Market Meltdown, the Virus, and our Actionables

[dd1474]

I try to seek answer from history. I consider all thoughts which are prevailing (including ancient scripture, I do believe that something survive over 2000 year+ definitely has more substance than to call them “Mythology”).

The seed for my thought is Nirvanashtak by Adi Shankaracharya. When describing inner Self or Atma Shankaracharya start with concept what is not “Atma”? I find priciple of exclusion more important than inclusion, as it reduce scope for decision making. Lesser decisions, better is investing process in long term in my opinion.

My basic thought process:

1. I have limited understanding of investing world. I DO NOT any special skill to outperform market.
2. But shall I be bothered to outperform the market? Personally, investing journey for me is my development as individual. It is mirror of my personality. I have drawn some basic rule for me which I always follow:
   a) Do not invest in leverage players. It has many moving parts. Also, not having any knowledge about how to value business which would have only free cashflow in terminal value. I WILL NOT invest in business of lending. (Not saying it shall be applicable to every one, what is poison for me may be nectar for others)
   b) While I can digest loss of networth in my account, can not digest same for others. Hence, even while I may have to sacrifice income of PMS/Fund management, I WILL NOT manage other person’s money.
   c) Being a credit analyst first, I look at investing in business first from credit angle. Credit analyst generally look at ability to pay and willing to pay. Ability would change over time but willingness will rarely change. Try to avoid willingness issue management in investment. Willingness in equity investing mean intent to promoter to share wealth with minority shareholder. I WILL NOT invest in the unproven management which are not giving dividend/buyback.
   d) Return from equity investment has more to do with software (behaviors) than hardware (valuation, growth prospect, management assessment). I DO NOT any special skills in assessing hardware, but try to improve a lot on software. How I react to market is more and more important than how I act in market.
3. @zygo23554 already put a very critical risk curtailment measure by way of allocation. I have four asset classes available for investing. Equity, Fixed income, Real estate and Bullion. I have range of 50-90% of equity, <50% in Fixed income, <20% Real estate and <20% in bullion. Considering my risk reward profile, I decided to have around 70-75% allocation in equity during 2018-19 periods. It continues to remain same during the period, but as market decline, my equity allocation is systematically decline. When allocation would reach to 60%, I may reconsider changing asset allocation again from debt to equity. However, at any time, Fixed income + Dividend (my guess which may be wrong) shall provide for at least 110% my expected life style expense, as I am not selling my time for money (not having alternative income stream from either working or business).
4. Last @Donald suggested, objective of investing process is to maximise return per peaceful sleep hour. Anything which affect long term sleep order will have disastrous impact on overall wellbeing of an individual. Learning from @deepinsight, respect your health and peaceful mind. The objective of investment process is to improve (or maintain at least) present health and peaceful mind. If investment journey is not adding to it, evaluate your thesis from scratch.
5. Understanding meaning of “Sthitprgya” try practice same in volatile time. Evaluate myself against my previous behaviour in such volatile time. Personally, despite I have more allocation in equity market than 2008 and decline is likely to more stiff in 2020 than in 2008, I am happy about my reaction to market situation. Trigger of allocation in Fixed income insulated me from basic requirement. I consider this volatility temporary. Any way have around 70% allocations in equity. Further decline in equity valuation, would systematically Debt allocation, appreciation in equity valuation would be good as well (if not great) as have still 70% of allocation in equity.

Disclosure: I may change my investment thesis anytime without intimating forum. Reader shall try to write down on piece of paper what they want achieve from investment. (This was told to me by my first mentor Mr. Sunil Mehta while evaluating industry. Whenever try to attempt to look into future, try to write down your thought with pen on paper. I find this excercise very useful.) Please do it alone and think through. Keep social distancing from mobile/laptop and individual at first time attempting same. Consult same with family and then finalise your investment process. Investment is mean to achieve personal goal and not other way round. Apology for a long post with no solid actionable. Just trying to reinforce my thought again for me relearn.

[deepinsight]

Why are the markets so volatile? Bill Miller explains the context very well…it may help us frame the context.

How Markets as Complex Adaptive Systems Process COVID-19 - Miller Value Partners

[deepinsight]

Akash Prakash’s synopsis is a must read…to grasp the cascade of events that are happening…

Market meltdown and the virus

[1.5cr]

There are broadly 3 situations that most fall into

1. Fully deployed

• Fully deployed in good businesses: In this case nothing one can do and this is perhaps the toughest situation to be in. I heard analogies that at least in 08 one could travel and take his mind off of the markets. It would be extremely difficult to be in such a position

• Fully deployed with some poor/non core/mistake kinds of bets: In this case one has to have the courage to cut the position and move to cash with the view on deploying into good businesses as there has been a correction in the high quality businesses of India as well. This would encompass everything from HDFC Bank all the way to Eicher Motors. The fact that you can exit some positions and mobilise cash makes this an easier situation than the first one. Temptation of deployment then happens. What does one do?

