Tuesday, May 19, 2015

The Good Bad and Ugly

Market has corrected in recent times substantially and there are few trends which are driving the markets in near term like Global Energy Prices, Inflation trends, Impact of Monsoon on Inflation, Leading economic indicators (cement dispath, Auto sales etc), Interest rate / Bond yield movement, Valuation of Sensex, FII Investment trend and Profit Margin situation of Sensex Companies & Future Expected Trend. We are at a stage where a 5% to 10% correction in the stocks can turn investors bullish. We will discuss the reasons for that here. We were picking few quality names in Indian consumption stories, coupled with few export oriented companies which have long way to go. We will continue to add them in our portfolio. Infact, a few names become so attractive that, we have advised subscriber to invest upto 15% of their portfolio into these stocks. Why not, Concentration in quality names, leads to wealth creation as we have seen in last 20-30 years.
There are stocks in the market today that are quoting at 60 pe and those wih 20 pe. It is the nature of the market to overrate companies that are showing high growth rates and punish those that have temporary setbacks and not growing as much. There is a glamour element in stock markets just as in Bollywood. A fundamental investor should screen through those companies that are undervalued in such-times due to temporary growth hurdles but are likely to increase their profits soon. The best ones who can show this behavior are the sector leaders who are in the unpopular phase of growth. They generally have the best people and resources to turnaround. Benjamin Graham calls them unpopular large companies’ model.
This is a “low risk and high probable way” to increasing your wealth. This looks obvious but is difficult to practice as it requires a mindset change, patience and belief that money is not going to be made overnight. It requires you to not be fully dependent on the markets and that you should have a full time occupation that will distract you from the regular moves and moans of the stock market.
It serves our interest to remember that valuations are relative to the times we are in, the mean growth of the industry and other sentiments. So it is impossible to develop a model where you buy low and then sell high, as the discovery of high or low is only possible in hindsight.

Which are the companies that are sector leaders and going through a temporary phase of low growth? Who are most likely to get back to high growth? Are they cyclical businesses or secular growers?
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