was giving out good results. Trend continued pushing the stock to 680 levels from where it turned down. When this down side happens, results had kind of showed slowdown in growth. DHFL moved out of our ranking tables and triggered exit for us.

We did not exit at the top, while got out at 642 levels, almost pocketing 100% in 10 months.

In Graphite we had an early entry, we picked up at 155 levels, stayed invested for more than 18 months. Graphite has a continuous rally in price without any tiredness.

Earnings too supported with robust growth, by 4th quarter of FY18, it showed tiredness, we had exit signal at 900 levels. At that time SEBI and Exchanges played havoc in the markets. Both re-categorisation and Additional Surveillance Margins killed the stock price. It had continuous down freezes which gave us exit only at 643. Yet we made a little more than 300% in this stock, while had the opportunity to book 500%.

The learning at that time was, even a good stock can get hammered when regulators step in. Had to accept the gains left for us and not worry about that which is lost.

Now after a year since we had exited most of these positions, there is an even big learning. Come what may, follow your rules, you will be saved always. Today we own none of these stocks. Feels proud when we see the prices, on the hindsight mind thinks, we have made good a big chunk of profits from these stocks which today seems nowhere close to them.

For those who have a strategy, follow it divinely, profits are available in loads.

Sept 2019 webminar

Market going up, not a sustainable up move due to low buying power. FPI taxes & Bank mergers propelled market to go up. 5% GDP was brushed off, which is a sign that market has bottomed. Expectation on GST cut, Auto and Biscuit segments where cut is expected while there will not be any positive change due to this. Present correction which is likely to stay for another year or so is a very good time for investing, to pick up stocks at a bargain. It is time to increase SIP’s as well as bulk investments. ITC is now in a attractive buy position for long term investors. Dividend yield on ITC stock is about 2.25%, similar to rental income. Whereas growth is expected to be around 400% in the next 10 years.

Large, Mid, Small Caps, where to invest?

When it comes to mutual fund investing, Investors are generally confused as to where they should invest their money, some times large caps are doing well, some times Mid-caps are beating large and Small caps giving very high returns.

When you invest in Large cap, Mid & Small caps do well, while you are there, it goes opposite. Then, you decide to have all of them, the whole market goes down.

How to overcome this confusion & where to invest.

If we can get a better understanding of what to expect from each category, that will help us make a wise decision.

Let’s go from large Cap segment.

Large cap consists of big companies of our country, the top 100 by the stock’s market valuation. They are well established in their businesses and have consistent performance. On hearing this, your mind will say, ideally this is where we have to be invested.

Yes, It is a very wise thought. Every investor should have some exposure in large cap, because they form the back bone of the economy. Owning them will help you grow your savings as the economy grows.

AS they are well established and consistent in growth, can I have all my investments in Large cap?

No, you will miss the actual potential of Mutual Fund or stock market investing.

Large business are steady yet slow in growth. So are their stock prices too, they don’t give big returns.

Average growth is at 7-10%

Why large cap stock prices don’t have big gains?

Stock prices go up based on the growth in profits the companies make. These big companies have grown so big that, from wherever they are, having say a 100% growth in a year is not going to be possible.

For example let’s take ITC. It is a company  that is more than a century old now. It’s annual sales is 42K crores and it makes a profit of around 12K crores.

Almost all of us will be consuming at least one product that ITC manufactures, in our daily life, yet what is the possibility that ITC’s profits will double in the next one year. That is from 12K crores to 24K crores in 1 year. It is practically impossible to double in one year, while it has all the possibility to double in 6 -7 years’ time, & so will be the stock price, it will double too in the same period.

Being big makes them trusted names, while their growth will have a slow & gradual increase.

Investors in Large Cap fund can be confident of having 7 to 10% returns and they will deliver.

Now, what is different in Mid & Small caps?

They are fairly small businesses,

Bring in some new innovation,

Can adopt faster to market dynamics with their products

Management is lean, which helps in faster decision making, which is also a disadvantage is the decision backfires. The company will go up in air.

Whereas when everything clicks, their space for growth is phenomenal.

Example: Jockey, how many of us used jockey 10 years back. Not many right? Because it was a luxury those days. As our country grew in income, so did the populations taste for branded products. Today, at least 50% of population know of this brand and there is a large percentage who are using it too. Else the company which had 650 crores sales in 2011 could not have grown to have 3000 crores of sales in 2018. Profits, which was at 85 crores in Mar 11, now grown to  411 crores. Near 5 times growth in 7 years.