2. Partially deployed and sitting on 20%+ cash: This is also tough position to be in because you have some cash and perhaps were tempted to deploy during the first step of the correction to 10k or further on the way down. And continue to be tempted to deploy at this time. What does one do here?

3. Huge cash position, 40%+. This is a space where one could consider a slow investment and decrease cash towards 30%?

The issue is Companies are still expensive (I’m only speaking of the so called quality names, small and mid caps in general have been attractive long before the nifty50 started its crash).

Nestle and asians still trade at astronomical valuations. Perhaps only HDFC Bank is looking attractive and this is assuming that it is still “HDFC Bank” and its fundamentals looking 3 quarters ahead have not changed.

The big issue is, is there a fundamental change and hit on the economic positions of the companies? A more permanent long term hit?

That is the question that is tough to get around.

Is HDFC Bank or Kotak Bank damaged in a long term fundamental way thereby changing valuation metrics completely?

Is Nestle or Asian paints impacted heavily to cause a change in their valuation metrics or will they simply hover around 40-50x and move on once the tide turns?

If there is a fundamental change to the underlying business then a valuation change can be caused and this is perhaps the biggest fear of most of us as investors (again the bigger fear is bioligical and lack of containment and most importantly lack of medical facilities for the country, but this is an investor so I speak from an investor point of view).

If there is no long term fundamental change then the valuations of some of these companies are beginning to look rather reasonable at the least.

[Donald]

Thanks to many Seniors for speaking up, and giving the community sufficient food for thought on actions/inactions we are guilty of, and introducing that important note of caution/and no benefit in trying to be first-off-the-block. A more measured response while waiting for clarity to emerge, will be equally rewarding in the future! That much is guaranteed!

Can we summarise with the excellent posts already shared by seniors, there is common acknowledgement in VP readership sub-conscious NOW that we can be better structured/better-prepared for maintaining durability of success with a more open/flexible mind - that acknowledges and assimilates best practices from the best of the minds here in VP.

Actionables

1. Structured Asset Allocation - for Equity Investors -
   @zygo23554 - Introduce & drive a new thread on basics to ensure before you start serious allocations to Equity
   e.g. Mr D drilled into us long back shifting 10% to Gold to escape volatility doesn’t make sense, you should have already allocated (catering to personal situation) share of equity/debt ranges, real estate, gold, and fixed income (if any) while you start serious investing - so you are structured to “sleeping peacefully”; and then one can add market-cycle-intelligence on top, not without the first
2. Portfolio Structuring & Maintenance
   @Donald - Introduce and drive a thread on quest for an all-weather portfolio (stability, moderate growth, and aggressive growth combo) after assimilating insights from many previous splinter attempts
3. Structuring for Long Term Investment Success durability
   @deepinsight - Introduce and drive a thread on learnings from experiences with “best of the best” businesses over multiple market cycles.
4. Structuring for Knowing/Reading Market Cycles better
   @someone-to-be-discovered
   how to Read Market Cycles better for effective Drawdown Management - to first protect & then take advantage of big crashes; Position Sizing, knowing when to strike hard at Averaging Up; hoping we will find someone soon to introduce and drive this important discussion thread

These are my top-of-mind long-term-actionables needed badly now, for bringing everyone on VP on the same page - towards structuring for sleeping peacefully. I might have missed some actionables; if yes, Seniors/Learners please point out and we will find someone to drive - just like we will find for 4. above

[Donald]

Now, with important longer-term actionables out of the way, it’s time shift FOCUS back on more exciting actionables, mainly Where is the best bang for my buck, in current emerging situation - extended lockouts bringing economic engine to a grinding halt!

@deepinsight

Now we need to grasp the risks of the economy being engined down to a complete stop. It feels like a risk raise to the power of 5. Risks not calculable have been introduced. Nobody knows what this means, how long it will take, what will be the costs, which companies will face severe consequences, which will emerge winners, which maybe severely impaired.

Actually, I took the central message to first ensure survivability quite seriously, but I did not agree with the rest of what follows.

I find that this is the best time to put our minds to discussing/debating in a structured manner (not whatsapp messages flying in and out, e.g.) which sectors are severely impacted (what to avoid completely), and which sectors/industry are better insulated and thus likely to be less impacted - and get down to identifying sound businesses with strong financials, competitive position durability advantage - that are likely to emerge stronger once the economic engine starts whirring loudly again - whatever timeframe that is allowed to us 3m-6m, or more.

As @zygo23554 mentions (after ensuring survivability and potentially big mistakes) nothing is stopping us NOW from calibrating to first order effects first if you will, and then keep re-calibrating as and when 2nd order or 3rd order, or 5th order effects emerge!

This is certainly NOT the time for a freeze!

Me and a few friends are starting work to present to you in a week to 10 days, an opportunity map (you know by now, I am fond of pictures) of what to avoid, and what to focus energies on. This is quite an exciting exercise for me, and I feel from initial ideas tossed up, we can deliver a structured opportunity investigation map pretty soon, that will stand your scrutiny.

