This is shaping out to be a brute of an earnings season. Any disappointment in earnings is seeing stock prices go down 5%, even if the YoY PAT growth looks healthy. It looks likely that the market is looking at the immediate future with a lot of nervousness and rightly so. Businesses do not operate in a vacuum and have interlinkages with many things in the real world. With the developed markets showing an increasing tendency to tip over into a recession and staying there for some quarters, growth will not be easy to come by for many businesses in India.
The hiring environment for tech businesses and IT services has soured from what it was 12 months ago, when the largest businesses struggle to keep margins intact it usually means a smaller pool of capital to keep employees happy. Tier 1 businesses employee base not feeling secure and confident about the immediate future tends to affect urban consumption at some point of time. Rural and semi urban pockets are already affected due to inflation.
Many consumer discretionary businesses are starting to show early signs of sluggish QoQ growth though the YoY numbers are still very healthy.
Building materials segment has had a below average Q2, businesses assuring investors of 15-20% growth have reported hygienic growth at best.
The only real momentum appears to be within the financials, industrials and select few capital goods businesses. But they too are fairly priced, nothing is particularly cheap right now.
No brainers are absent in the market right now. What is cheap has a hazy near term outlook, whatever has a healthy near term outlook is fully priced in and is susceptible to a selloff if numbers are below expectations. There is no liquidity force driving prices higher, earnings momentum isn’t easy to come by and valuation is longer favorable after the bounce from the June bottom. In a technical sense, there are too many failed breakouts since October even when the results are good. Almost as if the market is saying – welcome to how investing is supposed to be.
So what should investors do?
Active Investor – Cut through the din of macro noise and get busy understanding more businesses. Do bottom bottom up work, become more concentrated if you must and be sure of the near term outlook for the next 3-6 months. A time will come when export oriented businesses will offer opportunities as peak pessimism gets priced in, we just aren’t there yet
Passive Investor – Index it and carry on with life. Focus on your career, health, work life balance and whatever else you think is important. Whenever you see a lot of noise about how great the market return has been, take some money off the table and sweep it into a plain old FD. Once the noise turns to pessimism, deploy some money into the index and get on with your life again
If you are doing well professionally but aren’t yet rich enough, focusing on your career offers far better ROI than spending more time seeking out a 3% alpha in investing. There are just too many misguided people out there wanting to become full time investors by 40 so that they don’t have to go through the annual appraisal process at work. The market is more brutal than all of your bad bosses put together, ask the tech and crypto bros how it feels to lose > 40% of your net worth in 6 months. And not many investors manage to beat the benchmark by 3% any way.
Since inception our portfolio has beaten the BSE 500 by more than 8% p.a. but has underperformed by 2.5% over the past 12 months. But it is again beating the benchmark by 3% YTD. The benchmark and I take turns kicking each other’s ass every now and then, just that I have come out ahead most of the time over longer timeframes so far.
Successful investing is usually the outcome of a process and lifestyle that one commits to, it is rarely the outcome of a goal that one sets for oneself. Goals are for suckers in active investing and will only stress you out, contrary to how it works in an operating business. In an operating business, stress forces you to work harder and this can result in higher throughput. In investing the link between hard work and good outcomes is as hazy as it gets. I’ve made great returns when I was lazy and sub optimal returns when I was in a hard working phase.
Hard work does not hurt it but does not lead to great outcomes by itself over the short term. Over the long term though, hard work and consistency work wonders in investing. It takes a run of 3-4 years for the hard work to come good. Till then patience and persistence is all we have to fall back upon if the market is not kind to us. Rewards from investing are non linear most of the time, one good year makes all the difference to your long term return. If you do not have the patience to last it out till then, the probability of good outcomes comes down significantly.