Its been a long bumpy ride from 8000 to 12,000. Every street corner looked like a cross road and the TV anchor seemed the perfect weather man who told us about the rains only when it started drizzling and about the heat just as we were taking our jackets off. Well, stock markets are all about that. They will make the consensus go wrong each time. For everyone cannot be rich at the same time.
The fundamental guys have started talking about charts! Did one ever hear the guys who looked at Balance Sheets suggest that we should buy only if the sensex breaks over 12,700 but yes, times have changed and in these changing times it takes a lot for the human mind to change. The emotional self within is still thinking of how everyone else got it wrong and that the guys who are lapping it up at 12,000 have no clue that the world�s biggest democracy goes beyond the polls into the results next Saturday.
The ones who have bought are busy thinking of exiting and the ones who are on cash are expecting the markets to fall before they buy. Someone argued that it makes little sense to buy at such valuations but did it make sense at 8000. It did but at that time the street was busy preserving powder for 6,000.
My firm belief is if we retrace back to 8,000 (a weird hypothetical thought) no one would buy because at every index level we will like to buy it lower and the only way to get in the suckers is for this rally to extend beyond 12,000. The left out feeling will create panic buying because markets do not oblige timers they oblige the people who are prepared to spend time with them.
While elections are a big issue for the news channels just think whether anyone else coming to power will affect you in your trade or industry. Suppose you are running a branded garments shop in a busy street center would you actually close down the shop if Mayawati becomes the Prime Minister? Additionally would you say to yourself that I would re-open this shop only if one of the two big parties heads the country?
True there will be severe volatility if the results are fractured to the core but in one quarter we will get along with life. The mornings would re-start with the Nikkei and the evenings would again end with the Dow but as investors we should welcome events that allow us to participate again in this great long term story called
Sometime the news channels do a lot of justice to us. They harp on the negative news so much and so fast that it gets discounted to the core and then the markets say ok let�s see ahead. If most of the MFs are still in 30% cash and we get a severely fractured mandate would you bet for any of these MFs to go 60% cash from the 30% that they are already holding. I do not think so.
So the need of the hour is to take a slightly longer term view with the money that we need and then move along because passive index investing has returned a 20% CAGR over the past 30 years. I doubt if any market timer (leave alone stock picker) would have fared any better then that.
So unless you are a hedge fund manager or a MF guy trying to avoid that short term blip it would pay to remain invested if like me you cannot time in the entries and exits. But if you can then there is nothing like it!
As I said I do not know where we are headed but I surely understand that the market will not oblige the consensus. Its time to buy some small and mid cap companies which are segment/sector leaders trading at 6 to 8 times trailing PEs; 4%-5% dividend yield and Return ratios of 35% and above; free cash flow and with cash on Balance Sheet. Of course these small and midcaps should constitute one part of the portfolio the other part being made up of secular long term stories where you have a 3- 5 year view. Everything else should follow.
Maybe the volatility in the next few weeks will provide such opportunities let�s see!
Very well said Basantji.Getting the macro picture right consistently is next to impossible for anyone.We have to be bottom up in our approach and look at individual stocks attractiveness right now.
I just know two things:
1 - Always stay invested
2 - Whenever market falls, its opportunity to buy. Dont predict the markets to fall, but if it falls enough, dont loose the opportunity and also dont have too much greed that it will fall more.. Keep buying..
Its time to buy some small and mid cap companies which are segment/sector leaders trading at 6 to 8 times trailing PEs; 4%-5% dividend yield and Return ratios of 35% and above; free cash flow and with cash on Balance Sheet.
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At the height of bull market if you have asked some expert, he would have said, "who cares about cash flow, people made 50 bagger with negative cash flow".
Market downturn has taught all us why, basic investing fundamental rules are important.
Any company with 35 pc RoCE zero debt and 5pc div yield will essentially be cash flow positive. The ones that are cash flow negative are where growth is less then RoE. So cash flow positive is a associated factor not a primary one. Bharti and Pantaloon went up 40 times with negative cash flow. In this market there is on single way of making money. Given a choice I'd rather buy a long term secular story with negative cash flow in the initial years for a 50 bagger then burn midnight oil doing the alternative.
The more i read about it,the more it tells me that,to make a lot of money you have to take a long term trend call about an industry or a company and buy its stock at reasonable valuation.Period.
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Basant, very good article. Just wanted your views on one point. Do you think if we have a really fractured mandate and a motley group of parties including the Left, BSP etc try to form a government, it would harbor well for the indian economic policy environment?
There is no issue with either a Congress or a BJP led government at the centre. I think other combinations may create a difficult economic and social policy scenario in India.
Maybe not for the next few weeks but finally we wil be back to tracking results. But the odds are too difficult to really bet on and when we have a probable loss in the near term and a possible gain in the far term I'd rather stay invested and reap the far term gains then worry about near term losses.
One of the best writeups I have read in recent times
Posted on:5/6/2009 8:07:10 AMbasant
As always I am more an admirer of that chap's writing skills then his thinking ones! He has been bearish all this while and rightly so but its interesting to note how that stance is slowly changing or rather getting ready to change!