SENSEX risk and reward.


If someone is rich (filthy rich), chances are that all of their riches came from Equity Investing. Either they own one or many businesses or have invested in some companies and have stayed on with it. Generally people shy away from Equity investing due to the fear of loss to their capital. This fear is due to either their own experience or through other people’s sharing of losing experience in the markets.

It is true that a lot of retail investors lose money is stocks; the reason is not the markets. It is because of the approach. Most of the times, it is because of the fear of losing, even before approaching the asset, that attracts the losses. Many a times a person does not know the reason for investing in a stock. Just because someone close to them have told them about the stock, they go ahead and park their hard earned money and when the stock goes down, which invariably happens, the reasoning will be, “it has to happen, when I have invested, how can it go up. Always it happens.”

Holding gets exited after suffering a lot of pain due to losses. Then, they shy away from the markets when it goes up again. The same fear makes them wait for more and more confirmation. Again when media begins to talk and they begin to hear from their friends and near ones about their big gains through some stocks. They venture again, when there is news about big gains already made, left over gains are lesser and signs of weakness have already set it. Which, most of the times is not known to the fearing investor. After getting in the markets begin to slide, again the story repeats.

The other reason for losing is “GREED”, just because there is a great opportunity to make money in the markets, people want to take high risk & get all that is possible from it. One transaction would have given a good profit, while they would have made only small money. The experience of profit will make them take the decision to invest all the money they have and sometimes even borrowed money. The motive is to make big or very big gains in few transactions. After investing, even a small negative move will shake their belief, not because the stock they invested lost heavily, it is because their exposure is so heavy. Once the mind balance gets lost, everything that follows will be against their wishes.

In reality, stock markets are, one more asset class like Gold, FD, Real estate etc., it has the advantage of giving the highest returns, while not always in short periods. Stay invested for a longer period, the returns will for sure be very high. Due to volatility in the price moves there is risk in this asset, for that matter any asset has a risk quotient in it. Only that it is a little more in Stocks and that is the reason the returns are also high.

Some data on what is the risk in the markets and how it can be taken at our advantage:

In shorter durations the risk of loss can be as high as 50%, while at the same time if the period of being invested increases, the risk goes in the opposite side, it gets reduced.

The chart below shows that if we stayed invested for 7 years, the chances of our capital getting negative is zero. That is, if a person invests 10 lakhs in the SENSEX stocks and stays invested for 7 years, the chances of his 10 lakhs getting negative is zero.

7th Year Zero risk

Similarly, staying invested for 10 years and above gives an average return of 12% per annum. There is an 80% chance of achieving this.

10 year rolling

SENSEX goes through changes once in 6 months, most of the times 2 of the index stocks get replaced with a new stock. If such a low turnaround index can give 12% without any effort, a little extra effort to churn and manage the portfolio, the chances of better returns is higher. Another advantage with Equity investing is that, long term capital gains are not taxed.

Equity is the only asset which has the highest return possibility along with liquidity, take advantage of this asset class. Any individuals investment portfolio should contain some percentage of Equity exposure in it, so that the overall returns can beat inflation.

Portfolio performance April 2016


When a person invests his earnings be it in any asset class, either Real Estate, Fixed Deposits, Gold, Mutual Funds or Stocks, the one single minded approach here would be to beat the benchmark or how is my investment doing against its peers?

Whatever be the condition, all of us want to be the best, the same holds good with investments too. We should be making the best returns when compared to others. If we find that our investments are giving double the returns against other assets, there is full of joy. If we find that we are marginally above the benchmark, say the SENSEX is 10% and we are 11%, still we are happy, because we are outperforming.

Suppose we find that we are negative to the benchmark, say the SENSEX is 10% and we are 9%. There is worry and it is good too, because, this is the condition where thinking process comes to play. Should I hold on or shift my investments? In most of the situations where there is below average growth in investments, people have missed to observe and take action of this condition, where, the investment is under-performing and they have not taken action.