Let me start the ball rolling, so that we have a continuous inflow of actionable ideas, while we structure for better grip on the emerging situation

First Order Effects:

1. Likely most Impacted: Airlines, Hospitality, Box Office, and Leisure industries.
2. Likely most impacted: Highly leveraged, where earnings dry out for 6 months
3. Likely least impacted: Pharmaceuticals, Pharma CRAMs
4. Likely least impacted: Utilities
5. Likely less impacted : Agrochem CRAMs?
6. Likely less impacted : beaten down Asset-Heavy solid infrastructure businesses with low debt, available at or below replacement costs with near 2-digit dividend yields

This is just a starting list and is open to discussion & pointed debates, with facts. (I am naturally not so good at this) but I am sure senior members will have many interesting ideas to toss up with their own justifications. A request - in order to maintain the quality of this thread - Lets refrain from opinion sharing minus any substantive facts.

Over to Senior Members and our strong idea generators @hitesh2710 @ayushmit @Anant @zygo23554 @ankitgupta @basumallick @desaidhwanil @rupeshtatiya @vivek_mashrani @spatel and other senior members like @okhade @Shivkumar Please excuse me for the name-calling (discerning readers are missing you). I might have missed more, help me add here and put everyone under the arc-lights to deliver.

Let’s identify/discover better stronger idea generators from the newer crop of contributors. Old VP members returning after a hiatus (like me) this is the time to make your presence felt again.

Yet again, think twice before posting random lines. This IS the most important community activity underway now, pause and deliberate a bit to check if I am adding value to the discussion, am I able to take forward someone’s constructive suggestions/ideas, and the like - before posting!

[Investor_No_1]

@Donald

• Likely most Impacted: Airlines, Hospitality, Box Office, and Leisure industries.
• Likely most impacted: Highly leveraged, where earnings dry out for 6 months
• Likely least impacted: Pharmaceuticals, Pharma CRAMs
• Likely least impacted: Utilities
• Likely less impacted : Agrochem CRAMs?
• Likely less impacted : beaten down Asset-Heavy solid infrastructure businesses with low debt, available at or below replacement costs with near 2-digit dividend yields

This list looks good considering how the first leg of deep correction has unfolded itself.
Some views on few.
Utilities - These would be impacted when industries shut down and business, commercial establishments are shut. So they would not be least impacted. Also, State boards are already debt ladden and the epidemic would put further pressure on State financial health. Now, they were already fairly valued considering many headwinds is another factor to consider when we can say that recent drop may have brought them to a fairly valued stage (considering the epidemic damage till date).
Pharma - They have not fallen much but I have doubts on the impact from Virus. Government regulations would certainly come in and no pharma company would profit from an epidemic and rightly should not. So I would refrain from commenting how the Pharma story would pan out.

Some sectors which I would like to add for seniors to comment are -

1. FMCG. I would divide them into Indian FMCG and HUL/Nestle/Colgate (for obvious valuation gap reasons) and second one would be
2. RETAIL. How would Retail Story would pan out and can the huge growth and huge valuation Retail sector give interesting entry points. RETAIL grocery would be needed eventually, even in times of shutdowns
   Third,
3. Insurance - Life and Health - Short term panic and risk of claims but long term awareness and need. and Lastly,
4. DATA driven sectors in times of Shutdown - The ones who own data carrying assets and Enterprise connectivity services. More ideas on this DATA segment welcome.

Regarding Actionable - Thanks to Seniors for their views and Donald for initiating.
The actionable from my end, with my experience, would be - Stick to basics if you believe in businesses you own. Keep cash for uncertain times but I would not completely abandon the businesses I believe in.

Thanks. Pls remove the post if you feel there is no value addition

[vivek_mashrani]

Had some thoughts running since last few days (lower circuits kind of accelerates those + few reminders from @Donald always helps Got opportunity to put them down last night and also added some points to my existing investing framework as well as checklist.

At a risk of duplication of few points already mentioned by fellow members on this thread and some points at a glance might look bit simple and obvious, here are my thoughts:

Trigger of 2nd and 3rd order thinking hats: I had read Howard Mark’s book - “The most important thing” which had this topic of 2nd and 3rd order effects. In events like this, it becomes even more important to start thinking of implications and accordingly temporarily or permanently adjust your portfolio allocation.

One thing which now seems obvious is that biggest pain will be to lower category banks, NBFCs, MFI (though we are seeing brutal lower circuits etc. just recently and it gave enough time to switch to those who thought wider implication of such lockdowns.

Again reinforcement to learning is - stay with strongest if you are investing in financials (all learnings are personal, please feel free to defer or throw alternate ideas).

The packing order for incremental financials seems to be logically below based on potential impact on balance sheet - lowest first (assuming we are yet to see worse in terms of lockdowns as well as social + economic implications). All credit goes to @zygo23554 for triggering these thoughts.

