K A Chacko, a Kochi-based cardiologist who invested ₹10 lakh in 2003, as the first client in the portfolio management system (PMS) of a boutique investment firm in Kochi — Equity Intelligence India — is laughing all the way to the bank following the spectacular growth in his equity investment.
With the Sensex crossing 25,000, his portfolio has registered a mind-boggling 33.7 per cent CAGR (compounded annual growth rate) over the last 11 years. “He admits he has made more money from equity than as a cardiologist”, says Porinju Veliyath, CEO of the company.
Sateesh, a BSNL employee from Irukki in Kerala, who invested ₹9 lakh, finds his portfolio kissing the ₹1-crore mark. “Another businessman thought our system-generated report was wrong when he found that his portfolio — ₹38 lakh invested in April 2012 — had recorded a 71 per cent CAGR against the Sensex registering 20.4 per cent,” adds Veliyath.
He was able to give these results through “focused value investing”. Some of the stocks in his PMS include Finolex Cables (₹50 to 180), Orient Paper (5 to 32), Orient Cement (35 to 95), Selan Exploration (230 to 600), KRBL (22 to 75), DCM Shriram Construction (50 to 180).
Risk appetite back
Motilal Oswal, CMD, Motilal Oswal Financial Services, Mumbai, says retail investors are “reinvigorated by this rally, as their under-performing stocks, have soared”. Beaten down capital goods and infrastructure stocks (Suzlon, HCC, Reliance Infrastructure) have fetched multiple returns from their Feb-March 2014 prices. “This rally is concentrated in small and mid-cap stocks where most retail investors invest, so their portfolios have beaten frontline indices in the last three months.”
He finds “appetite for risk coming back, with the market, especially high beta names, performing well.” L&T, for instance, has jumped up 2.5 times from its yearly low. More than global liquidity, “expectations of improved governance and better political leadership has enthused retail investors to rejig their portfolios, exit low-quality stocks and enter better companies”.
Veliyath’s message for those who’ve missed this rally is: “Better late than never! I see exciting values out of Sensex companies. Investing in blue chips, already chased by FIIS, Mutual Funds, may not be the right strategy; “smart stock picking is the way forward to make big money”.
Bargain hunting is available in mid and small caps “provided you take some calculated risk and make compromises on current stock liquidity, quality of management, debt position.” Here, common sense, more than number crunching helps. “When I was accumulating Finolex Cable at ₹50 a year ago in our PMS, analysts had warned about management quality. Today nothing has changed, but big brokerages now recommend it at ₹180!”
When he was buying a few million shares in Orient Paper at ₹4-6 last year; many clients asked him: ‘Why do you buy penny stocks?’ “Today at ₹32, it’s a hot favourite in market. It is all about perception.”
That’s why, he says, direct equity investors have made more money than mutual fund investors “as the rise in lower quality, illiquid and beaten down stocks was significantly higher than large caps and blue chips.”
So are they seeing a shift in the mindset of individual investors? Oswal sees both existing inactive clients as well new investors participating in this rally, “but more heartening is the return of astute HNI investors, waiting on the sidelines for a few years. Veliyath agrees.
“As usual, more people want to invest when the markets go up and stay high; 2013 was a great year to invest in equities. But domestic investors were net sellers, buying gold and real estate whereas FIIs aggressively bought equity.”
The Sensex going to 35,000 is “no big deal considering company valuations and fundamentals of the economy. With Indians highly under-invested in equity, he sees much more intense and larger domestic participation. “Don’t under-estimate the power of domestic buying; this could be the next driver for a further market rally.”
Parag Parikh, Chairman of PPFAS Asset Management, Mumbai, says behavioural patterns don’t change overnight. “The usual pattern is: Disbelief, scepticism, reluctant belief, strong belief, euphoria.” He is seeing increased interest in their equity MF schemes, with many commencing SIPs.
In the coming days Oswal sees enough scope for PE expansion. “We believe equity gives the highest risk-adjusted return in a growth economy like India, and is a “must-own” asset class for anyone seeking to protect and enhance their purchasing power over long durations. Moreover, earnings acceleration is yet to begin. Together these two factors provide significant headroom for markets to appreciate, he adds.
But the perennial tussle between traders/speculators and value investors remains. Parikh thinks those who look at the market as a casino are higher in number than serious investors. “Online trading has only accelerated this.”
Veliyath adds: “People talk about value investing, but very few practise it. Many think holding some stocks for a few months is value investing. The proportion of ‘satta’ in the market is going up steadily every year, but with a stable government, rational policies and potential economic uptrend, I expect genuine investing to gain momentum.”
He also blames some TV channels for fuelling speculation. “In 2008 when the Sensex crashed below 9000 from a high of 21000, a leading TV anchor asked a market expert: ‘Do you think the Sensex will take support at 6,000 or 4,000?’The expert had no option to talk rationally!
All three are bullish on equity; Oswal says this will outperform other asset classes; Parikh recommends the mutual fund route, and Veliyath expresses faith in the power of compounding through disciplined investing.
Meanwhile, one of Veliyath’s youngest clients, a college student, is not even aware that the ₹25 lakh her planter father had invested for her in August 2013, had swelled to ₹65 lakh!
The original article could be seen here.