Revisting end September 2008 Blog post “Ab Kya Kare?”….Fantastic Wealth Creation since then

I’m reproducing a blog I had posted nearly two years ago on September 27,2008 on what should be the Investment Strategy going forward….this was contrarion in the face of many experts at the time who were recommending selling at every rise…sentiment at the time was getting gloomier….Sensex had reacted from 21000 in January 2008 to 13000 levels at the time…I had said it will seek sub 10000 levels,which it did a month later in end October 2008…Strong advice was to buy at Distress Prices in  2008 for fantastic wealth creation by 2010….this is exactly what has happened

Ab Kya Kare ! ? Should You Buy,Hold or Sell ?

Washington Mutual (WaMu) ,one of USA’s biggest Banks was forcibly taken over by the regulator,FDIC yesterday and sold off for US $ 1.9 Billion to J P Morgan even while the Chairman and CEO of the Bank was on a flight in Mid Air…The quick move was to prevent a collapse as Depositors had already began a run on WaMu and withdrawn over US $ 16 billion in the last ten days

As we move towards Panic,Capitulation and Despondency in Equities with the Scenario in USA turning scarier than ever a lot of friends,family, clients,associates and even my Pay and Park Attendant are asking me “Ab Kya Hoga ?…Ab Kya Kare ?”

This is what I strongly advise…..

We are surely moving towards Distress Prices on the Bombay Stock Exchange and the National Stock Exchange…With the continuing disturbing scenario unfolding scarily in USA,there is clearly more Pain ahead in India as Dalal Street gets Wall”ed in

Critical Valuation Basis remains on Assessing the  Sustainable Growth in Earnings…Here is the Problem….Clearly we are seeing a rapid deceleration in the Earnings Growth

The Sensex’ earnings grew by nearly 17% in the first Quarter ending June 30,2008 in the current FY 09 supported by a 33% yoy growth in Earnings in Capital Goods Companies and a near 30% growth in earnings in Telecom Companies and a strong 44% growth in Earnings in ONGC. However, the Sensex (excluding the oil companies) saw an earnings growth of only 12.5% yoy during the quarter…..the lowest in the last fifteen quarters…compare this with the peak 40% growth in the December 31,2006 third quarter of FY 07  

EBIDTA Margins contracted by 1.8 % and are expected to contract yet further.Metals and Pharma were the saving graces and saw some margin expansion

The Earnings Momentum  going forward will continue to be impacted by hardening Interest rates and double digit Inflation and an economy slowdown,notwithstanding the Minister of Finance yet assuring of 8% GDP Growth this year assuming strong domestic consumption and Investments

From a closing Peak of Sensex of 20873 in January 2008,the correction has been a mighty near 40%…With Wall Street resembling Ghost Town,the Sensex Slide should continue to distress Levels of a P/E Multiple of 9 and 10 ( Last seen in 2001)…With the remaining quarters in FY 2009 expected to reflect continuing slowdown in the  earnings growth  I expect the FY 2009 Sensex EPS to be around 950 levels…This gives a macro Sensex Valuation of 9500 thereabouts on a derating P/E Multiple of 10…that’s another 25% to 30% drop from current Sensex levels of 13000 to 13500…yesterday it declined sharply by 445 points to close at 13102

The Danger remains that if Panic turns to Despondency then Sensex may seek even lower levels than what a Macro Valuation projects  

FII’s have been forced to sell off  their holdings big time….it’s got more to do with Salvaging Liquidity for their Bankrupt or on the Verge of Bankrupty Parent entities back in USA than  Indian ValuationsAs of date over US $ 9 billion have been pulled out of India this year by the FIIs…They had put in US $ 20 billion last year.It was FII Inflowsof over US $ 40 billion from 2005 to 2007 that had driven our markets to record highs and far ahead of fundamentals with P/E multiples recording unprecedented highs of 25 with justification that India is a rerating Story of High sustained Growth and is deserving of such high multiples

What was assumed was that Sensex Earnings Growth would continue in the 30% + zone…at worst decline into the 20%-25% range….It’s down to below 15% and falling !

Reminds me of the Information Technology Euphoria of 1998…the late President of NASCOM had boasted that the IT Sector would see 100% Earnings Growth yoy for the next Ten Years !Infosys shot upto past Rs 15000 !…Once commonsense and rationalisation dawned that this assumption was far fetched it was too late as the Markets collapsed dramatically from Feb 2000 with Infosys retracting to below Rs 2000 ! Ironically it was an excellent Buy at this price in late 2001…but even if there was Investible Surplus very few had the conviction…Realising that late 2001 was a historic time to Invest in Equity,I had conceived in August 2001,even before the 9/11 World Trade Centre Attacks, a Workshop on “Restructuring, Repairing and Revitalising Your Portfolio” at the World Trade Centre here in Mumbai.It was held in October 2001…Clients who were not convinced I threatened to throw off the books…so convinced was I of the great Wealth that would unfold in the subsequent Years…I stood vindicated

I see a similar opportunity like that in 2001 emerging yet again in 2008 

So in such a depressing scenario should one Look for Opportunities to Buy…..or Sell out…or Just Hold ?   

This is what I strongly Feel…..Think Two to Three Years….In 2010 you’ll be looking back and saying why Did I not buy into Distress prices in 2008 !

I acknowledge, realise,confess and recognise that these are simply unprecedented times that brings alive the USA Depression of 1929 that lasted for years ( Check out the Pages Section of this Blog for some great Quotes on the Depression of 1929)

However I came across very two convincing chart presentations as below that should convince you to atleast Stay Invested in Equity even if you are not inclined to Buy Further

This Remarkable Chart from Data from Fidelity Investments  shows that you just have to remain Invested in Equity for the Long Term,riding out even Turmoils like that of the present…if you sell and are not invested on the best ten days your portfolio value gets halved !

It’s really a fallacy to believe one can time the Markets.Here’s what John Bogle, legendary founder of Vanguard, the most respected mutual fund company in the world had to say about market timing…

“After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”

From Personal Experience I can say that staying Invested in  Sound and Sustained Growth Scrips is really the only way to create Wealth….In the late 1980s there were many who sold of Larsen and Toubro as the Ambanis of the Reliance group tried to take it over….even the co founder Mr Holck Larsen sold off his shares !…The company was and is a gem…those who sold off never re-invested back into the Company and if they did it was at much higher Prices…In the 1990s  I repeatedly advised Investment in Infosys when it was quoted in the Hundreds…Many sold off after getting 100% returns…and lost out on 10000% returns over the longer term !

So the Bottom line is Stay Invested in Equity for the Long Term

Now Look at this Sentiment Chart…it should inspire you to consider Buying

Currently Bearish entiment is expressed by 55% of the people surveyed…..Going by the history of the last Twenty years this would indicate a strong rebound in the coming year

The Opportunity that is arriving is clearly Historic to create Wealth over the next few years

So I take a contrarion View…Instead of the Herd of Experts and Analysts that you get brainwashed into listening to day after day, again and again, on various Stock Channels who are recommending Selling at every Rise…I say await the Buying Opportunities at Distress Prices at every Decline…The quicker you are inclined to sell,the slower will you be inclined to Reinvest…and that is a tragedy that you need avert…so dont sell…instead get convinced to top up your portfolio with fresh funds in the coming weeks and months as the Sensex seeks lower levels towards 10000  

Clients can look forward to a list of atleast 25 Stock Selections with Distress Price levels that should be the benchmark to Invest

Anyone who wishes to play the Devil’s Advocate with me…please feel free to respond

Cheers ! 

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