Packing order: AMC > Non-Life Insurance > Life Insurance > Banks > NBFCs > SFBs > MFI

Importance of Asset Allocation: This again is re-enforcement to my ongoing process: Never go 100% equity if you have big/longterm liabilities (EMI, kids, unstable jobs etc). Again one should stress test scenarios of robustness of their jobs and how much buffer one has to meet near term liabilities. Idea is - do not fund your long term assets by sacrificing short term liabilities (similar to typical NBFC crisis which was triggered due to similar reason).

One more checklist point which got added after seeing few lower circuits is periodic stress-testing (mentally or with peer group - ideally contra peers) portfolio and investment thesis (maybe once in 3-6 months. This includes thinking of robustness of business models, asset-liability mis-matches, accessing capacity to suffer etc.

Choice of companies during such fall: Now coming to choice of companies in such falls, my choice will be growth compounders over pure value (cigar-butts). Would look for below key parameters:

• Divergence (to see strength of sector, will add more on this later on this thread)
• Strength of business model (assuming event will not pass away too soon)
• Capacity to suffer (will add on this in a bit)
• Growth + High ROCE + Reinvestment of Cashflows + reasonable valuation (which is less of worry now, hopefully!!)
• Long Runway (want to hold them for much longer, hopefully we won’t have another recession too soon…!!)

Capacity to suffer: Conservatively, I would like to assume that we are not done with the event yet, and there might be more pain to come. In such circumstances, below will be some parameters:

• Debt-free companies: This will ensure they can withstand pain and don’t need to stand in queue in front of a bank to survive (again this was re-enforcement to my existing checklist)
• Cash on books: Would check how much cash is on balance sheet as a % of fixed cost like salaries etc. and they should be able to survive at least for 6-12 months without any external funding (assuming zero revenues). Again this criteria I have added to my existing checklist - stress-testing survival for 12 months without any external help

Avoid concentration: ne of the biggest lesson from this fall is also avoiding concentration - in terms of geography, customer, supplier, distribution network etc. This was again part of earlier checklist but had never thought of dimensions like online vs. offline distribution network etc. which becomes critical in such times.

Finding alpha for next few years and quest for investible universe:

• In terms of divergence, I think we have to clearly think of impact in terms of temporary vs. permanent. From the list I think Pharma and FMCG are clearly showing strength due to short-term necessity but I doubt that as a sector they can create big delta after this event. Ofcourse this has enlightened again the fact that these are essential sectors and will probably form important part in portfolio from survival point of view.

• Second thought is in terms of cycle: Again at a risk of slight duplication, assuming we are at or near bottom, the cycle of GDP, equity AuM etc. is going to go up going forward. Some businesses which can benefit from such uptick are - AMC businesses, Insurance players, Cement players etc.

• Digital vs. Non-Digital: Another layer of thought process was that businesses with higher % of revenue coming from digital will pick-up very fast and potentially gain market share from competition who are not fully digital. I can think of businesses like HDFC Life, ICICI Lombard etc. (please feel free to add names, I am just thinking broad-based for now)

• Compulsory vs. Optional spending: This can be also combined with above point, where we identify essential spends eg. Motor insurance (no matter you drive or not, next year you got to renew your insurance and pay premium), if this is digital even batter.

• Perceived risk but not actual: This is area where market thinks that they will get highly impacted but there are few niches which might be diversified and impact might not be as presumed. Again Mr. market has tendency to paint everything with same colour in times of panic sell. Eg. Business like Nesco has 50-60% rental revenue, while could be beaten down assuming it’s an 100% exhibition centre (again directional example, please do your own valuation and calculations).

My research hat is ON, thanks to push from various senior VP members. Will add company specific comments and create new company threads as required in coming days.

Hope this is not too long and repetitive post. Further ideas / comments / constructive arguments are most welcome as always.

Disclaimer: Any of the companies mentioned are not buy/sell recommendation. I may or may not be holding these businesses. All are for example purposes.

[vinamrachaware]

AMC & Insurance in India are valued near perfection just like Bajaj Fin few days back…
Even there is very big market to serve but nowhere in world these business are valued at such exorbitant price(Even after recent correction).
Its my personal opinion might be wrong as happened in past too…

Thank you @Donald for creating thread…

There are lot of industry leaders now available at very much attractive valuation…This idea stuck me when I was reading 1997 MOSL Wealth Creation study

Most of these companies survive and remain market leader even after 23 years and will remain in future too.
So I am sharing my ideas that I think will survive in future…

