Dearest investors and friends,
Hope you are doing great. Firstly, I want to congratulate all of you. If you were not part of the 2000 or 2008 panic, then I am sure you got a small sense of how panic selling happens in the stock market. If you held on to your businesses or added to some amazing businesses, then pat yourself friends. Awesome stuff. I salute you.
If you didn’t even know that market crashed, then that’s even more awesome. Love you for that.
Hanging On !!!
Let me begin by saying that Nifty 50/Sensex is just a movement based on companies in the index. These companies change from time to time. Also, the weights of companies in the index matter a lot. Sometimes, 5-6 heavyweights in index take it up or down based on their movement. The Index was hitting life highs a month back due to few companies. Today, also, correction of these few companies is taking Index down as well. Of course, others are also falling. Falling is contagious friends.
Above is a weekly chart of the Nifty 50 from 2006 onwards. As you can see, there are huge red candles right from 12000+ to 8600 odd levels and then a sharp pullback to current levels of 9900 odd. All in a few days time. Many would have seen the Nifty suspended for 45 min on 13th March 2020. News channels screaming. You might have felt that your Money is gone. Paisa doob gaya. Your stocks being sold left and right. Freeze in front of your eyes. Most people saying – Maine bola tha. Few people like me, boring you with same advise – Stay invested. Don’t worry etc etc etc.
I asked on Twitter – “Investors. How is the JOSH?” I was thrilled to receive the reactions. I am happy to have right friends following me !!!
You must be wondering – “Why is FI showing us a chart when he doesn’t even care about them?”
Many of you know that I do not look at charts. Yes. I actually do not. I am just showing this chart to show you how mad the selling looks like. Do not further get into the chart. It was just to make a point.
Now, if you plot the indices of various countries, you will see a similar panic selling in their charts as well. Great Businesses across borders becoming valuable.
So, what really happened. In pure layman terms, weeks back, a Corona virus allegedly originated from China and spread to various countries. Production came to a quick halt. Hospitals were built quickly. China is very very key in the supply chain across the world. When China came to a halt, markets across the world panicked. Heavy selling began in anticipation of a global crisis.
As I write this article, even though the virus-spread in China has been contained & factories are back in action, many countries are in panic mode. I must congratulate the way China handled the situation. Kudos. Markets across the world started collapsing as top officials and even government servants in various countries starting testing positive on the virus. Sadly, virus has moved to other countries. Travel has been banned across. The social media further deepened the panic and created a fear among everyone. Interest rates getting slashed, people asked not to move out etc. Basically, lots of fear all across. On a lighter note, situation looks so bad that even the President of the United States has stopped bragging about the markets. In my opinion, in addition to this, in the Indian context, many Top Blue Chip companies were at rich valuations and needed a much needed breather.
As an Indian, we are entering Summer now. Also, our cultural food is hot and spicy. Our food is extremely healthy and most of us eat hot, fresh, home cooked food. Namaste is our local greeting where we fold out palms in respect. We, as a country are chaotic and we love the chaos. Thanks to that, our immunity is very well built. With the heat, the virus should just fade away. Let us use this opportunity to fine tune our lifestyle a little bit for our long term benefit. I personally feel that we would not be affected by the virus as much as some of the other countries did. Having said that, I pray for the victims’ quick recovery and hope that the containment happens sooner than later.
I personally see a huge difference in the 2020 market fall compared to the falls which happened previously. Be it the 2000 bubble or the 2008 financial crisis. Or the small corrections which happened time to time. I frankly do not see a Fundamental reason for this kind of fall to happen. I repeat. Fundamentally, for most Indian businesses, nothing has changed between a month back and today. Valuations have come down. But not the business. Many can argue that, since the other countries are suffering, we can see a crisis looming. Let’s agree to disagree on that.
According to me, one reason for this kind of crazy selling is foreign institutions (FIIs) wanting to liquidate as much as they can so that they could invest back in their country markets which were also available in a huge discount. Now, our domestic institutions (DIIs) are smarter. They are not buying the fall aggressively. They are allowing the FIIs to sell and then slowly buying in at every dip. This is just my take. As a reader, you might feel otherwise. Let’s respectfully, agree to disagree. Of course, there could be many other reasons. But, this is one of the reasons what I see.
Friday, 13th March, 2020, saw a small pullback across markets. I repeat, a pullback. Many are celebrating. But friends, hold on. In my opinion, if the FIIs would want to liquidate some more, we will see more downside. We might never see a downside also, since there is value. We never know. Most likely, if every retail investor is waiting to see that low price again, they might keep waiting also. As I said, we never know the immediate future.
The question is, should we as Indian investors be worried? Do we want to waste time in predicting the direction? Are we seeing anything wrong fundamentally with the businesses? Are we able to see value in top companies across the listed markets?
Today, as I write this article, I can personally find businesses which are leaders, strong balance sheets, extremely profitable, having good cash flows, growing earnings above 10 – 20% CAGR even in the last one year where liquidity was tough, mouth watering dividend yields, trading at finger licking valuations. The non leaders which have decent balance sheets are also trading at panic valuations. Of course, the companies which are having bad balance sheets are also trading violently.
The magic question to ask is – What to make of the current situation? What do we do now? What’s the road ahead?
1. We saw the first pullback on Friday the 13th, March 2020. Do not assume that the markets will not go down further. Anything can happen. In markets, everyone is just speculating the future in short term. No one knows. So it is futile to predict how the market will go. It can also happen that many retail investors sold at the peak of pessimism. They will either never enter markets or will enter at 30-50% higher prices when everything looks better.
