We may soon reach a situation where a plain old bank FD might turn out to be the best performing financial instrument for some time. For all the gyan peddled about fixed income investing, the past 6 months have been brutal there too, this is how the rate cycle goes. At the bottom of the cycle one loses money in long duration funds, at the peak of the rate cycle the very same long duration funds can deliver a double digit return. In fixed income the return is fixed but not assured.
The US Fed hiked rates by 50bps on expected lines while the RBI was forced in an out of turn rate hike announcement. Whether one accepts it or not, winter is already here for risk assets to some extent. That we have fallen ~11% from the NIFTY 50 peak is a pleasant surprise given the carnage we have seen in US Tech, the broader US market and other risk assets. If you were worried about big FPI outflows from India, that has already happened.
We however should not celebrate our market resilience too soon, the final down leg of a sell off can put the fear of God into those who came into equity for the wrong reasons. The Index level right now hides the pain in individual stocks, some of whom are down more than 50% from the peak.
For this reason we track the deviation of stock prices from our estimates of the reasonable price and not the peak, we stick to a range since investing is never precise. By buying within the reasonable range, investors can ensure that they aren’t putting in too much capital at the cyclical high of a stock. This is one of the few ways of ensuring some margin of safety at the stock level. Then all one has to do well is to stick to the defined allocation limits to contain portfolio risk.
For the first time in 18+ months we are in an environment where stock picking offers good risk to reward. We may not be fully there yet, but there is no harm in starting to think on these lines. It is easy to reel off quotes on buying when the weather turns foul, going out and actually doing it calls for some amount of bravery and self belief. Borrowed conviction does not work when you need it the most.
At the same time this is not the time to be needlessly brave. One should stick to segments of the market where one has already done the research and has comfort on business quality, earnings visibility and valuation. Buying the dip just because something has fallen 30% from the peak isn’t smart because the peak was never justified in the first place.
Keep your faith in good businesses that have market leadership, real profits, and healthy cash flows at good capital efficiency. GST collections aren’t rising for flimsy reasons, there is something tangible happening beneath the surface which people aren’t paying too much attention to right now. The headlines will always be dominated by news that can shock or awe immediately rather than by news that can indicate steady progress over time.
Making this distinction consistently is an important and underrated part of investing.