Anybody with even a slight interest in the equity markets will know that there has been a party going on in that arena for the last couple of years. With every passing month, the noise decibel has been only going higher. There was a small interruption on June 4 post the election results but it seemed that the cops had turned up to see if all the approvals for the party were in place. And after the cops left the venue, the emboldened party goers went into a frenzy.
What do the valuations look like ?
I tried to compare the historic Nifty PE valuations with the current valuations to gauge the margin of safety. As per this note, it might not be prudent to rely on that comparison since NSE switched the earnings calculation method in April 2021.
Standalone versus Consolidated: NSE published standalone PE for the NIFTY up until March 2021. Starting April 2021, they switched to using consolidated earnings to calculate the NIFTY PE ratio. Therefore you see in the table below, a dip from 40.1 in March 2021 to 32.7 in April 2021. This means the NIFTY PE ratio now is not directly comparable to the PE ratio before April 2021. Any analysis that draws a relationship between historical returns to prevailing PE ratios can't be directly be applied to the current NIFTY PE Ratio.
[Source : Capital Mind]
So, I will leave it at that and look for some other signals.
Let's, look at the IPO subscriptions. Promoters are most knowledgeable about their businesses and they know the right time to cash their chips. Read this and this. Opportunistic promoters are taking money home by selling shares while the exuberant investors, particularly the small investors are falling head over heels while deploying their money in the stock market.
Another signal is the sheer number of first time investors who are entering the market. These investors have not experienced any sustained bear market and they don't know how stomachs churn when stocks fall down by a large percentage. In the past few months, I received hurried calls from a couple of my friends (who are very successful businessmen but have no clue about the stock market) to understand how to invest in stocks. Their enthusiasm makes me nervous and I don't think I was successful in tempering it.
The last signal for me is the lack of margin of safety in the valuations of businesses I like and would be open to investing. Since the valuations are not in my favour, I have no other option but to wait.
How long will you wait ?
I look for businesses that (1) I understand (2) earn an attractive economic return (3) are run by quality managements & (4) are available at a reasonable price. I will not invest till ALL the above conditions are met. I have been waiting to make an investment of a significant size and the current valuations are making the wait longer. I am prepared for that and sincerely hope that my clients are with me on this.
If you don't invest, what do you do in the mean time ?
I show everyday at my work with enthusiasm and remember Prof Donald's Sull's idea of active inaction. "Inaction does not have to mean that nothing is going on. When troops are not in battle, they keep themselves in a state of active preparedness." I am trying the same.
I read up on new businesses, review the existing ones, exit the ones which I think were a mistake or are not as good as I thought earlier.
Are you making a market forecast that the market will fall substantially ?
No, I am not. I am also sure that nobody can forecast that. All I am saying is that multiple signals have turned yellow and risk reward is not favourable. Hence, it is prudent to be cautious.
What does Rapper Badshah has to do with all this ?
All work and no play makes Ankur a dull boy. Since I don't want this note to be dull, I will end this with a groovy & peppy number by Rapper Badshah "Abhi to party shuru hui hai"
He says in the song :
Baad mein na kehna, pehle hi de doon warning
party chalegi till 6 in the morning....
I know the party is on. I don't know if it will go till 6 in the morning. But I think there is a high chance that whenever it ends, it will result in a bad hangover.
10 comments:
Thanks, Ankur.
It is always a delight to read your blogs.
Hi Ankur, finally first blog of 2024.
To quote your words: "I have been waiting to make an investment of a significant size and the current valuations are making the wait longer."
1. While investing new money or not can be gauged from the above argument, what you do with existing investment is a challenge in itself
2. There was a recent quote by S Naren that we are trained for fundamentals rather than liquidity... any views on that, sharing the link below
https://youtu.be/LKd3-sxhsAY?si=1bneMD0ygAzHj61u
Thanks for sharing your thoughts
I believe in one of your interviews you said you don't try to time or increase cash positions based on overall market factors. But at such a time, would you consider trimming position in a biz selling at intrinsic value, which you bought for half of IV? Solid cash generating company, management has made moves which have improved competitive positioning, and external environment which was rough when you bought is now benign. Asking because this biz had grown to 40% of my pf, which I've now trimmed to 30%, very reluctantly.
NFO in already heated up space like Defence
SEBI chairman raising concerns about F&O volumes and savings being directed into speculation
Banks in deposit crunch as many started to prefer capital markets
Articles on next gen promoters saying why should invest in running a business or avail dealership when we can make easy money by directly investing in the stocks itself
Finfluencers giving direct projection of future corpus based on past few years returns and simple suggestion for retirement etc.
Some companies giving more importance to stock price, home page of the company itself has stock price/market cap related information.
Huge raise in no of share holders in many companies
Foreign MNCs' reducing their stake in Indian subsidiaries
That's right, Apar. I used to think about cash position many years ago. But then I used to invest based on quantitatively cheap criteria with little emphasis on the quality of the business. In that context, maybe thinking about cash position had some relevance. When I shifted to buying more quality businesses, the need to sell reduced tremendously and the idea of cash position became irrelevant. Hence, I hence discarded that practice.
My decision to trim a position in a good quality business will depend on the quality of the business, its valuation and the position size. I will also keep in mind that I am very likely (almost a certainty) to be over optimistic about the business I hold and hence would be under weighing the risks. So, there would be situations based on the combination of the above 4 underlined factors where I would be fine with trimming the position of a business which is good quality in my opinion.
Thanks Raju. All of these are pointers to the road down the hill.
And together they might create a negative lollapalooza.
That's right Gaurav. Choosing the right course of action for the existing investments is a challenge, but a happy one given the valuation surge. Selling the poor/mediocre businesses and pruning/ retaining the stronger ones seems prudent depending on the respective valuations, position size and one's own comfort level.
Thanks to share the nice quote by Mr S Naren. Liquidity like a deluge has covered everything rational in its path. But this too shall pass. And when the tide goes out, it will leave a lot of destruction behind. Hence, we need to be fearful while others are greedy.
I believe in your Stoic podcast you said you would consider trimming when stock reaches 1.7 to 1.8x of IV.
In terms of position size of pf, when do you start getting uncomfortable and start trimming?
Also (taking the risk of sounding like a broken record), would you be conducting your internship this year?
Hi Apar,
Since the stoic podcast, I have evolved even though the core thinking of investing in good quality businesses remains unchanged.
About selling a business I would reiterate what I wrote earlier: There are many things that go into making the selling decision and valuation is just one of them. (inspired from Raymond's advertising)
The decision to sell (or not) a business is a combination of a few factors. If I am convinced about the quality and longevity of the business, I would be reluctant to sell. There is no mechanical rule (in isolation) about the position size in the portfolio or my intrinsic value estimate. It would be a mix of the factors I described in my previous comment.
Thanks for your continued interest in the internship. I don't plan to conduct it in 2024 but am planning to do it sometime in the future.
Greed is everywhere - I can't paste the chart I was looking at but seems now Nifty 50 is trading ~ median. The data I have does smoothen the data because of Readjustment in the way P/E was calculated but do agree with all points here. As PPFAS said invest for the right reasons https://www.youtube.com/watch?v=RPBOTkkKk6E
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