Strength displayed by our indices baffled many investors in India. While they see serious dents in their portfolios, Indices are having a relentless run and are scaling newer heights on almost daily basis. It is true that there has not been broad based rally in Indian markets, as far as prices are considered.
To prove our point, we picked up the time between January 29, 2018 (When Nifty peaked) and 9th August 2018. Since most retail investors are swayed by tips from friends, TV Analyst views, Stock commentaries on web, brokers’ recommendations and sometimes by their own gut feelings, it is impossible to have any single portfolio reflective of common clients. Instead, we assumed that typical portfolio of conservative retail client will have 20 stocks and investor is rational to allot equal weights (investments) to all stocks. That implies, in a portfolio size of Rs 5,00,000 on January 29, 2018 he will have invested Rs 25,000 each in 20 stocks.
Since we intend to cover the possible performance of conservative investor, we asked our computers to pick 20 random stocks out of NSE 500 index only to build the portfolio on start date i.e., January 29, 2018. We asked our systems to build 100 such random portfolios. The concept of Long term investing is drilled so deep into our investors’ minds and hence we allowed all the portfolios to continue till 9th August 2018. We checked the performance of all such 100 random portfolios and tried to tabulate the appreciation or depreciation in individual portfolios.
|How portfolios performed|
|Number of portfolios built||
|Number of stocks||
|Stocks picked from Index||
We are appalled with the findings as displayed in the table above. 95% of the portfolios are still suffering capital erosion. This is despite the fact Nifty rose by about 300 points between January 29 and August 9th of 2018. Further, the average capital erosion (or Loss) was at 10.74%. Out of those lucky 5% portfolios, when we checked for the best return, it gave 7.05% and the next best was at 5.93%. The other three portfolios returned less than Index gain in the same period. When we checked for the worst performing portfolio, despite widespread diversification, it stood at 22.59%. In fact there were 21 cases where the loss was more than 15%. We also realized that another batch of 37 accounts witnessed losses above 10% and below 15%. This exercise clearly explained and reflected the prevailing situation in Indian markets. Several investors are heart broken and are waiting to bid good bye to stocks if they see their portfolios recover losses. Can we call this a good move?
But, Vivekam strongly feels it is the right time to get into equities, not necessarily into those hot stocks that fuelled this surge in Indices. Instead, there are many other stocks that are improving their performance significantly in their operations but, for some strange reason, see their stock prices lie low. When Vivekam analysed the entire stock universe, based on latest TTM results, some interesting and encouraging findings emerged.
A total of 1081 companies reported their latest quarter results helping us calculate Latest Trailing Twelve Months (TTM) and compare with previous TTM numbers. We removed bank stocks from our radar as their numbers were anyway bound to be bad with mounting NPAs in public sector banks. We further narrowed our study to stocks with more than 1,000 Crore market cap and realized that this group has seen an increase of 3.59% in their aggregate profits. Invariably, a few stocks in this basket must have some companies reporting lesser profits or more losses.
We then divided this basket into Stocks that improved Vs Stocks that lost out on profits. Former category of stocks numbered 388 and they have seen 10.35% growth in aggregate profits. Later category had only 125 stocks, which meant less than 1/3 of former category, and they reported a dip of 21.32% in their profits.
More companies reporting higher profits and an improvement of more than 10% is highly encouraging sign for stock markets in the long run. Please have a look at the table below.
We also studied the relative performance of all stocks (excluding bank stocks) by putting them in different buckets of market capitalization. Ratio of better Vs poor stocks seem to improve as we go up the size of Market capitalization as displayed in the table below. This, to some extent, explains why only the market cap heavy stocks are surging while other are languishing.
What does this study offer to investing community and to retail investors in particular? We all know that “trees don’t grow to skies”. Though large cap stocks seem to be much in favour at this time, attention is bound to turn towards other stocks as the days pass by, when those very large cap stocks become expensive and are therefore less attractive. When it happens, stock with solid fundamentals and lower prices will zoom in a much shorter span of time. Vivekam strives to identify and list such stocks for your investment on any given day. All our clients are loaded with stocks only from such list and they have already seen an uptick in their aggregate portfolios as was shown in the image below.
We are glad that our investors did not lose their nerve when mass mispricing of stocks was happening in markets. They knew that their portfolios had only quality stocks that kept improving operational performance, which is the main fuel to let stock prices surge. They also believed that time tested process will bring smiles back on their faces.
Congratulations to our matured clients and we commit not to deviate from the set process ever. May the process deliver magical returns to all our clients!