Where ITC grew 100% in  7 years, Jockey grew 500% in same period.

What happened to Jokey share?

It grew even faster, 1200% in 7 years.

How do you like it?

Profit growth was fast, stock price grew even faster. That is the power of Mid & Small caps.

Jockey had space to grow and had the product that quenched the thirst of a growing population. Will Jockey repeat the same run in the next 7 years, for sure it will not.

Funds having this stock in their portfolio have to ideally reduce exposure to the stock and look for the next similar stock for their portfolio.

Now the next question that will ring in our mind.

If Mid & Small cap funds can give such high growth, why should we invest into any other segment and have lesser growth, why not invest only in Mid & Small caps?

You can do, only that, you need immense patience and tonnes of belief on the fund manager because, when the funds go through bad phase, you should still stay invested, only then you will be able to reap such big gains. When the tide turns valuations just trip and prices fall like 9 pins. It will get back and run again, which can take good long time. This is the period where investors lose patience and take wrong decisions.

So, ideally having a mix of both is the best choice and for that we have the Multicap funds which have all the segments in their holdings.

These are funds which invest into a mix of all the segments, helping investors get a better return than Large cap yet safe as the spread is mixed.

Now the next question will be, here is a fund which has all the qualities, one can invest and just be with it, money will have best growth. Yet, why are people still not making big gains?

Large cap funds give 10%, Mid & Small caps give 20%, Multi caps give 15%. When you hear this mind will fork out a question, where did I have such returns? All these are only numbers, just spoken, doesn’t come in reality.

True, I agree on your thought. Not all investors get to have these growth numbers which we saw here. That is because of concerns that people have in their minds. They don’t stay invested for a long period. The moment they see a small dip in their account, the next thought is how to stop it and first action is to withdraw and keep money safe before big damage happens.

Almost all of us would have known about the 2008 fall. SENSEX was at 21K, dropped to 9K. Today it is joyfully nearing 40K. In 10 years index has doubled. This price move did not happen in a smooth slope. It had 2 instances of 2 year long steep drops in price and 3 years of doing nothing. Impatient investors would have moved out and ended up having made nothing.

This is the reason why very few make big gains from the stock market investments.

Now coming to the question of where to invest?

Have a mix of all three large, Mid & Small, along with a multicap. Follow these 5 steps –

  1. Select the best fund, which has history of consistency.
  2. Be committed to stay invested for a long period
  3. Don’t watch news, it will force you to react.
  4. Have a goal with a period and target only for that, nothing else.
  5. Once a year review the investment to check if it is doing better than the markets. If not move out to a better fund, while have a discipline, not to withdraw funds in the thought to get back later. It almost always never happens.

One small tip to make a little extra profit

When Small caps index drops more than 30%, add a little more money  into your small cap allocation.

You can reduce large cap exposure and increase in Small cap.

Don’t invest in one go, use STP for a 6 or 9 month period.

In the next rally, your investment will be right at the spot to gain big & help you reach your goal earlier.

 

Inside Our Portfolio – 2

This video talks about positions in Delta Corp, AU Small Finance Bank, Bandhan Bank, Bajaj Finserve, HCL Infosys, Himadri Speciality Chemicals, Sterlite Technologies, L&T Technology Services Going light on this week as there is no commitment to buy stocks, stops on existing positions getting closer to current prices indicates that market will take a breather. Having a little extra transaction cost is better to having weak stocks in the portfolio, getting in and out of stocks benefits in having a smooth equity curve, which brings confidence to invest more in the portfolio.

Inside Our Portfolio – 1

This video talks about stocks that are at advantage in our portfolio from the current result season. Intellect Design Arena, L&T Technologies, Sterline Technologies stocks in big rally mode. Trading positions in Himadri Speciality Chemicals. Top technology growth stocks in our portfolio helps us outperform the SENSEX by more than 3% this week even with 50% exposure.

What is SIP?

SIP is the short form for Systematic Investment Plan. It is a way to invest small amount of savings on a regular basis.

SIP is similar to a bank RD, here it is invested into a Mutual Fund. Where you can pre-fix the amount you want to invest on a regular basis. It can be monthly, Bi-monthly or quarterly.