To help our clients know how their investments are performing against the SENSEX or NIFTY, we have begun an initiative to report the performance of our portfolio against that of NIFTY every fortnight, with details about what is right and wrong. It will be of help to our investors to know if the money is safe and give confidence about the future.

From the time that we have been tracking the performance of our portfolio since December 2012, our portfolio has managed to have 61% profits against the NIFTY returns of 33%. We had an advantage as our portfolio consisted of strong growth stocks. As we come to the shorter periods, in the last 1 year, our portfolio was positive with a near 1% profit where the SENSEX had lost 5.63%.

Whereas on the last 6 months and 3 months period, we are trailing the benchmark, the reason behind the underperformance is that, most of the stocks in our portfolio were exited following the market weakness in December and January 2016. After the sell out that our markets had, which was overdone following the Global slowdown, our exposure in the markets were down to less than 15%. Cash was moved to debt funds to protect the account from any further weakness.

On a normal process, stocks move in and out based on their fundamental strength, now that our portfolio has exited almost all its holdings, it will take a couple of quarters to load stocks to it, from the sectors that show renewed strength.

Till the September results are out, markets are likely to be range bound while adding a couple of stronger stocks, that show strength on their earnings.

Not in a hurry to turnaround……

Slow TurnaroundThe Indian stock markets which had an euphoric rally in 2014, turned down in 2015 and is looking to have another negative year in 2016. Price increase in stocks are always backed by earnings growth, and when earnings show a slowdown, price moves either get flat or decline based on the interests each individual stock has built in it.

In 2014, earnings growth was very good and it supported the price increase following which expectations got higher and it fuelled the valuations to get a little bit stretched. Once the reality set in to show that the expectations were wrong, rather it was in fact the other way around, a slowdown in the growth rates, investors were in for a surprise. All of a sudden all the buy orders became sell orders and hence the larger fall we have had in the markets post Chinese market crisis.

Automobile companies which were leaders in 2014 began to slow down on their growth. Infrastructure restructuring which was expected to be big and to support the banking sector, has been taking more than the anticipated time to get on the roads. New sectors that began to show strength were NBFC’s and Pharma along with export based businesses. Each one went on to face its own challenges. As spending declined, which has been shown in the top line growth of the Indian businesses in their December financial results, with sales growth in the lower single digits and profits showing an increase which means, companies have resorted to controlling operations to increase profits, which is also a negative in a growth story. Controlling operations expenses cannot continue for a long period. Without sales growth, it will bring in more challenges. This facilitated the weakness in the NBFC sector. USFDA played the devil’s advocate to pharma companies, big names in the Pharma space began to fall like nine pins. Between 20-30% drop in prices of stocks like Dr. Reddy’s Cadila, Cipla etc.,

Exports sector went into a different challenge, external forces played against them, all of a sudden they become un-competitive to their markets following the devaluation of Chinese currency. Orders began to slow down and some of the prominent stocks have lost more than 50% from their peak price.

With big time damages done to the markets, Indices Nifty and SENSEX breached their near term supports and turned bearish. Within few months what was the world’s best economy became the opposite. Now, it will take a little longer than anyone could guess for the markets to turn around. Government through its next arsenal, “THE BUDGET” looks like not to give any big fillip, with just a couple of days for the budget, markets don’t show any kind of strength. Next triggers can come only from the Q4 results, which already shows weakness as banks like SBI have announced that, they are going to show more bad loans in their books.

The best way to approach the market at these troubled times is to wait on the side lines, ready with funds to take the next opportunity early on. In our portfolio for our clients, we have liquidated most of our holdings baring very few best performing stocks like Bajaj Finance, Pidilite etc., Being invested in short term debt will help our capital grow at nominal rates till the next opportunity arrives. In Equity investing, if we deploy this method of getting in when the markets are strong and out when it is weak, it is possible to outperform the benchmarks over a longer period. Hence, again it gets proved that, buy and hold will not be the best strategy in Equity investing. It can only give returns to the extent of that which is got from FD’s. Rarely one can find stocks that have given super normal returns on a continuous basis for decades.

Take a look at your portfolio and do a churn of holdings wherever required and be in cash to take the next opportunity.