New Year 2020 began with great promise. Markets were at all-time high in January 2020 with early signs of economic recovery on the back of benign macro indicators, the government's tax cuts and RBI's expansionary policy. After the incidents of 2018 and 2019, there was finally a seed of belief that economic growth and the elusive earnings cycle, better known as "Karan Arjun", would finally come back. The spread of COVID19 and scary data emerging from countries like Italy, Spain and then UK followed by USA resulted in panic in the global markets and looked like Karan Arjun would be delayed by a couple of decades in real, just like in the reel. Pardon the hyperbole, but a 40% decline in Nifty with an unprecedented USD 10 bn FPI outflow in first 3 weeks of March 2020 did suggest something just along those lines.
Usually analysts have a bear case, a bull case and a base case and one sees an artificially narrow range of variables defining these outcomes, often devoid of real-world unpredictability. It happens very rarely that there is a choice to be made between two crystal clear options like 'the world will come to an end" case and "the world will not come to an end" case. Remember those last few days of March 2020?
Somebody posted on Facebook recently asking for a one-word characterization of the year 2020. I replied "Masterclass". This is a year that will be referenced by many a stock market warrior in the years to come.
So, let me share what I learnt in 2020 with a short story of my interaction with an equity investor. This is one exemplar, but we know this is what is happening with many.
There was an investor who invested somewhere in March 2015 when Nifty was close to 9,000 and by end February 2020 when five years were over, the investor had a return of about 12% CAGR in a large and midcap fund; about 4% CAGR ahead of the Nifty 500 TRI index like to like basis. When this investor spoke to me in early April 2020, obviously she didn't care for the position in February 2020. When I got the call, she was quite upset because the five-year CAGR was 4%. What is long term and what is the use of investing if return is less than FD rates after five years?
I referred to historic portfolio values as at various dates and explained as recently as February 2020, one saw about 12% compounded. By end March 2020, it did not matter what one was holding, everything collapsed; there was a 35-40% decline. Arithmetically the entire five-year CAGR declined by 7-8%. She was unhappy and over the next few months I had to stay connected and make efforts to avoid redemption at an inopportune juncture. Ultimately, the investor prevailed, and she redeemed in early November when Nifty crossed the Jan-Feb 2020 peak levels. The return had improved from 4% to 10%. Now, the saddest part of the story. If the investor had waited for a few more days or say till end of 2020, the now five and three fourths years CAGR would have been more than the earlier 12% noted in February 2020. What are the learnings?
1. Belief and conviction in the concept of equity needs to be demonstrated at the troughs and not just at the peaks. One may or may not demonstrate faith when Nifty is 14,000, one does need to demonstrate faith in this concept of equity investing when Nifty falls 40% and hits 7,500 in flat 15 days. When money doubles in a year, everybody has faith and belief; what you do when it halves, is what will eventually count.
2. Equity returns are non-linear and lumpy. What was built over 5 years can be destroyed in a matter of weeks and that which can be destroyed in weeks can be regained in short periods too. Did a 3-6-9- month disruption call for companies to lose 50-60-70% of their market value? The wise investor is one who takes advantage of the irrational mood swings of the markets rather than become party to it. "Be greedy when others are fearful, be fearful when others are greedy", is not just meant to be a soft board pin-up.
3. Recent experience has nothing to do with the future potential. Famous American novelist, F Scott Fitzgerald said, "the test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function". Another famous American novelist Jack London said, "life is not always a matter of holding good cards, but sometimes, playing a poor hand well". When things do not work out as expected, instead of re-visiting and re-calibrating, we human beings crave for closure and conclusion. In the equity investing journey there is nothing like black vs. white, right vs. wrong, good vs. bad; there is only context and perspective. One needs to stay away from drawing fateful definitive conclusions because what works is careful calibration and probabilities.
4. Equities are for optimists. Something that economic analysis will not be able to model; when humans experience threat to life and livelihood locked down for months; what does that prolonged fear and suppression eventually do to the human spirit to overcome fear, bounce back with vengeance, rebuild and reclaim life? If one generally believes that humans, and corporations or businesses run by humans are the next dinosaur, then equity is not for you. I, for one, am an optimist and I see 2021 start with a lot of positives on the horizon; just like 2020. What is the chance there is another COVID 19 around the corner? For now, "the world will not come an end" case has played out, the macroeconomic conditions for India are benign, interest rates are low, liquidity is high and the Government has heeded Winston Churchill's advice, "Never waste a good crisis".
Get back in the saddle.
(Author: Aashish Somaiyaa, CEO at White Oak Capital)