The difference between Bank RD & Mutual Fund SIP is, in RD, every rupee invested will be growing every day. It has a fixed growth in a fixed period. In an SIP, the investment will not be growing every day. Some days it can be up and some it can be negative. It has no fixed return though it can have a fixed period.

This up & down movement is what makes SIP’s more attractive, because it will give lesser number of units when markets are up and more units when it is down. It will help in averaging the investment so that, when the market goes up to its next higher level, your investment brings higher return.

Let’s look at this with an example:

Investing ₹1000 into an RD account which gives 7% interest will accumulate to ₹12465 after 12 months. The same amount invested in a MF SIP where the assumed return is 7% and the funds NAV goes down to -7.60% in the same year before closing with a 7% profit. The value of the investment will be ₹12765. 300 additional earnings which is 30% more than bank RD.

This is the advantage of an SIP in mutual Fund. And Mutual Funds generally give 15% returns which would mean the same 1000 investment for 12 months would have grown to 13670. A profit of 1670 against only 465 from the banks.

 

Why you should start an SIP?

The first reason is that it brings a discipline to save. And the second, the most important reason is that, it keeps you off mood swings. For example – If you decide to invest an amount every month taking time to check the market and then do it. Most of the time, you obviously get held up in some task and miss the investment. If you have the time, you would want to wait for a better price. Or think about your previous investment which is now in the negative and postpone the current one.

SIP removes all these worries about timing. It helps you have the investment happen automatic & accumulate wealth.

Axis mutual Fund has coined a tag line for SIP, Sleep In Peace. It is really so peaceful was of accumulating wealth.

Stock markets ready for its next euphoric rally

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Expectations….expectations. Expectations, towards the end of a Government term which did not have the confidence to decide on any plans that will allow the economy to grow. Expectation on the team that was coming to power, which was aggressive. Expectation on Narendra Modi, who was presumed to be a strong decision maker, as the next Prime Minister. Expectation that, the new government will clear all the infra projects awaiting clearance, which will drive the economy into a robust growth phase.  Indian economy staged a pretty strong recovery and went on to give a robust growth.

Favourable RBI policies, supported by Raghuram Rajan’s strong commitment to revive the Indian economy with his bold decisions on the interest front along with the cleaning up the banking system. His decision to impose curbs on Gold consumption, bring transparency into the Real Estate markets.

Almost all the external factors supported the expected growth. Crude Oil prices crashed, never to see the high’s that it went through. Favourable monsoon, good automobile sales followed by growth in profits of companies in competence. 2014 was a wonderful year for investors as the SENSEX surged more than 40%.

This expectation fizzled out earlier than it was to, things changed. As markets grew leaps and bounds, businesses did not see growth in sales. People began to complain that, “only the stock markets are moving up, money flow is not seen yet. No visible developments in the economy.”  Soon, it was followed by the historical crash of the Chinese markets. Volkswagen case and normal to flat growth from the businesses, markets turned down, went into a tailspin throughout 2015.

After the March quarter results, there are glimpses of change visible. One of the most important factors in the results announced so far is that, sales growth has been still at a slower pace, while profits are showing good growth numbers. Such number growth is possible only if operations are controlled. On one side it is a negative, as controlling operational expenses cannot give continuous growth, it can become counterproductive.

While, on the other side, there are green shoots visible, if the companies who have managed to bring down their expenses, continue to maintain the same tightness on their expenditure and along with that when the sales numbers improve, the profit margins are going to be phenomenal. And that would mean a euphoric rally in stock prices.

As many analysts say on the media, “we are in a cusp of a great bull market” the future looks very attractive for India. It is time to give more exposure to Equity investments. For those who have missed the 2014 rally, now there is an even bigger price move waiting to happen. Those who have maintained a wait and watch on their stock investments, now it is the right time to begin investing. One can even think of adding to their existing investments. Those of you who had stopped their SIP’s or had moved to the debt markets for safety of capital can now think of venturing into the Equities segment to have very good gains.

If things pan out well, we might witness a rally in stock prices, which we had not seen so far in the Indian Stock market history. The next 5 years are going to be a boon to all those investors who venture into the markets.

Take advantage of the markets next move; at the early stage itself, waiting for more confirmation will only result in lost opportunities.