Investing in turbulent times

Veeru had just had his bath and was settling down to a hot poori-bhaji breakfast when there was hectic knocking at the door.

Veeru: Gabbar, itni subah! Come join me and have some poori! Now, don't start asking me about the budget and why your funds are doing badly. It will ruin my appetite.

Gabbar: Haha! I know what you will say. Like a broken record, you will ask me to continue with my SIPs. I am quite happy about the budget because super-rich people like Basanti now have to pay more tax. I heard that after including surcharge and all, people earning over Rs 5 crore will have to pay a tax of 42.7 per cent. I like it! India has so much population, so we can't make the poor rich anytime soon. So why not make the rich poor!

Veeru: Very horrible idea, Gabbar. It is billionaires like Basanti who contribute to much of India's taxes. The top 5 per cent of income-tax payers make up 80 per cent of our income-tax collections. If they shift out of India, the economy would suffer. The super-rich in any country make a large contribution to the economy through employment creation, spending and risk-taking.

Gabbar: That is certainty true. Basanti has more than 20 people employed in her house itself. But I don't mind her shifting to Switzerland so I can visit her.

Veeru: Jai! Come in, we were busy with budget discussions.

Jai: I was looking for you at the tea shop. Hope you both are not bashing up poor Nirmalaji over pooris. Yes, super-rich tax, etc., is not a great idea, but now it is getting to be too much. You cannot blame the FM, that too a 60-day old one, for all the portfolio mistakes you have committed.

Gabbar: I haven't made any portfolio mistakes, Jai. I got out of small-cap funds and all long ago. I have been quietly doing my SIPs in multi-cap funds. But it is very hard to keep investing every month, when you read such terrible things on the economy from market experts on Twitter. People who were so bullish about Modi winning only one month ago are now saying the Indian economy will become like Pakistan's and no foreign investors will come here because of the surcharge.

Jai: Don't believe all that, Gabbar. Those experts know very well that there has been no sudden deterioration in the economy after the budget. Car sales and IIP have been falling since last July. India's GDP growth had slowed to 5.8 per cent in the January-March 2019 quarter itself before the budget. The issue really is that, for the last four years, stock prices have kept rising even as corporate profits were growing very slowly. When the P/E for the Sensex is at 28 times, it needs a trigger to correct. The budget provided it.

Veeru: Yes, mid- and small-cap stocks and consumer stocks were trading at very high P/Es. With the slowdown hitting them hard, the P/E needs to correct.

Jai: And it is not as if FPIs invest in India based only on capital-gains tax rates. Making a capital gain in the first place is far more important. If you remember, the Indian stock market reacted badly in the past too when we tightened rules for FPIs, like cracking down on participatory notes, introducing GAAR or changing the Mauritius treaty. Those events saw big FPI outflows. But when India saw a stable government after elections and the economy looked up, the flows came back. FPIs take a relative call between different countries and India is not looking too hot right now!

Veeru: Yes, what we really need to do to get FPIs to invest in India is to get consumers back into a spending mood and companies back into investing in new projects.

Gabbar: And maybe stop introducing so many laws and taxes in every sector that businessmen feel like jumping into a river.

Veeru: Sadly, you are right, Gabbar.

Jai: But as an investor, Gabbar, you should not be put off at times like this. The lower the valuations at which you buy equities, the better will be your long-term returns. Without this correction, the markets would have simply become more and more expensive and finally we would have ended up with a big crash like 2008.

Veeru: Yeah, I was looking at five-year CAGRs of the Nifty 50 for the last 20 years, Jai. Do you know, for people who invested for five years, the market gave a more than 20 per cent return only 16 per cent of time and more than 30 per cent only 7 per cent of the time?

Gabbar: Nice statistics, but who knows when one should invest to get that 20 and 30 per cent. I am struggling to get to 10 per cent now.

Veeru: I was coming to that. Do you know who made 30 per cent CAGR in five years Gabbar? People who invested in the Nifty just after the 9/11 attacks on the World Trade Centre, when everyone was predicting World War III. October 2008, when the global financial crisis had just hit and everyone was saying we would see a Great Depression, was also a good time to invest. If you invested in the Nifty then, you made a 17 per cent CAGR in the next five years. Remember the taper tantrum in August 2013 when everyone said India would run out of money like in 1991? If you invested then in the Nifty, you made 16 per cent in the next five years.

Gabbar: I am convinced about all that, Veeru. I have had enough of this wisdom. But I'm not sure what to buy. In fact, I wanted to buy some nice beaten-down stocks like DHFL and Yes Bank. Do you know that DHFL's stock price was Rs 660 just one year ago? Now it's Rs 46. It will easily double from here. If I put Rs 10 lakh in the stock, I will have Rs 20 lakh in just one year. No need to struggle with mutual funds, which can only give 10 or 15 per cent.

Jai: This is one of your bright ideas, Gabbar. I am sure people who were buying DHFL at Rs 350 in September 2018 and Rs 100 in February 2019 also thought the same thing. When there's a fundamental problem with a business and the auditors are not sure if the business can continue, a stock can halve from any price. Even if you buy it at Rs 2, it can become Rs 1.

Veeru: Tell me, Gabbar, if there's an end-of-season sale in the mall, do you rush there to buy Puma at 25 per cent off or Rs 99 hawai chappals at Rs 40?

Gabbar: Haha! You know me, Veeru. I am quality-conscious.

Veeru: It's the same thing in investing Gabbar. When markets are crashing, people get tempted to buy poor-quality stocks which they think will make them rich quickly. But they often end up losing big money. A bear market is a great opportunity to buy quality stocks that you have always wanted to own, Gabbar.

Jai: The same holds good for funds, too. While it may be tempting to buy thematic funds which have done extremely well in the last two-three years, it is safer to stick to long-term performers that you've always wanted to buy. Better put that Rs 10 lakh into a liquid fund and do a six-month STP into one of your multi-cap funds.

Gabbar: But I don't want to put more and more money into the same funds, Jai. They have been trailing their benchmarks.

Jai: If you're very worried Gabbar, do STPs into a Nifty 50 and Nifty Next 50 Index fund. Then you'll be benefitting from market lows and also don't have to worry about choosing outperforming active funds.

Gabbar: But are multi-cap funds good? Many people are now saying that there is further pain ahead for mid- and small-cap stocks and that it is best to stick with the bluest of blue chips.

Jai: They're wrong. Don't keep changing your allocation, Gabbar. I remember that there was a very good reason for you to start SIPs in multi-cap funds. You did it because you felt that over the next 10 or 20 years, the mid- and small-cap stocks in your funds would give you much better returns because they have better growth prospects than large caps. That logic has not changed.

Veeru: Cough, cough! I have some data on that too. If you invested in the Nifty Midcap 150 index in October 2008, you would have made a 17 per cent CAGR till date, Gabbar. The Nifty 50 earned only 13 per cent in the same period. Bear markets are great times to invest in mid-cap stocks. Of course, you don't know how long the bear phase will last or how deep the correction will be, so do it through SIPs.

Jai: Gabbar, it goes back to the Buffett saying - be greedy when others are fearful. Now there's maximum fear in the markets about mid and small caps. That makes them a good investment.