I was reading this interesting article herewhich made quite a lot of sense. The main theme of the write-up was whether technology is the culprit which is speeding up the market cycles?
I am not sure whether it is (entirely) correct to put the blame of quickened pace of market rises and falls to technology, but some parts of the article made sense to me. For example, in one paragraph, the writer quotes William Bernstein, a brilliant author and investor:
The Great Internet Bubble will not be the last of its kind, but if history is any guide, we should not see anything approaching it until the next generation of investors takes leave of its senses, sometime around the year 2030. If the current generation gets caught out again, we should be very disappointed, as no previous generation has been so dense as to have been fooled twice. 
Little did Bernstein know that after just 5-6 years, there would be another bubble (real estate – subprime) which will implode. And alongwith it, bring down big and established financial institutions on their knees. Many countries around the world are still trying to deal with that event.
In another example, he says that it took almost 25 years for markets to surpass the 1929 stock market peak (reached just before the depression). Compare this with the all-time highs of 2007-2008, which were surpassed after just 6 years (after the correction). Also, more than 65% of the losses from crash occurred in just six months, from mid-September of 2008 (after Lehman Brothers failed) to early-March of 2009.
Will such newspaper headlines become reality soon?
I am still comparatively new to stock markets, but frankly speaking, it does seem that everything happens at a quicker pace these days.
A recent example of increased pace of events is the surprisingly quick fall of oil prices. Almost no one knows why the world’s most important commodity has fallen almost 50% in just 6 months. Professor Damodaran gives some insights here though.
It simply seems that the speed at which information is being disseminated is clearly having an impact on market cycles. To quote the author, “there is acceleration in the ups and downs of market cycles from the flow of information and its instantaneous dissemination through channels such as social media and other forms of online communication.”
People are now geared towards short-termism. Many are in the act-first, think-later mode. When the implications of our decisions aren’t accompanied by enough time and deep thought, unintended consequences will occur with more frequency. The crash of 2007-2008 was not supposed to take place just few years after the dot-com crash of 2000. And the general perception about 2009 lows of markets is that it was once in a lifetime event. But looking at trends, and more importantly pace of things happening around us, don’t be surprised if we very soon get to witness our SECOND ‘Once-In-A-Lifetime-Event’ 🙂
Don’t get me wrong guys. I am not against our country.
If one was to take the current national mood (as suggested by opinion polls) and mediaproduced content as dependable indicators of election results, there are decent chances that India might get a strong and stable government.
Indian Elections 2014 – To decide course of markets for next 5 years
Who would it be?
I don’t know. And atleast for this post, its immaterial which party or alliance it is.
But before I tell you why I want Indian elections to fail, I want to caution everyone.
What I Am Concerned About…
In last 6 months, Indian stock markets have made new highs and moved up from 19,000 to a new high of more than 22,000. This means a good 15% increase in less than 6 months!! And if one thinks carefully, it has only been in last 6 months that various political parties have become ‘electionally’ active.
Fundamentally, almost nothing has changed apart from Rupee appreciation.
So as far as I am concerned, this rally is fueled mostly by hope and people’s expectations.
And there is nothing wrong in being hopeful and optimistic about a strong leader. But to think that someone has a magic wand and would change everything with the word go is like… being very unintelligent.
People have already started talking about newer and bigger targets like 40,000 for Sensex.
And headlines like the below ones have become very common
Common Newspaper / Online New Site Headlines
Let’s be a little rational, if not wise.
Stock Markets are riskier when moving up. And as of now, markets are moving up pretty fast.
A number like 40,000 or 42,000 is not unachievable. And it is possible that it might happen over the next five years. But stock market history bears witness that whenever things get a little too optimistic, and markets run up without any improvement in fundamentals, there is a reversion towards the mean, which means…
And gods forbid, if the new government is unable to deliver on its promises within the first year, the markets would definitely overreact and start grinding down.