1)CCL–10% world Coffee share
2)Kajaria–10%Market Share in Tiles (India) + Kajaria PAT > .50% of Industry Profit Pool
3)Supreme/Finolex --30% Pipes Share
4)Wim/Nilkamal–30-40% market share in furniture
5)GrindwellNorton/Carborundum–more than 60% market share
6)Laopal–more than 30 % market share
7)NTPC–Monopoly
8)Centuryply–25 % market share
9)Jindal Stainless Hisar–more than 70 % market share
10)JSW Steel–15-20% market share
11)Apl Apollo–40 % in structural steel pipes
12)Balaji Amines–70%DMAHCL
13)Amrutanjan–25% market shae
14)Actin Construction–55% market share in tower section lift/cranes
15)VIP–46 % in Luggage
16)Jamna Auto–70% in CV parabolic leaf market shsre
17)KRBL–Dupoly in global Rice Business

Disclaimer:- some of them are in my pf and planning to add as and when valuation looks attractive…

[gautham1]

Hi @Donald. Good initiative. However I have a different take on this. How does it help if one cant act at the right time?. ( Of-course nobody can). Just to expand on the items you listed.
Likely most impacted: As we know, market wont wait for it to show up in the quarterly report. Damage will be done ( most of it is already done.) well before it happens.
Likey least impacted: Usually names are already overvalued to begin with. And such corrections wont make them any attractive.
Anyways my point is that, in most of the cases, the price already reflects good/bad news.
Slightly off topic: I have seen quite a few discussions around market cycle leader, change of leader etc. IMO one shouldn’t read too much into it. The sector leaders ( with a decent earning visibility) will always do well. I think one is better off sticking to such sector leaders instead of reacting to various events.

@Donald

• Likely most Impacted: Airlines, Hospitality, Box Office, and Leisure industries.
• Likely most impacted: Highly leveraged, where earnings dry out for 6 months
• Likely least impacted: Pharmaceuticals, Pharma CRAMs
• Likely least impacted: Utilities
• Likely less impacted : Agrochem CRAMs?
• Likely less impacted : beaten down Asset-Heavy solid infrastructure businesses with low debt, available at or below replacement costs with near 2-digit dividend yields

[Anant]

Pretty much all view points are covered. Those like @deepinsight truly showed great insight and those like @Donald got into cash and now have a bazooka. Other than what is needed for survival and which I always keep aside I have remained invested through and through not necessarily out of choice but I firmly believe in the dictum ‘What smart people do in the beginning fools do in the end’. The correction was sharp and swift and gave little time to manouver. For someone like me who is invested the only option is to switch and move into better (will quantify) stocks. Just a brief summary of what I am looking at now:

a) Survival of self. Never compromise on that, stay out of leverage have cash, house etc.
b) Survival of the companies that you are invested in. Remember the age old dictum ‘Even if the market shuts down…’. This brings absolute focus to balance sheets. P&L can take back seat.
c) The next set of opportunities. The current market drawdown gives opportunities to pick up companies which can have a good next quarter, a good next year and a good next few years. Why looking for a quarter? Because the drawdowns even in case of a bad next quarter can be significant.

Coming to industry, you have pretty much covered everything but a few points:

@Donald

• Likely least impacted: Pharmaceuticals, Pharma CRAMs

A major impact of all this will be on Globalization with a much higher focus on China aversion. Globalization which has already taken a backseat since Trump will get a further setback. Pharma will get impacted. Almost countries have had severe shortages of ventilators, PPEs, masks and time and again countries in the midst of crisis have created export restrictions depending upon where a country is in the Covid curve. I wont be surprised if Pharma industry as such becomes more strategic in nature instead of purely transactional. This could result in subsidizing domestic pharma in one way or other and can have a severe -ve impact.

On Financials: I personally think any lending business which does not require capital infusion or govt. support in the near to mid term along with no liquidity issues can be considered as an investment and that kind of makes you evaluate business from a least likely to fail scenario. This clearly rules out almost all corporate lenders, most NBFCs and lenders which lend long and borrow short. The obvious choices here are MFI (rural econmy doing much better) and they are the least likely to have ALM issues, gold loan companies and of course HDFC Bank. Even before the crisis I went short on Insurance and I think the current budget has been a significant red flag.

What remains?: My personal choices have been companies which are well discussed in this forum. Most of them are non economy linked or financial, most of them had a fantastic Q3 and have a high possibility of a decent Q4 and next year. As a sector chemicals and chemical proxies remain the top pick and they have tailwinds followed by companies which are consumer facing or proxy to them. Will discuss the specific companies in a separate post.

What next? From my experience in the previous cycle I see that once the uncertainity settles down, valuation discussions and valuation mismatches will follow and will be chased. A less risky environment will require us to be nimble to bring P&L back into account, until then lets keep floating.

