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Monthly Digest – December 2021

By Avatar photoKedar B | Edited By Kedar B | Updated on September 22, 2023

Over the past 6 months or so I have been repeatedly sounding a note of caution on the valuation in specific pockets. On expected lines, it has turned out that way within a reasonable period of time. Though the exuberance appears to have simply moved out of these pockets into a different pocket like IPO issuances. 

Sometimes we can go years together where prices stay exuberant and make prudence look foolish. Buying the dip works well in a bull run until it doesn’t. The definition of a dip also changes once the texture of the market changes. 8-10% from the peak at the index level is called a dip during most times, in a roaring bull market a two day fall of 3-4% in stocks is called a dip. 

I distinctly remember saying this to some of my subscribers that eventually a period will come when you buy a stock and it goes nowhere for months. This is what a balanced, healthy market should feel like. When every single stock is in the green within a short period of time and by a healthy margin, it has historically been a sign of caution in the Indian market. Liquidity by itself can move the needle by 10-15% in the smaller counters in our market. 

Over the next few months we will see some or the other macro concern making the headlines. Be it inflation, the price of crude oil, what the US Fed does, RBI action or the FII’s taking their money elsewhere, the narrative will keep changing and focusing on the “next big” potential issues, most of which will flatter to deceive. Anticipated events rarely shake the markets, even if they cause a flutter or two. India will continue to be on a strong macro footing unless the price of crude oil spikes well beyond USD 85 per barrel and stays there. Monthly GST collection continues to stay beyond 1.3 lakh Cr as the economy normalizes. ~USD 640B forex reserves offer cushion for the RBI to shore up the currency if needed. 

What should investors do? The same answer yet again – Buy good businesses that are reasonably priced, stay balanced at the portfolio level and prune positions that are exuberantly priced. The current bout of volatility is business as usual so far with earnings expected to do well over the next two quarters. 

Over the medium term it is consistency of execution that produces good results, not occasional strokes of brilliance or luck. Execution also means calibrating to the market cycle well unless one is in the business of buying long shots that can each deliver 30x+ if they work well, even if the strike rate of each one is low. 

Newer investors today appreciate that good earnings growth does not make a stock immune to short term gyrations, it is more about what expectations are priced in rather than what the business delivers. I continue to look for mispriced bets in the market where stocks are priced for a scenario much worse than what is likely to occur. There still aren’t too many of these mispriced bets visible to me, in which case we are better off sticking to the known devils rather than seeking out unknown angels.

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