Why Do I Actually Want These Elections To Fail In Giving A Clear Majority To Anyone…
Once again, don’t get me wrong. I am not against our country. But I am an investor too.
Anyways the government would be formed. But in case there is no one with clear majority, then markets would not take this as good news.
And that is what I like. Markets go down because of bad news or because of absence of good news. So to bring sanity back to Indian markets, it would be a good correction to have. And for long term investors, what better can happen than a decent correction?
Once we are able to sensibly judge when the markets are cheap, it makes sense to buy stocks of great companies at cheap levels. It is the concept of buying low and selling high (though we personally prefer not to sell if we have bought a stock really cheap).
So, now you want to buy stocks. But how do you fund it? Either you have a stash of extra cash which is waiting to be deployed. Or you can just crib over the missed opportunity. You know markets are cheap and you have the courage to go out and buy stocks. But you don’t have the cash. How much unluckier can a long term investor get. 🙁
But this fate is avoidable.
Its a given fact that markets will move up and down. So suppose markets today are trading at expensive valuations. Knowing that markets are supreme and you are just an average investor, you have opted for systematic investments in mutual funds. But you also know that a time will come, when stocks would be available at really cheap valuations. This thought should act as a trigger for you to start a simple recurring deposit. This RD would keep accumulating money, month after month. And don’t forget, this RD earns interest too.
Everyone remembers the bloodbath on Dalal Street in January 2008. But what panned out over the next one year was something which changed lives of many people who had the courage to take bets on great businesses.
It has now been almost 4 years since markets touched their bottoms in absolute terms (Sensex@8000) & rock bottoms in valuation terms (PE>12). A few days back, a perennial Indian Bear (read Shankar Sharma) predicted that we might be heading towards 2008 lows. So just out of curiosity, we decided to analyse price performances of large cap companies (& a few smaller ones) since 2009. This exercise has no significance apart from the fact that it dispels the myth that only small and mid caps can give big returns in short term.
We have nothing more to add except that please do focus on numbers in Light-Red-Colored Absolute Returns column of the table.
The figures (in %) are free of typos, i.e. there are no errors in calculations.
We hope you got the hint 🙂
Since 2009 Lows…
Click to enlarge
To quote Joshua Kennon, “It was such a bizarre time. (In 2009) People lost their minds on the upside, and gave up all hope on the downside. Anyone with money (& courage) during these dark days got very rich.”
Note – CMP figures as of April 5, 2013 Disclaimer – Long term positions in few stocks mentioned in this post.
After witnessing freefalls in individual stocks like NHPC (a PSU!), Core Education, etc, we wondered what would we do if suddenly, markets decided to crash? No, we are not trying to predict a crash or correction. We are just trying to be prepared. It is same as buying life insurance. You don’t predict your date of death. But you want to be prepared for it and hence, you buy insurance.
We did a similar exercise 6 months back when we came up with a list of 10 great stocks to buy in market corrections. And now we feel that we should make this a regular 6 monthly exercise, i.e., every 6 months, we should be ready with a list of 10 stocks to buy in case there is substantial fall in their prices.
Stock Market Crashes
But before we go further, we would like to end any possible controversy, which may arise in future regarding our love (& prayers) for market correction. Please read thisbefore going ahead.
So how do we come up with 10 stocks?
In four simple steps…
Step 1: Select 40-50 stocks initially
We have decided to start with an initial list of around 40-50 stocks. These include –
·Stocks respected by markets (part of indices like Nifty 50 & Sensex)
Step 2: Decide parameters for evaluating the selected 40+ stocks
Now here is the tricky part. We are evaluating stocks. Hence, our first reaction was to choose parameters which are qualitative. For example, growth rates, profitability, ratios, etc. But then we thought that we should rather use simpler parameters to come up with 10 stocks. What we mean is that after ensuring that our initial list of selected stocks meets certain minimum criteria (on qualitative parameters), we should finally use more intuitive and simple filters. And therefore, we decided to use following 5 parameters:
Company Management (It should be atleast decent*)
Company shouldn’t be highly cyclical
Company should have atleast above average growth potential
Company should have a decent dividend record
Would we be ready to hold the stock for next 10 years?