[desaidhwanil]

I am quite late in responding as I am really short of bandwidth due to multiple things happening on professional/personal front. Let me articulate my views on the markets- and what a market it has been! I must admit that I was behind the curve in terms of understanding the multi layer impact of the virus spread on real economy and markets as it kept spreading to newer countries. At the same time, when I realized that we are going through an event where outcomes are unknowable- I did what mind dictated (overruling what my heart said) - take some money of the table with twin objectives - first and the foremost objective was to ensure that I had enough money for sustenance for a long period(more than 1 year as I am full time investor with significant networth in equities) taken care off - given that we were going into sitution where no body had a clue about the extent of damage and.or the time period for which this event will last. Second objective was to ensure that I had some ammo to take advantage of attractive risk-reward that market presented if situation deteriorated - compared to what I had in my portfolio. To give the context, Some of the top positions in my portfolio had run up anywhere between 50-500% in 3 months so I had some positions where the expected return from the market price was decent but not spectacular- while the allocations were quite high - upward of 10%. Hence, instead of taking money off the table proportionately from all positions- I cut down allocations from positions where the incremental return were looking just around/below my threshold. I also sold all the positions where either my conviction levels were low and/or had multiple variables in business. As @hitesh2710, Hiteshbhai rightly mentioned, even if one takes money off the table little late in the correction, one may still be better off as it gives good night’s sleep, keeps some ammo for firing when markets is capitulating (which in this market means - everyday or so it seems).

Given this context and the fact that I am not sitting on 50% Cash and have limited firepower- how do I think about approaching this market and what interests me the most. Let me start with a negative list - as to what I do not want to do with incremental capital (as they say investing is a negative art - so what not to do gets precedence )

• I am not looking for a 2X in 3 years when the whole world is panicking and there is literally firesale on everything
• I am not looking for safe heavens- I already have some in my portfolio and they did a decent job of protecting capital in small-mid cap carnage in last 2 years
• I do not want to buy something - just because it is very cheap- and once the price value gap closes I need to/want to sell
• I definitely do not want to overpay in this market (at the same time I believe P/E is an overhyped metrics for valuing a company)

Having laid down what I do not want to do, let me put down what characteristics I am looking at for putting incremental capital

• My return expectation from the incremental capital - are significantly higher than the 2X in 3 years
• I want to buy business models that are scalable, proven and have good execution track record but are facing/will face temporary challenges due to COVID-19 scare
• Survival of a business model under a much prolonged eventuality is not a question mark and I am able to build conviction that 3 years out the business will be much stronger and COVID-19 will be a non-event for them if we look back
• I will demand quality of business (and ofcourse management) and decent discount to fair value both - I do not want to compromise on either
• If I buy something today, I want to ride it out for at least next 5 years. For that I need to be convinced about the strength of the business model and earning visibility
• Preferably the business model should have potential for disproprtionate growth due to operating leverage and/or industry tailwinds
• Ideally I want to stick to companies which either I own and/or I have looked at in the past and understand but had given it a pass due to valuation not being attractive. I feel starting to study a new company at this juncture and to build conviction around it to put meaningful capital in it will be difficult

Even though the list looks too ambitious- in current market I feel there are multiple such opportunities that meet these criteria across sectors - Agrochem, QSR, Financials, CRAMS, Chemicals, Auto ancillaries.

In terms of putting money- I am buying some of the names in tranches - on the way down - upto 35-40% of capital at hand (as no body knows where the bottom is) - remaining I would like to deploy once I have some grasp of the extent of damage and duration of event - even if it means at 20-30% higher prices (the key is to have courage to buy at higher price once the clarity emerges, hopefully I am able to execute it well)

[lingalarahul7]

Firstly, thanks to @Donald bhai for this really wonderful thread!

So much wisdom at one place where new investors like me who are going through their first significant correction in markets can gain from.

Second order effects:

Above discussions talk about second order effects in terms of businesses and markets. But I think one should also consider the second order impact of how geo-politics scenario would emerge after coronavirus is treated. This could directly / indirectly impact businesses in India.

Some events which I wouldn’t dismiss - writing them in order of probability of occurence:

1. Global dominance shift from the USA to China
2. Western countries going mad on China after they resolve the pandemic in their countries and taking some extreme measures leading to global geopolitical crisis - I would assign this a high probable event if some loved big leader in the West succumbs to the virus (I really hope we don’t go through this)
3. More Authoritarian regimes in the world

Cash vs. Equities allocation strategy:

Given I’m relatively new to investing (started in 2018) as well as new to workforce (joined my current & first job in mid-2017), my portfolio is small and I had about two years of savings in equities and one year of savings in FDs. And in the next one year while I receive compensation from my employer, it will be about 33%+ of my current portfolio size as I will be entering my fourth year of employment. So I’m not really worried in cash aspects and I’m confident that I’ll retain my job during this crisis.

I followed the discipline of increasing my allocation in equities in bi-weekly / monthly SIP mode through tiny steps over the past one year and now, I’m more or less sticking to it with some increased weightage to take advantage of the current valuations.

Businesses I’m looking at:

Category A:

1. Large cap Market leaders
2. Demonstration of survival and Management response during past cycles
3. Huge amounts of cash in balance sheet with no debt

Category B:

1. Mid cap good companies
2. High growth with emerging moats
3. Okay to have Debt on Balance Sheets or temporary headwinds due to crisis but competition should be in a much weaker position such that organized competition gets into some long-term trouble / unorganized competition gets out of business due to the current shutdowns

Category A businesses may give lower return compared to Category B businesses from a three-year perspective, but I’m going to have high allocations to Category A businesses.

