—Feb 20, 2019
Recently there was news that some business houses had stitched a “standstill pact” with its lenders under which they will not sell any of the shares held as collateral for the period of 6-7 months. On a lighter note, the investors would be wishing that only if they could arrive at a similar arrangement with the sellers in the Indian stock market!
As we all know, the headline indices are not reflecting the severe erosion in stock prices of many companies. Though the BSE Sensex has only fallen 9% from its highs, the mid and the small cap indices have fallen 24% and 34% respectively from their highs. The 30 stock BSE Sensex seems to be propped up only by a handful of stocks. Since only a couple of stocks are doing well there has been a tendency to crowd and “hide” in these stocks.
One is reminded of an old joke – Late at night, a police officer finds a drunk man searching for something under a streetlight and asks what the drunk has lost. The drunk man tells the officer that he has lost his keys and they both look under the streetlight together. After a few minutes of searching, the policeman asks if he is sure he lost them here, and the drunk replies that he has probably lost them in the park. The flustered policeman asks why he is searching here, to which the drunk replies, “This is where the light is”.
This is what is happening in the Indian stock markets as well, where investors are only focusing on companies or stocks where there is light i.e. perceived near term visibility of growth and earnings.
The problem is aggravated with the amount of information that we are subjected to. Although this might seem like an advantage, it can lead to an overdose of data and opinions that we don’t need. Negativity feeds on itself and can cloud decision making forcing us to exit our investments at any price.The problem arises from the difficulty in going against the prevailing opinion around us. Our pre-historic traits bog us down. It is painful to be separated from the herd as it also feels unsafe. However, if you are looking to make above average returns on your investment, you need to look beyond companies which are currently in the limelight and focus on companies where the promoters/ managements have an impeccable record and where there is a greater probability of improved business propects in the medium to long term. This may involve taking notional losses in your portfolio in the short term. But it could lead to above normal returns if you have a longer investing time frame.
—-Parag Telang