* Deciding what ‘Decent’ is, is subjective. 🙂
Now all these 5 factors were not used as eliminators. They were used to subjectively evaluate these companies, i.e. we used all these 5 parameters in totality to come up with a final list of 10 stocks.
Caution: The approach is very simple and may not appeal to those who love calculations to come up with stock ideas.
Step 3: Evaluate stocks on selected 5 parameters
The table below shows a simple Yes-No analysis of the selected 40+ stocks.
Step 3: Evaluating stocks on chosen parameters
Step 4: Final shortlisting of 10 stocks to buy for market corrections
As already mentioned in step 2, all parameters are looked at in totality to arrive at the set of 10 stocks. The table below shows the 10 stocks, which you can consider buying in next market crash.
10 Stocks to Buy in a Market Crash
Want to know which were our last 10 recommendedselected stocks for buying in market crashes? Click here.
But wait. We are not done yet. We had a tough time selecting these 10 stocks. We felt that once you are through with buying a few of these stocks in a market crash, it would be interesting to look at a few more good stocks, which did not make it into our list because of our own personal biases, our lack of knowledge, etc. So we decided to come up with an additional 7 stocks which we will keep an eye on…
7 Additional stocks to keep an eye for in market crashes
Now you might be thinking that these guys are trying to fool us. They started with just 40 odd stocks and have come up with around 17 stocks as their choice. Is this what we call shortlisting and selecting? How can this be called as stock selection? Choosing 1 out of every 2 stocks is not called selection.
But friends, this is only because we found it difficult to eliminate the good stocks. Why? Because we started with a very small number (40) of really good companies. But if you consider the number of available stocks in Indian markets, you would understand that we have actually selected 17 stocks out of about 5000+ ones listed on Indian exchanges, i.e. we chose just one company out of every 295 companies. Now that is called some selection 🙂
As soon as we read this, we had a feeling of Déjà vu…
Déjà vu, according to Wikipedia, is the phenomenon of having the strong sensation that an event or experience currently being experienced had been experienced in the past.
You must be wondering why? The reason is…
2008 – Reliance Power’s IPO – About 2 Billion Dollars – Sensex near All Time High
2013 – NTPC’s Offer For Sale – About 2 Billion Dollars – Sensex near All Time High
Power Stocks : Deja Vu??
Striking similarities, isn’t it? Both companies belong to power sector, both are coming out with almost equal offer sizes and markets in both cases are trading near all time highs.
But similarities end here and there are some marked differences too:
In 2008 (Jan-Feb), Sensex was trading at multiples of 24x. As of today (Jan-Feb 2013), Sensex is closer to 19x.
Reliance Power did not have any assets at the time of IPO (2008). On the other hand, NTPC (2013) has an installed capacity of about 40,000 MWs.
We should pray that similarities end here itself. This is because if what happened after Reliance Power’s IPO (Great Crash of 2008-09) gets repeated in 2013, once again there would be massive erosion of investor’s wealth and confidence.
Disclosures: No positions in Reliance Power or NTPC.
Exactly 4 years ago, i.e. on 21st January 2008, I bought some shares of Ranbaxy. The day is remembered as one of the darkest days for Indian equities as bell-weather Sensex lost 1408 points in a single trading session. This was the first-ever 4-digit loss for the Sensex at close.
And this big cut was just the start. It was followed by another bloody cut of 857 points on the very next day. (Read more about biggest Sensex falls here).
Now let’s go back a little deeper in past.
In July 2007, I invested some money in A. Ambani’s Reliance Natural Resources Limited (RNRL) at Rs 42. This decision to invest was neither based on any fundamental nor any technical analysis. The only reason which I can now remember is that there was a growing interest in ADAG stocks (herd mentality). Though I always want to believe that I am a sensible investor, the truth is that I have made my share of mistakes in stock markets and have traded in not-so-good companies quite often.
