Manu Rishi Guptha: Investors are Dancing

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Is a Financial Tsunami Building up?

Just as the
stock price of
Tesla kisses $2000 (and by the time i finish writing this piece, it might be $2200) and Apple is way past the 2Tr$ Marcap, I receive a text message from
an enthusiastic friend of mine who first started investing a few months ago
(March 2020) after being forced to work from home and shared his stellar
success at his new-go at the markets. He shared his desire to be a
professional fund 
manager and started exploring ways to get a SEBI license to
be a RIA (Investment Advisor) or a Portfolio Manager.

Being an investor since 1992 when I made my first investment and having managed
funds for family and friends all life and now as a professional Fund Manager
since the last few years, and having seen euphoria and fear again and again, I
can say with some degree of confidence that this time it isn’t different and something is about to give way.

Covid has
been the most unfathomable disruption, the likes of which hasn’t been seen by
anyone alive today. The concept of Black Swan stands redefined which – till now
– was an unexpected and improbable event and people would often relate to it by
comparing it with a Tsunami or an accident or a sudden unexpected failure of an
enterprise with global ramifications.

No one had ever imagined that within days, the global borders would be closed,
airlines across the planet would be grounded (95% still remain grounded as I
write this), and all levers of the global economy (travel, trade,
manufacturing, shipping) would come to a grinding halt. ‘Sudden Stop’ in global
economy was an academic expression that became a reality almost instantly.

Some 30 million Americans lost their
jobs
(more than 3
times than the previous highest), markets crashed by about 40% in 3-4 trading sessions, China got blamed for its alleged Chinese Virus, oil hit (-) 37 $
while the global leaders remained clueless and the only policy response was a
complete lockdown of nations as leaders grappled with the  enormity of the situation.

Hundreds of
millions of people have lost their jobs and millions of small businesses
have shut down forever and the economic contraction has been so secular that
some of the most high flying businessmen and executives have resigned
themselves to the new normal only yearning for their basic needs to be met for
their families and themselves.

While some countries have shared the real data and the extent of severe and
unprecedented economic contraction, most have conveniently chosen not to release
the same either to avoid embarrassment or to avoid panic. But imagine, for a
second, that everything (revenue, earnings, profit, salaries, rentals, commoditiesetc etc etc) gets deflated by 40-70% – what effect
it is likely to have on the global economy.

If the
savings rate from income varies from 1% to 25% in different parts of the globe (it
is believed that more than 70% Americans have less than $500 in savings and the
max savings rate is about 25% in China and India), it is safe to assume that
every person on a monthly salary / entrepreneur is already digging into life
investments and assets to keep afloat as the inflow (after salary cuts or loss
of income) is far lesser than the outflow. Majority of my friends and
acquaintances have either stopped their SIPs or redeemed their Mutual Funds.
I read that last 2 months have been
the worst for the MF industry because of incessant redemptions and negligible
inflows
.

And Yet…

The Indian
and global stock markets have shown immense resilience making these an easy ATM
to churn out daily profits for
Robinhooders.

Human memory
is short and 10 years is a long time to lose and gain confidence all over again
and the stars (Corporations and Executives) of yesteryears fade away while the
new ones emerge on the evolutionary principles of Creation – Preservation and
Destruction

It is
believed statistically that 95% of market participants and fund managers have
less than 12 years of experience which implies that only 5% have seen the crash
of 1987, 2000, 2008 and a few other mentionable flutters in between. And human
mind is generally tuned to be optimistic as hope and evolution trains the mind
to expect a better future always in every which way. Little credence is given
to people who invoke caution and sometimes border pessimism as a result of
lifelong experiences and perhaps that’s the reason the
world is deriding WarrenBuffett for having lost a decade by underperforming and not investing in Tesla
and Amazon and all the 30 yr olds have seemingly outperformed by simply
investing in Tesla or Kodak or Overstock kind of shares.

Parameters
such as performance Ratios, Profits, Real cash in the hands of shareholders
have lost every mentionable significance and price earnings of 200/300 or even
1000 in case of Tesla seems like ‘THE’ new normal.

And while the bears have been irreparably scathed in this recent melt-up, it
would be prudent to remember that over long periods of time, either the price
catches up with the fundamentals of a stock or the fundamentals catch up with
the price,  but just to put the things in
perspective (and I know nothing about Tesla and am not a Tesla basher sitting
here in India – but it’s a good example) if Tesla was to maintain its present
earnings, it would take about 1000 years to fully recover ones investment
through Tesla s present earnings. Anyone who buys a Tesla stock now is
valuing it at
approx. a million dollars for every car sold
.

