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  • Beware! Like in soccer, Messi, Ronaldo & tiki-taka of your portfolio can fail you

    Quote by Jayant Pai in The Economic Times Markets, July 03, 2018

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    The original article could be seen here.

    Equity MFs get over $1 billion in Jan via SIP We picked a few that show the substance of soccer in your investment world.

    NEW DELHI: Soccer does teach us life lessons. And Fifa World Cup 2018 has simply been outstanding on this count!

    Major upsets at both group and knockout stages of the tournament echoed not just the uncertain times we live in, but also behaviour of our markets.

    Financial markets globally have become more volatile in recent times than they were a decade ago amid economic shocks, changing money flow dynamics and protectionist trade policies

    Investment gurus say that what Russia did to Spain, South Korea to title defender Germany, Uruguay to Cristiano Ronaldo-led Portugal and France to Leonel Messi’s Argentina have similes to what technology changes have done to many frontline businesses and newer, more aggressive rivals have done to established market leaders.

    Dalal Street’s talking class these days is making regular references to the world soccer’s biggest spectacle in Russia to back every investment brief.

    We picked a few that show the substance of soccer in your investment world.

    Germany’s exit

    That’s the biggest lesson, say market pundits. In their failure to get past the group stage, Germans in a way kept a tradition alive: that of title holders biting the dust early.

    It happened with 2010 champion Spain in 2014, 2006 champion Italy in 2010 and 1998 winner France in 2002.

    Curiously, the bull phases of Indian stock market since the economic liberalisation of 1991 show a similar trend.

    Recalls market veteran Basant Maheshwari: In 1992, the entire market was led by Harshad Mehta. There were hopes that the liberal rules would pave the way for more infrastructure development and, hence, cement stocks got rerated. But stocks like ACC, Apollo Tyres, Tata Steel, which had become market darlings, failed miserably thereafter.

    Maheshwari is the Managing Director of Basant Maheshwari Wealth Advisers and author of The Thoughtful Investor.

    In early 2000, the entire market was led by Ketan Parekh and the K10 stocks -- also known as the KP pack -- which included Himachal Futuristic Communication, Satyam Computer, Silverline, DSQ, GTL and Aftek Infosys, among others. They hit new highs every second day, only to fizzle out with the dot-com bubble burst.

    In 2008, the market was led by infrastructure and real estate stocks such as L&T and Unitech. Telecom major Bharti Airtel, too, enjoyed its day in the sun. Their leadership ended soon after.

    Between 2010 and 2015, the market had a new set of favourites in Page Industries, Eicher Motors and MRF. But in 2017, leftover stocks of the 2008 bull run – GVK, GMR and Lanco Infra – rose from the ashes, Maheshwari points out.

    Leadership has an expiry date, and that applies to stock market, like every other area of life.

    “The replacement cost theme of Harshad Mehta days, blue-eyed boys of Ketan Parekh days and 2008’s theme of ‘India as a runner without shoes’ did well without fundamental support, but for very brief spells. Eventually, India never got its shoes, but investors lost their pants,” Maheshwari said.

    If valuations are cheap and things are ripe for a bull run, investors should focus on sectors that are getting tailwinds. After taking a ‘top down’ look, pick the stock with best fundamentals, says Gurugram-based value investor Gaurav Sud.

    Fall of tiki-taka
    Spain is known for the 'tiki-taka' style of soccer, which they use to control a game and frustrate the opponents till the latter commit costly errors.

    “When it was new, it made a mark. But now football teams know how to counter it, as was seen not only with Russia, but in the group rounds. But Spain never really changed the base strategy; they never played like champions,” says Sud about the red brigade's early exit from the World Cup.

    Creating a moat -- read competitive advantage -- is as important as preserving it. How Patanjali ate into the market shares of established FMCG companies is an example. Dabur India was hit by Patanjali’s honey and Colgate saw pressure in its oral care segment. Patanjali's rise made Hindustan Unilever rethink and come out with Lever Ayush. Both domestic and MNC players have since altered their strategies to counter Baba Ramdev’s company.

    Investors should always keep evaluating prospects of their investments, even if the money is invested in the bluest of blue chips. Who knows what emerges next?