At times I have been lucky to have made some money. And at times not so lucky.
But in this case, I would say that I was quite lucky. Even in 2007-2008, RNRL was widely regarded as a speculative stock and not worthy of holding for long term. It was a stock which was abhorred by long-term investors. Luckily for me, markets continued being irrationally exuberant and started making new highs on a daily basis.
Out of my sheer fear of losing profits, I sold all my shares of RNRL at around Rs 200 each in first few days of January 2008. This investment gave a staggering 383 percent in 6 months and made me feel like a Stock Market Super Hero. 🙂
But my luck continued helping me and I used that money to purchase shares Ranbaxy at Rs 340. And as if markets had decided to prove all my decisions correct, the Japanese pharma major Daiichi Sankyo bought Ranbaxy and there was an open offer by the acquirer for shares of Ranbaxy. The open offer came at Rs 737, but I decided not to wait for the same and in August 2008, sold my shares in open market for Rs 552.
These two stock transactions gave a 7x return on my initial investment in just under a year! A compounded annual growth rate of close to 700 percent!! The above is the sequence of events which I personally experienced. And with loads of help from my luck, I made almost 700% in a market which was grinding down every day and was well on its way to crash 50% for the year.
But honestly, it was my sheer luck and nothing else. But this small story also has a few lessons for everyone to learn from market crashes. I have tried to list them out below:
Always be a big fan of fear in stock markets. When people become over pessimistic, it should be taken as an invitation to make huge profits. Even Warren Buffett says that “We are fearful when others aregreedyandgreedywhen others arefearful.”
Always be ready with a list of stocks to buy in market crashes, i.e. have a list of crash stocks. This list consists of stocks which one regularly tracks and is eager to buy in case prices fall sharply.
Always understand the difference between shares falling due to weakness in broader markets and those falling due to fundamental issues. A stock like DLF fell alongwith other shares in 2008. But it was not ‘just’ because of fall in broader markets.
Always keep an eye on 52 Week Low List. You may find some really interesting & investment-worthy-companies in the list during market crashes.
On 25thNovember 2011, Nifty closed at 4710 – A level 26% lower than highs of 2007-2008 and 2011. So does it mean that all 50 stocks that make the index are following a similar trend?
Before answering this question, I would like you all to know that Nifty is made up of stocks of 50 companies representing 24 important sectors of Indian economy. All these stocks have different weights. And for all practical purposes, the index can be considered to be a good enough representative of stock markets.
NSE itself provides a lot of information about Nifty like Full list of constituents, calculation methodologies, etc. for retail investors.
I did some quick calculations to see how individual Nifty stocks were placed with respect to their 2007-2008 & 2011 highs –
Nifty Stocks – Discounts to their 2008 & 2011 highs
As evident, shares of companies like RCom (Reliance Communications) are down 92% & 66% from their highs of 2008 & 2011. RCom, because of various negative reasons may not be the best stock to evaluate. But this small analysis also throws up some interesting insights about other large caps –
Sterlite Industries – According to a few, another ‘Reliance’ in making, is down 68% & 58%
Tata Steel is down 64% and 50%
BHEL is down 54% & 50%
Reliance Industries – Bellwether of Indian stock markets, sitting on a cash pile of more than 16 Billion Dollars, generating cash of around a Billion Dollar every quarter is down a staggering 54% from its 2008 highs and 35% from its 2011 highs!
Long term investors should understand that though index is down around 25%, good individual stocks like Reliance Industries, Tata Steel, SAIL & State Bank of India are down more than 60%. And these are not small or mid caps; these are full-fledged large caps!
This analysis does not suggest that there won’t be any further fall in these scrips.
It makes sense for long term investors to continue with their SIPs in good mutual funds or index funds. Also investor should start selectively buying these large cap stocks, which score high on sustainability parameter and have visibility in revenues/profits.