If you think from an FII perspective, the first inflows of FIIs will go into the Category A businesses. Once those start to reach fair valuations, then they would be flowing to Category B businesses.
Similarly, as I go through my first bear market, I feel a lot more comfortable having higher allocations to established players during current times. As the pandemic subsides and I feel more confident that the economic situation is improving, I’ll start moving my money to Category B (I’m okay to miss early gains here).

Another reason for me to have higher allocation to Category A is my relatively smaller circle of competence. Before the virus started, I could do a first-level study on four companies per month on average over the past one year. And I didn’t see a point of studying a small cap company before really understanding how the big players’ history evolved in that industry over the past decade (after losing money in the small cap rout ). So lots of my time was spent on Category A companies.

Category B companies is something I started exploring just a few months ago, after I feel that I gained a grip on Category A companies in that particular industry. So I understand very few companies in Category B. Let me honestly admit it

Simply put, prioritizing “Return of Capital” over “Return on Capital”.

My Action-ables:

Given my stance that I feel more comfortable (sleep well) by holding Category A companies during the pandemic and I also know that Category B are the ones which can give higher return from three year perspective:

1. I should get a strong understanding of businesses which fit in Category B and increase the number of companies I track in this area, before the crisis ends.
2. While the crisis starts to subside, I should increase allocation in Category B companies and start reducing allocation to Category A companies which I feel can’t demonstrate high growth rates and start studying Category C companies in industries where I understand Category A and B companies.
3. By the time crisis fully subsides and markets fully back to normal, I should have a good understanding in few Category C companies and start investing in them

Category C companies are those which @ayushmit bhai and @Donald bhai love to crack. Small-cap, un-discovered, ground-work, scuttle-butt, some under-the-hood-story leading to sudden-sustainable-high-growth rates. I have to say I have a really poor track record in this area from my investments in 2018 and 2019, but seek to learn from seniors.

Health & Well-being during current crisis:

Following all the advices being laid out by health experts - Washing hands regularly, Staying within apartment complex (good to see no community transmission in Karnataka till date), Spread awareness.

One small point I would like to bring up is lack of exercise due to work from home. We spend around 30 mins walking in office premises during regular days, but don’t do it while working from home. Lack of basic exercise like walking for 30 continuous days can be harmful and apartment gyms are closed too. I’m following a 10 mins YouTube video to keep my body active and request everyone to follow something similar to keep their physical body active.

Thanks again to @Donald bhai and other seniors for sharing their wisdom.
Wishing everyone good health and mental / emotional strength to face this crisis!

[Donald]

@lingalarahul7

One small point I would like to bring up is lack of exercise due to work from home. We spend around 30 mins walking in office premises during regular days, but don’t do it while working from home. Lack of basic exercise like walking for 30 continuous days can be harmful and apartment gyms are closed too. I’m following a 10 mins YouTube video to keep my body active and request everyone to follow something similar to keep their physical body active.

Swasthya with Sri Sri Yoga

Get #YogaFit at Home through our Facebook Live series

Sri Sri Yoga

Looking to build immunity and strength to sustain health while working from home.

Welcome to the online Sri Sri Yoga series - a free month long Live Yoga series on Facebook with senior Yoga faculty of Art of Living.

Date - 23rd March to 22nd April 2020

Daily Yoga session timing - 7 am, 11:30 am and 5:30 pm

Patanjali Yoga Sutras chanting with Kashi Ji - 2:30 pm

Benefits

1. Pranayamas to improve respiration and circulation
2. Build strength and immunity through asanas
3. Daily detox

Join us and share with your family and friends.

[basumallick]

For all contributors to this thread - Please discuss each company in its respective thread. You can make general market related or sector-specific views in this thread.

And restrict your discussions to the topic. All non deserving posts will be deleted without any notifications.

[hitesh2710]

With the meltdown having hit most companies hard, as Donald says its back to the drawing board and try to figure out where the odds lie of creating decent amount of wealth once the correction is out of the way.

I would tend to think of investment in two phases. Current phase and phase two when all things related to the impact of the virus becomes clear.

Again this is only an academic exercise and idea is to get as many views on this exercise as possible and then take an informed decision.

I think in the short term we might have made a bottom looking at the kind of news being digested by the markets effortlessly. Lockdown of 3 weeks beginning today for most businesses but what does the market do? Not much downticks and in fact goes up. So the markets have digested this bad news and probably this was baked in the prices. To play this kind of a counter trend rally (I feel it is so but may be wrong and in fact we might have bottomed out for good) it might make sense to be in the strong companies that have not fallen much to take advantage of trading gains. (provided one is inclined to do so). Here we have fmcg, some select chemicals, pharma etc providing fertile grounds. Here key remains to be on the toes and treat the bounce only as a trading bounce.

