Has the market fallen enough? Should I invest now? What if it falls more? Are bonds better than stocks? Should I invest outside India? What is the BAAP myth? Each one of us is probably having these or some version of these questions in our mind. And if you feel the answers are not coming easy, you are not alone.
Amey Kulkarni of Candor Investing agreed to share his candid views with us and I think what he says makes immense sense and can help us find a direction to the answers. Here’s a full and unedited interview with him.
Q: As an investor, what’s your current assessment of risk? How has that changed over the last 6 months?
AK: The markets are less risky today than they were 6/12 months back.
Why do I say that? – Markets are the riskiest when everyone thinks that stocks can only go up.
This was the situation in Sep/Oct last year in 2021.
Today, the bubble in the US tech stocks and pandemic stocks has burst.
E.g. Check out the stock price of Zoom – which is a great company and has been so useful to the entire world during the pandemic years
The Zoom stock has literally fallen by -80% from its top
In fact, the super profitable darling business of so many people – Netflix has fallen by -70% from the top
Today, investors have woken up to the fact of higher inflation, higher interest rates, higher commodity prices, lower growth.
There is a wide consensus that the above problems are not going to disappear in a hurry.
In fact, out of the 4000 odd stocks traded on the Indian stock exchanges, nearly 40% stocks have dropped by more than -40% from their top
The Nifty50 has corrected only about -14% from its top.
The Nifty50 index is hiding the pain that is right now being experienced by investors in non-index stocks
One good thing that has happened in this mini-crash is that the buy quality companies at any price (BAAP) myth has been busted.
DMART – which has corrected -38% from the top
However, I would also say that it does not necessarily mean we are at the market bottom.
The reason why today’s scenario is a little trickier than the previous stock market crashes like 2001 or 2009 or 2020 is that the US is not in a position to reduce interest rates and / or print more money.
The standard response of the US in 2001 / 2009 / 2020 crises was to print money and save the economy and the stock markets
Till the time US inflation is above 6%, US will neither be able to reduce interest rates nor print money.
Predicting when and how inflation will reduce is impossible.
To summarize, today is a better time to deploy more funds to equities than it was 6 months back.
But, also be prepared for lower prices and be prepared to invest more.
And the most important thing – gather courage to buy more when you see red everywhere in your portfolio.
Q: On a yield basis, bonds are more attractive now than stocks? Would you say that incremental money is better off going to bonds?
AK: Bond yields may have gone up, but what matters is not nominal yield, but real yields i.e. (interest rate – inflation).
And the real yield today is negative.
Over a 5/10 year period, equities will almost always outperform bonds.
If your time horizon for incremental cashflows is 5+ yrs, and you have already built in a large enough safety net, a majority of the incremental cashflows should go to equities.
Either one could do a SIP in an equity mutual fund or hold some cash for some time to take advantage of the depressed prices of direct stocks
Q: We have seen a major market correction in the US and somewhat in India? There are analyses about a recession looming large and/or stagflation worries. What’s your take?
AK: The US is in a soup.
US citizens have not experienced inflation for the last 4 decades.
High inflation is going to be politically suicidal for US politicians and they will fight to keep inflation at least at moderate levels.
The federal reserve will increase interest rates.
However, the inflation is both monetary in nature and due to supply-side constraints.
US-Russia war, higher commodity prices, supply disruptions due to lockdowns in China will persist longer.
Just increasing interest rates and reversing money printing may not be very effective.
There is a good chance that the US will suffer a stronger recession and will see worse days before it sees better days.
However, there is also a small possibility that say 12 months from now, inflation normalises, i.e., it comes below 5% and has a downward trajectory.
E.g. lumber prices which had gone up significantly (in the US) due to high housing demand have reduced significantly from the top
Housing demand in the US has also reduced.
Shipping rates for containers which had gone through the roof due to shortage of container ships and traffic jam at ports, has started reducing
So, maybe things will not become as bad as some of them are predicting.
However, one thing is for sure – interest rates will go up, money printing will stop for good.
This means the era of easy money has ended. Stock valuations will come to their long term averages.
Investing in good businesses bought at reasonable / low prices will make money.
High valuations in the unlisted / start-up spaces is also a phenomenon of the era gone by.
Gone are the days of investing in “high-growth” loss making businesses. Investors will demand actual cash profits.
Q: Equity Investing outside India vs in India? Do you support that thesis in your portfolio?
AK: I will talk about direct stocks.
The biggest factor in investing for me is that I should not lose conviction in the business / stock at the wrong time.
I make sure that my study is deep enough so that I am not scared even if the stock falls by -40%
A stock in which I have made a lot of money and am still holding – IEX India, has fallen by 40% from the top and I am not worried.
The reason is I understand the business very well and know what factors are driving the business.
Invest outside India only when you are confident about your analysis of the business, industry and socio-political environment.
I personally do not own any stocks outside India and the reason is I have not spent the time to analyse those businesses in-depth yet.
I do not believe much in some mechanical formula that say 20% of your money should be in stocks outside India.
Own what you understand, own the stocks that have the maximum upside potential with low downside risk.
Having said this, I think with the US markets falling so much, this is in general a good time to start evaluating and investing in US tech businesses.
Q: What are the mistakes that a beginner investor can make in today’s environment?
AK: I think the biggest mistake that an investor may make today is to withdraw a big chunk of money from equities thinking that the markets will fall more.
A little bit of asset rebalancing, booking some profits you have made since Mar-20 to repay your home loan is fine.
But, getting scared out of equities will be a big mistake.
Secondly, confusing the market (index) returns with individual stock returns.
It is quite possible that the market may go down by -10% in the next 6 months, but the stock you own may go up 20%
E.g. I own Wonderla Holidays – an amusement park company.
Movie theatres, hotel chains, amusement parks suffered massively for 2 years.
However, Wonderla managed to cut down costs and remain debt-free during this entire period
Today, business is booming for Wonderla and initial signs suggest it is better than pre-Covid times.
Park visitors are spending more, footfalls are higher, ticket pricing is now above pre-Covid times.
Even if the market falls in the next 6 months, there is a good chance this stock will be up.
And last but not the least, contemplate a little on the below quote
“Money is made by buying the bull, but real wealth is made by buying during bear markets”
Q: How’s your personal portfolio structured as of now between equities, bond, real estate and gold? How has it changed over the last 6 months?
How much cash do you hold? What’s the thinking?
AK: I own only 1 house, so I do not consider it as an investment.
My wife owns some gold ornaments. I do not consider gold as an investment.
I am 85% invested in equities. However, I know what I am doing with my stock investments and I am only 37 years old.
I will probably be working till 70 years of age and earn far more in the next 33 yearsthan what my current Networth is.
The balance 15% is in a savings bank account earning 7% p.a. interest.
For the last 8/10 months, I have been finding it difficult to find new ideas to invest in primarily because of high valuations.
I intend to deploy incremental cashflows to direct stocks in the next few months / years.
Q: What are you planning to do in the next 6 months?
AK: Find new ideas to invest in
Wait and remain patient to let the stock prices fall in my buy range.
Start learning about US markets and find a few promising US tech businesses to invest in.
—
Fantastic. I think your views should help provide a lot of clarity on the current market and how an investor should proceed from here. Thanks a lot.
Read earlier interviews and notes from Amey here.
—
What are your takeaways from the interview? Any other questions that you would like to ask?
