Investment Mantra: "Buy good businesses when prices are down"

If history is an accurate guide to the future, the ongoing correction offers an opportunity to long-term investors to take advantage of the fall in stock markets.

October 15, 2018 12:27 IST | IIFL Derivative Desk
Nifty has corrected 14% from August's high level of 11760, due to several macro factors, the NBFC crisis, high valuations, EM crisis, and global market weakness. The Oct-Dec quarter is typically considered a good period for our markets, due to the festive season. But the index is off to its weakest start to the October quarter in 10 years.
If history is an accurate guide to the future, the ongoing correction offers an opportunity to long-term investors to take advantage of the fall in stock markets. Why is that? 
  • In the last 27 years, whenever an investor entered the markets six months before the general elections and held on for two years, the investor made on average annualised returns of 23%, as per a Moneycontrol report. The largest gain of around 52% was made in the 2009 elections when the UPA government was in power. The least return was 1.5% in 1999 when the BJP won. 
  • Last week, the Nifty PCR OI (put-call ratio of open interest) stood at 1.07, which is below 10 percentile (near to 1-year low), implying an "oversold" situation. Further, since 2017, this level has been witnessed in 42 sessions out of 435 trading sessions. The market gave a positive average return in the short term. 
  • In addition, the relentless sell-off in the last 6 weeks dragged 90% of Nifty 500 stocks below their long-term 200-day SMA. Historically, such a bearish extreme has often led to the bottoming out of the index. 

Which are the safe investment themes currently?
  • Consumption is the largest component of the Indian economy, constituting about 54% of the GDP, recommended picks being "GODREJCP, BRITANNIA, and PIDILITIND
  • In banking and financial services, historical wealth creators have been those firms whose GNPA is less than 2 and have a low "credit default swaps (CDS)" spread. The CDS spread acts as a shield against a likely default on outstanding debt securities by the issuer. Top picks on the basis of this include "KOTAKBANK, INDUSINBANK, YESBANKRBLBANK, BANDHANBANK, and GRUH.

What may be considered as the right investment pattern?

Volatility is inherent to equities (nature of the market); it is practically impossible to predict the bottom of the market. Hence, investors should not time the market and invest a fixed sum regularly (manual SIP) to average out the cost of acquisition by purchasing a greater quantity when prices are low. This will enhance one's returns over the long term by averaging the market volatility.
Investing comprises four aspects: conviction, valuation, discipline, and patience. One who gets all these aspects right will rarely lose money in the market. So, when the markets fall, do not panic or sell portfolio stocks. If you know why you invested in a particular stock and if the stock’s fundamentals are fine, continue to hold it. Further, buy more at lower levels and do not engage in manual SIPs, as it will defeat the purpose of rupee-cost averaging, one of the greatest benefits of SIPs.

Very few investors realize that if their goals are for the long term, a fall in the market today is actually an opportunity to buy more at lower prices.
Recommended derivative strategy: Covered call (Buy share in cash and sell LEAP-year call option) and Put hedge (Buy shares in cash and hedge with Nifty put LEAP-year option as per the beta of the portfolio). It must however be noted that these strategies require knowledge and experience and hence, must be executed under derivative expert supervision for active management. 

Save prudently.... Invest and manage wisely.

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