The decoupling of real economy and financial markets in past few
months has certainly caught many market participants by surprise. There is no
dearth of experts and masters of market who are claiming to have caught the
March bottom and minted money. I have no doubts that they might have actually
achieved what they claim. However, the publically available evidence suggests
that most mutual funds have yielded negative return in YTD2021 and in past one
year. The 5year return is worse than the average fixed deposit interest in this
period.
The investors are thus caught in a quandary - whether they
should use this bounce in the stock prices to redeem their investments or
invest more money.
The problem in fact seems more acute with the investors who
decided to play "safe than sorry" and redeemed their investments
during March-April and are sitting on the fringes. Many of them are wondering
whether it is a good time to invest back in equities; especially when the debt
and money market returns have plunged sharply.
The questions I get these days vary - "su karwa nu?"
(what to do?), "Kya lagta hai?" (how does it look?) "kuch karna
hai kya?" (is there any investment/trading opportunity?), being the most
common ones.
I do not believe in this entire FOMO (fear of missing out)
theory of investment behavior. I believe that this is just a deceptive jargon
to describe the unexplained part of the investor behavior.
In my view, it is perfectly normal and acceptable behavior for
investors and traders if they do not find it desirable to venture into rough
seas and prefer to wait in their cabin for the weather to clear out. It they
are looking for assurance that the storm has passed and it's safe to sail now,
this is a prudent behavior not fearsome.
My answer to the inquisitions of investors/traders who chose to
retire to the safer confines of their respective cabins is as follows:
(a) The economic storm triggered
by outbreak of COVID-19 virus is far from over. The economic consequences of
the disruptions caused by global lockdown will continue to unfold over many
years to come. I do not expect Indian economy to regain sustainable 6%+ growth
trajectory (normalized for FY21 extraordinary fall) in next 3years.
(b) The asset prices,
especially equities and precious metals, may continue to rise in short term,
due to abundant liquidity; lower cost of funds & poor debt returns; lower
capital requirements in routine businesses;
(c) There is no sign of
bubble as yet in the market, as even the 3-5yrs returns are abysmal. The
valuations appear stretched due to extraordinary fall in earnings. The negative
real interest rates may afford higher valuations to sustain in the short term
(12-15months).
(d) The market breadth has
started to narrow again. In my view, this trend may accelerate in 2HFY21. I
will not be surprised at all to see the benchmark indices scaling new highs in
next 9-12 months, while the broader markets languish or correct materially from
the current level. Too much diversified portfolios therefore may continue to
underperform the benchmark indices.
My suggestion to the readers, who have asked these questions, is
as follows:
Follow a rather simple investment style to achieve your
investment goals. It is highly likely that most may find this path boringly
long and apparently less rewarding, but in my view this is the only way
sustainable returns could be obtained over a longer period of time.
I believe, taking contrarian views, anticipating short term
performance (e.g., monthly sales, quarterly profits etc.) and reacting to that,
or arbitrage on information/rumor of a corporate action are examples of
circuitous roads or short cuts that usually lead us nowhere.
Taking straight road means investing in businesses that are
likely to do well (sustainable revenue growth and profitability), generating
strong cash flows; have sustainable gearing; timely adapt to the emerging
technology and market trends, and most important have consistently enhanced
shareholder value.
These businesses need necessarily not be in the “hot sectors”
like commodities in early 1990’s, ITeS in late 1999s, or infrastructure and
financials in 2004-07. These businesses may necessarily not be large enough to
find place in benchmark indices.
I have discussed it many times in past. However, given that the
market is in a prolonged period of high volatility and low returns, making
investors jittery and indecisive, I deem it fit to reiterate. Of course there
is nothing proprietary about these thoughts. Many people have often repeated
it. Nonetheless, I feel, like religious rituals and chants, these also need to
be practiced and chanted regularly.