The really interesting part of investing comes in unearthing potential multibaggers. Here I would like to take a contrarian approach and look at companies and sectors which are hit the hardest due to Corona. Places like airlines, malls, and multiplexes, metals, cyclicals, small companies into manufacturing which have suffered big time in terms of financial performance and even more in terms of price damage . Just as the current lockdown news is digested by markets at some point of time, the damage perception due to Corona will be fully digested in terms of price reaction by the above list of companies. Thats when I would like to apply my full focus to that universe and try to find out companies which have staying power and decent balance sheets. The major impact of Corona will be to make strong companies in niches even stronger and these need to be watched out for. But my gut feel is that once all the dust settles and markets resumes its uptrend (whenever it will maybe a few months/quarters down the line) these kind of companies which are going to emerge smiling post all the catharsis will create max wealth.

As of now as I have been repeatedly mentioning, focus remains to sit and watch and absorb.

[Investor_No_1]

@hitesh2710

I think in the short term we might have made a bottom looking at the kind of news being digested by the markets effortlessly. Lockdown of 3 weeks beginning today for most businesses but what does the market do? Not much downticks and in fact goes up.

Market liked the idea of lockdown in anticipation of it controlling the spread. It is clear, just like humanity, market is bothered more about virus spread than effect to economy from controlling actions. If this lockdown works, fingers crossed, then there may not be further bottom. Wish humanity wins here and virus is controlled. One month lockdown would not kill good businesses, infact make them emerge stronger. Risk to above is a flood of new cases in next 2 week and lockdown not that successful. 22 to 25K should be in anticipation of control in 2- 3 months. If not, 17 - 22K maybe next stop. Although lower lever would be good financially to buy lower, but I wish we do not get that opportunity and India, world recovers in coming month.
Pls note, I maybe wrong in my assessment.

Also I agree with you @hitesh2710 Hitesh sir that most hit Industries would be better bets, however it is again difficult to wear the other hat of buying fragile industries for a trade than invest in sustainable businesses… More thoughts welcome on this approach
Thanks

[phreakv6]

@Investor_No_1

Market liked the idea of lockdown in anticipation of it controlling the spread. It is clear, just like humanity, market is bothered more about virus spread than effect to economy from controlling actions.

I doubt if market is that humanistic. Two things could be at play here

1. The ones who wanted to sell have mostly sold and are on the sidelines with cash waiting for further pessimism but they may also have the fear of a market shutdown. What if the market shuts down and will only be opened after the virus is well under control and everything is rosy and green? Nothing comes cheap with good news after all. This may have urged some to start buying today, just like buying groceries and essentials for the lockdown.

2. The lockdown may seem like bad news at first but the lockdown has ensured that there will be a certain sure loss than an uncertain big loss to the economy. This is typically how an individual thinks as well going by Kahneman’s prospect theory and loss aversion.

[smant]

For the people wondering about today’s rally, markets tend to make the biggest daily gains during times (recession/depression) like these. If you see the biggest daily percentage gains of Dow Jones (DJIA), 19 out of the 20 biggest percentage gains of DJIA came during recession/depression times (see below chart).

During the recent 2008 crisis, there are 2 such rallies (6th and 7th largest). DJIA actually declined another 30% from the day’s close of such rally (6th in this case).

[Anant]

Some more thoughts on this:
Despite the large scale dislocation caused by Covid 19, the world at large and India in particular is relatively lesser leveraged today and the major dislocation in financial assets is lesser due to leverage or liquidity but more due to hot money moving faster across boundaries and across asset classes. A clear indicator here is the D/E ratio of both the financial sector and non financial sector is significantly lower. The recovery too when happens will be swift and I don’t see major intra-sectoral leadership changes. One of the features of GFC was that almost all highly leveraged companies which were market leaders until the rally ceased to exist. There will be sectoral re-ratings and de-ratings and financials is most likely to get derated as a sector.

@Donald

• Likely least impacted: Utilities
• Likely less impacted : beaten down Asset-Heavy solid infrastructure businesses with low debt, available at or below replacement costs with near 2-digit dividend yields

I don’t see much hope for the above. If one recalls post GFC China started on a major infrastructure program to pull it out of recession. This led to sharp increase in commodity prices and that led to a boom in most state owned resources/mining companies. I dont see any such thing in a near term scenario. These companies languished pre Covid and I don’t see any significant earnings growth which could lead to a re-rating (compared to pre Covid 2019 levels).

The other important change from a short to medium term would be to introduce higher redundancy at some additional cost. This redundancy could be in inventory, in suppliers, in critical IT systems, in supply chains and at other places. The world was looking at a supply chain alternative/supplementary to China post the environment issues and the subsequent controls this will further get accentuated. Governments world wide could create more reserves of critical human needs.

Most of these are based on an understanding that crisis is a 3-6 months dislocation.