    Russian roulette
    Russia’s victory over Spain is being seen as the biggest upset of the tournament. Football fans worldwide are still in disbelief because they underestimated the determination and home turf advantage of the Russians.

    When oil major Reliance decided to venture into telecom via VoLTE, the analyst community, even while acknowledging that the Mukesh Ambani company had deep pockets, thought lack of VoLTE infrastructure and mobile instruments would stymie the firm’s ability to eat into incumbents’ market share. But Reliance Jio surprised one and all; it not only shook up the entire industry, but also quickly grabbed a large market share, setting off a wave of consolidation.

    The Ambani firm has just pipped Vodafone to become the second largest telecom player in India in revenue terms.

    In Indian IT, industry giants fell behind because they were lazy in capturing the technology shifts, which swept through the industry and completely changed legacy business models.

    Investors need to gauge whether a disruption is temporary or has the potential to permanently change industry dynamics. Spain and other football majors paid the price for not evolving their game plans with time!

    Croatia's determination
    Be it in soccer or stocks, one has to hold one's nerve. Those who lose theirs and give in to bouts of greed and panic at precisely the wrong moments are bound to suffer, says Jayant Pai, CFP and Head-Marketing at PPFAS Mutual Fund.

    Resilience and patience can earn rewards. That’s true for everything in life and investment. That’s the lesson one can draw from dark horses like Croatia or Mexico, which surprised everyone to progress in the tournament upsetting more established rivals.

    On the other hand, it also shows overconfidence can bring disaster in any life situation.

    Be it in stock investing or football, even gods may fail. Mimicking big investors’ style of investing may not always lead to growth path. How some of the leading wealth managers failed to generate returns for their clients is a fresh example.

    Past performance too is no guarantee of future return. It reminds investors of Warren Buffett's famous saying: ‘In the business world, the rear-view mirror is always clearer than the windshield’.

    Coaching blunders
    Sacking of Spain’s coach Julen Lopetegui at the 11th hour of the event is a case in point.

    Julen Lopetegui was sacked for failing to tell his federation about his plans to join Real Madrid. While Spanish media wondered what made Lopetegui accept the coach's job at Real Madrid on the eve of the World Cup, it also squarely put the blame on Spain’s interim head coach Fernando Hierro's decision to bench star player Andres Iniesta in favour of Marco Asensio in the early part of the match against Russia.

    Management change is crucial, even in listed companies. It can be good or plain bad.

    Those who had invested in Gitanjali Gems would vouch for it. As CBI and ED chased Mehul Choksi, promoter of the jewellery firm, on money laundering charges, investors paid through their nose.

    Nobody can predict scams, but one can always react quickly. One should seriously reconsider an investment rationale when such incidents occur and avoid averaging positions at lower price levels on hopes of getting rewarded in the short term.

    Mbappe's Pele moment
    French teenage player Kylian Mbappe’s two goals in France’s 4-3 victory over Argentina in the World Cup Round of 16 game has broken a 60-year-old record: he became the first teenager to score more than once in a World Cup match since 1958.

    “While Mbappe was being seen as the next big thing in France football, nobody outside France knew him well. The hidden gem came to light only when he sank the Argentine boat. Those who showed faith in the player hit the jackpot. Try identifying performing companies early in their growth cycle,” adds Sud.

    What star power? Bye-bye Messi, Ronaldo
    Some called them legends, but Messi (Argentina) and Ronaldo (Portugal) not just failed to take their teams through the first knockout round, but broke hearts of many of their fans, too.

    "Over-reliance on one or two ‘stars’ can be hazardous. While they are important, they also require the support of the team. Similarly, it is important that one's portfolio is balanced so that overall returns are not unduly dragged down in case the leaders do not perform as expected,” Pai says further.

    “Just the way a team cannot hope to progress solely on the performance of its stars, one’s portfolio should also cannot rely on just a couple of high performers to deliver big gains. A more broadbased portfolio can only help cushion against wild fluctuations in returns,” he points out.

    Besides, if you bank upon a stock looking at just the past performance, you may end up in a trap!

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