2. Remember that the index (Nifty 50 or Sensex), just moves based on price movement of the companies forming it. Not the other way around. So, please do not get carried away by headlines saying that “X Lakh Crore got wiped out etc”. Also, let us not blame the media. I have many friends in the media who are doing a fabulous job. For few (I wish not to name), writing masala headlines is part of their job. Bread and Butter. Let them do what they do best. Let us do what we do best.
3. If more foreign money moves out, we can see more downside. But I am very confident that our domestic cash will buy the value from here. Maybe they will love another lower circuit, but they will buy on the downside and definitely on the upside as well. There is lots of value on the street even in the best companies.
4. My favorite point. There are top companies which are profitable and will continue to grow. And the best part. They are trading at extremely awesome dividend yields. I am sure investors, in a panic selling always look at dividend yield in such growth companies. Remember, when the price comes down by 15 – 20%, the yield goes up purely based on the price at which the buy is made. So, friends. Look around for such companies. Keep ammunition ready. The real value of dividend yields is only seen in bad times. Remember this friends.
5. Foreign money will come back. We don’t know when. But, surely it will. India is an awesome investment opportunity. Why won’t they?
Now, I understand. Many of us are fully invested. Some of us have cash. How do we make use of this situation?
a) If you are a salaried person who gets salary every month, please use this opportunity to add more shares of your business. Increase the investment amount month on month without affecting your daily lifestyle. Please do not over expose. Just continue your SIP in markets or mutual funds. As the businesses get cheaper in value, you can invest more as well. Since your horizon is for a decade or more, you won’t have sleepless nights even if stocks correct from here.
b) If you are not a salaried person but have good dividend flow monthly or quarterly like me, please consider deploying good amount in great companies at this time. For me personally, in the last one month, many businesses have paid good dividend. I am enjoying this correction and adding good dividend yielding businesses at this time.
c) If you are not having money at all to invest and are fully invested, this is the right opportunity to shuffle portfolio and get out of businesses where the balance sheets are poor, earnings are lumpy etc. This is applicable for above salaried personals as well. You can deploy the money into businesses which are strong instead. If businesses are already strong in portfolio, then do not do anything. Just enjoy the markets from sidelines.
d) Either way, use this opportunity to clean up the portfolio. I keep saying – Do not feel that a business which corrected 80% is worse than business which corrected only 50%. Do not take call purely based on price. If earnings are significantly impacted, but you see that they will perform much better moving forward, you can buy more of the same businesses irrespective of price correction. If you feel they will not perform well, sell out. Period. Again I repeat. Do not base decisions purely on price corrections etc. Look at business fundamentals and performance.
Note: This is a good time to book short term loss on businesses and re-enter the same/different businesses the next day (slightly price will be up or down). This will allow you to show short term capital loss on your IT returns and also give you a new sense of ownership of same businesses. This is something I do when there is a major correction. I do not buy something new. Same businesses. If you do not want to do this, perfect. No compulsion.
e) Exit Whatsapp groups if you get influenced easily. If you have an independent view and are not at all affected and have a lot of time, only then indulge. Else, best to stay away.
f) I read a beautiful quote. If you do not read news, you are uninformed. If you read news, you are misinformed. So, Be informed. Period.
g) People will ask you – What did you learn from last week crash etc? Ask them to go and take a hike. We do not learn anything from one week of price movement. Price movement analysis is for the media to do, especially in short term. We should only focus on business movement. Stay in market and stay the course for more than a decade. Then you will learn that eventually price follows earnings and not the other way around. That’s what I have learnt.
h) I am seeing many people saying that having cash is a learning. I don’t think it is practical. Let us most respectfully agree to disagree if you have a different view. Let us assume that someone was sitting on 50% cash when the first red candle was formed. They might have deployed 20% on a fall. Now, lets say another 10% drops. They will deploy the other 20%. Lets say another 15% drops. They won’t have cash. How will they know the bottom? It’s humanly not possible. So, basically, cash is an asset only when market falls. Else, its a liability. You will see many telling you that cash is king. Yes they are absolutely right when market falls. And wrong when prices move up. But, frankly, I am always fully invested. The only way I have cash is, by selling some of my stocks to buy something cheaper. Or wait for my dividends to flow. I have never sat on a lot of cash 🙂 Those who had cash for this crash, hopefully have used it wisely.
g) As some selective stocks look good today, please please please do not borrow and invest. Do not sell something you need and invest in the dynamic markets. This is something I have said multiple times and repeat again and again. Deploy only the money which you do not need for the next 5 – 10 years in the market. If you are a trader, then this advise is not for you, my friend. This is for investors only.
h) Associate yourself with people who have reached where you want to reach. If you want to make quick money, associate people who are making quick money consistently. If you want to create wealth over 10 – 15 years, associate yourself with people who have been there, done that. Association Matters.
i) This is the best time to buy businesses which you are perfectly in sync with. Buy something you understand. Do not wait for someone else’s view on this. If you trust the management, see immense business (not price) potential, and find it trading at mouth watering valuations, just go for it. When tides turn, the price will follow.
j) Do not gamble with your hard earned money. Don’t go for quick 20% returns. Focus on businesses which can give you 15 – 30% earnings growth in a long term period with good dividend yield. Margin of safety is important.
Lastly, friends. The Stock Market has created wealth for many of us over a decade. For me personally, the crash of 2008 was the best thing that could have happened. I added more and more of my salary during the worst of times which has, with god’s grace and market’s blessings helped over a period of time. So, market is a friend. Not our enemy. Let us trust the businesses and definitely, earnings will follow price over period of time. As I say, if businesses continue to grow their earnings with strong balance sheet, neither you nor me can stop Wealth Creation !!!
Keep the SIP going. Follow the Process.
Let’s enjoy what is in store for us. Downturn or uptick, let’s chill.
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