Investing in equity is, at best, like being slightly drunk and taking potshots at moving targets. The events of the past few years had convinced most investors, lay and expert, that we were sober and that the targets were at point-blank range and glued to the ground. And, of course, that we were holding AK-47s with free bullets. Then came 2008... and we shot ourselves.
To all those who think it’s going to be a ‘different’ ball game now, I say this with all the conviction: we are back to normal now. Let’s see why the same old rules will work in the new environment.
Margin of safety: The fall has been vicious for most stocks. But at over 20 times the forward earnings, we were definitely overvalued and had global liquidity (driven by the credit bubble) as a strong supporting factor. Many stocks had run up dramatically as the Sensex rose from 16K to over 21K. To buy at such times was to place everlasting faith in global liquidity and wait for the bubble valuations to pan out. Momentum favoured the brave buyer, but the valuations left very little margin for safety.
Greed and fear: An irrational and artificially induced propensity to buy has now been replaced by the desire to exit. Under pressure to de-leverage, redeem, square up, people will now sell at any cost—without recourse to analysis whether this is a fair price to sell. The long-term investors love such situations and bring out their cash hoards during these bumper offer seasons. They get greedy when others are fearful.
Pedigree and franchise: Global consumption, largely driven by leveraged American consumers, is poised to slow down. Fiscal and monetary imbalances threaten other large economies such as India and China. USA, Japan and much of the EU are probably headed for a recession. Commodity prices are crashing and global capital spend may stall. Which company will do better in such an environment? Look for one that’s driven by a high quality management, has a sustainable USP and possesses that rare quality, client franchise.
To these canons of sensible investing, I would add that the company must be a leading participant in the India story. Notwithstanding the recent carnage, our socio-political mess, intellectual stagnation and the pall of gloom that financial soothsayers are predicting, I am convinced that we are at the proverbial tipping point of economic growth. There is enough promise in India, even today, to make it a great investment destination.
But how many times has India flattered to deceive? Let’s get sensible and hedge against this fixation with the ‘India story’. Check if your favourite stock-pick has the capability to withstand shocks—a couple of bad quarters (look for low overheads), fund crunch (find cash-rich companies and check dividend yield), interest rate hikes (tolerate zero-to-low debt) and margin squeeze (must be a large value-adder, not a mere processor).
Now that many stocks have fallen to apparently attractive levels, ask yourself these age-old questions about the underlying businesses. And decide which business you want to own a brick in, not the price levels at which you want to trade. If you own a great business and the price falls, consider yourself lucky and buy more!
Based on these criteria, here are some large- and mid-cap stocks I recommend: Infosys, L&T, Jindal Steel & Power, NTPC, Reliance, Opto Circuits, Federal Bank, Maharashtra Seamless, Esab India and Mphasis.
— Dipen Sheth, Head of Research, Wealth Management Advisory Services