Saturday, 29 June 2019

How to Deal with Companies in Trouble

Lately, many Indian companies have run into trouble. From those belonging to the NBFC sector to the ones hit due to poor corporate governance, the list is long. Unfortunately, many investors (including myself) have had to bear the brunt. Can an investor preclude investing in such companies?

After a scam has been unravelled, business newspapers and magazines are filled with postmortem analysis and how you could have avoided the impacted companies. But that’s all with the benefit of hindsight. Even if someone reliably predicts a troublesome company, how do you distinguish his analysis with the countless other analyses and propaganda against companies doing the rounds. In my view, you can’t always avoid investing in a stock that will turn a nightmare later on. This makes your post-crisis strategy important.

The first leg of your post-crisis strategy actually happens when you make the investment. Invest as per your pre-decided allocation strategy. Don’t go overboard with investing in just one company, no matter how promising it appears and how attractive it has become. Secondly, avoid buying more when the stock price has started to crash. Thirdly, avoid the temptation to sell away (unless you are in profit or making a small loss) just because some news has broken out.

Now the core of your strategy. You are invested in a company that’s caught in some trouble and your stock is already down significantly, say above 25% or, worse, 50%. What should you do? Avoid acting on media reports and wait for more clarity. Media tries to sensationalise things and hence its reporting will likely be nothing short of a doom prediction. Also, media is hungry for developments like these so that they can fill pages. If you sense that there’s indeed some trouble, try to measure its impact and timeline. If some problem is going to be over in the next six months, you might like to hold the stock.

What if you still don’t have clarity but the stock keeps falling? In all such cases, it’s better to start exiting in lots. If  it’s a big holding, it can be sold over a year. Smaller holdings can be sold between three to six months. By selling in tranches, you still stand the chance of benefiting from a recovery, which looks elusive when the crisis happens. The impact of the loss also gets distributed. Above all, you save the remaining capital from getting destroyed.     

In India, especially in recent times, stocks that faced some trouble have been thrashed to such an extent that a recovery looks impossible. It’s natural for the investor to lose hope. Just formulate a post-crisis strategy and stick to it. Over the long term, if your overall stock selection is good, such losses are neatly absorbed by the gains.

Sunday, 9 June 2019

How Anyone Can Pick Great Stocks

For most of us, good investing is about picking great investments. And that’s understandable. With a plethora of investment options available—many of which are substandard—it’s only natural that we should actively look for “great” investments among them. In fact, many fund managers, private-equity professionals and advisors spend much of their time in finding great investments. Of course, they charge you hefty fees for this service. What if you could identify such investments yourself? You won’t have to pay the fund manager and you will have greater control over your portfolio. 

Finding great stocks is easier than you thought. But you will have to open up your eyes. If you track businesses, good businesses are right there in front of you. You deal with them; you consume their products. Such businesses have stood the test of time. In the Indian market, some of such companies are HDFC Bank, Kotak Mahindra Bank, Hindustan Unilever, Dabur, TCS, Maruti Suzuki, Britannia, ITC and so on. Why shouldn’t you invest in them?

Investors face a few problems while investing in this “simplistic way.” Because these companies are clearly visible, they don’t arouse much interest or perhaps thrill. What arouses interest is what’s not widely known—that stock which you discovered after weeks of analysis and that nobody knows about but you. Secondly, the “already discovered” companies are expensive in valuations. Classic investment science says valuations are crucial, so investors give such discovered names a miss. Yet another category of investors feels that large companies can’t give smashing returns as mid and small caps do. Further, some investors feel cheated if you tell them the names of such stocks because they already know them. They want to know something new.  

The world of investing has been made complicated for no reason. While most experienced investors and analysts stress the need to be simple, they do just the opposite. This results in countless theories and models that try to pick the “winning” stocks and “beat” the market and the peers. It appears that investing were a game where only one person or a handful of people can win. If you “score” less than your neighbour, you have failed. 

Investing in already-discovered stocks should be the core of your investing strategy. Don’t worry about valuations much. Such stocks seldom come cheap, given their quality and robustness. They move slowly but then they also won’t likely fall the way mid and small caps do. Over the long term, the returns from the popular stocks add up to become significant. Invest in them for the long term; don’t get obsessed with short-term ebb and flow in them or their financial performance. Such companies have a history of weathering the storm. In short, they are boring but effective. 

Once you have made a core portfolio of such stocks, you can go about hunting for the next stars. This will make your overall portfolio prepared both for the next bull or bear market.