Markets are
a beautiful place that allow immense wealth to be created and accumulated for
people who have patience and discipline but history is replete with examples of
more than 70% of investors of all times to have permanently lost capital by
chasing garbage (aka penny stocks) that seems to provide short term euphoria.

Lets talk of
a few Indian stocks and themes or should I say wealth destroyers.

Between 2003 and 2008 Infra and Housing was a great story and a mere
‘infratech’ (use of tech and infra) in a company s name would get it rerated.
Unitech, IVRCL, HCC, NCC, Sintex, DLF, …………… have destroyed almost 99% of
shareholder wealth and most of these names have got delisted leading to
permanent destruction of wealth. During hay days these were stocks that were
the market darlings

Then came
the era of banking and finance. Between 2009 and 2018 NBFC s and Banks had a
dream run before the euphoria and invincibility of the sector was popped by the
ILFS, Yes and DHFL type of fiascos and recently while a top outgoing CEO dumped
his entire shareholding and ESOPS of 26 years in a jiffy (perhaps to pay for
the expenses of grocery, maids and electricity bills during tough times amidst the
pandemic), the gullible public and minority shareholders will be the last to
keep holding the hot potatoes and the music would stop suddenly.

And Now

We have the
API and the pharma theme on an assumption that all the medicine factories on
this planet will stop production and all pharma orders will come rushing to
Indian companies and the world population might start eating medicines instead
of fruits and vegetables all produced by Indian pharma companies.

The same
story gets repeated again and again. While the robinhooders are gloating in the
wealth created by some new age, recently discovered pharma companies doubling
in the value in less then 2-3 months, the end is always painful when the music or
the party stops. And by the way graphite was the pharma of today or pharma/API was the graphite of those times.

The 5%
people who have been around, all of them understand this, having gone thru
cycles, but the 95% neither have the wherewithal or the research to truly
fathom the depth or the lack of it in the present euphoria.

Every crop
must be harvested at a specific and optimum time, lest it should rot. Same goes
for ones stocks, corporations, businesses. Buying or creating is natural to
ones instinct of evolution, letting go / harvesting is an art which very few
understand or develop. And most end up in a feeling of regret esp small and
minority retail investors who fall in love with their stocks, cannot sell and take the profits home.

The trouble
is that most fund managers are obliged to be eternally optimistic (ignoring the
risks) else they would face redemption thereby leading to lesser fees for the
fund-house. Very few investors realize that cash in itself is a strategy and a
position worth considering and to be in from time to time.

As Howard
Marks says “To be a disciplined investor you have to be willing to stand by and
watch other people make money on things that you passed on”.

Irony of the
markets is well evidenced, rather strongly in just this one case in point :-
PVR Cinemas

PVR used to
be a perfectly fine and a successful popcorn and coke reseller till the
pandemic struck and just 11 days of disruption in March saw its profit fall
thru the floor. The future is bleak with zero sale in first 2 quarters and any
of the movie buffs whom I have spoken to in Delhi, Bangalore and Bombay (where PVR has max
screens) are not going back to a cinema hall as people have found a new freedom
on OTT platforms and using affordable projectors at home and replicating a
cinema hall effect without risking oneself to the virus-exposure. 

Producers are
preferring – selling to and releasing movies through OTT platforms as that
reduces their risk to zero. And yet retail investors are finding virtue in this
company that has zero sales, bleak future, debt ridden and trading at 300 times
its trailing earnings and no visibility of the future earnings. Some PVR stock
lovers say – all will be well in a few years, we are looking at 2030.

CNBC has
single headedly taken it upon itself to create a euphoric environment shrouded
by global liquidity and has allowed all dubious promoters to talk up their
stocks only on the base of ‘positive commentary’ as if the alchemist in them can
turn just commentary into profits, cash and dividends.

On the other
had a company like ITC that produces more cash and profits than all the other
6-7 top FMCG companies, is debt free, is trading at abysmally low valuations
(15 times trailing earnings) and yet the robinhooders find it less appealing.

This
dichotomy will self correct sooner rather than later and will come with its own
collateral damage which most new entrants in the markets aren’t ready to handle.

Harvest Your
crop, take profits off the table, let some notional profits be lost along the
way but evaluate the risk and reward that any company, valuation, story,
potential – offers.

If this fine art of valuation equilibrium can be
discovered, small investors would do themselves a great service of increasing
their longevity in the markets and protecting their capital.

Enjoy the party, stay close to the door, so when
the stampede starts, You can safely escape without being trampled.

My twitter handle @manurishiguptha

Also Read on FinMedium:  4 Investing Lessons from Mohnish Pabrai

www.manurishiguptha.com

www.mrgcapital.in





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Manu Rishi Guptha
Manu is an Investor, Blogger, and a Professor of Fearlessness & Minimalism.
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