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The #2 Secret to Winning Big After the Budget Reaction Is Over

Feb 10, 2020

Ankit Shah, Research analyst

What happened in the markets since the start of February has been very telling.

On 31 January 2020, just a day before the Budget, the Sensex had closed at 40,723.

On 1 February 2020, the day the Union Budget 2020-21 was announced, the markets crashed. The Sensex shed nearly 1,000 points to close at 39,735.

But then, suddenly and surprisingly, the mood changed and the markets started rising.

On Friday, the Sensex closed at 41,142.

For many investors, it has been a baffling week.

How did the reaction to the Budget shift from pessimism to optimism in just a matter of days?

All I can say is - that's how the markets are. That's how unpredictable and volatile they can be in the short run.

While this aspect of the market can be quite unsettling, this is also how attractive buying windows are created for serious long-term investors.

In today's editorial, I want to return to a theme I'd started a few weeks ago that will help you take a big picture view of investing.

It all started with a random conversation I was having with a family friend who witnessed a steep decline in the value of his stock portfolio in the broader market crash of 2018-2019.

It is only in the last couple of months that he started actively tracking his stocks once again.

He's hoping that the smallcap rebound will help him "recover his cost" - a thought pattern I am vehemently against.

In a follow-up note, I outlined the very first step that you must take before you can take advantage of the rebound - cleaning up your portfolio...eliminating junk companies whose fundamentals have significantly deteriorated amid the economic headwinds.

Many investors have this misconception that making big money in the stock markets is simply about picking the right stocks. And this is the reason why the portfolios of big, successful investors are closely tracked and scrutinized.

But there's a lot, lot more to investing than just picking the right stocks.

I believe that it is not the stocks that differentiate between the big winner and the small winner, but rather the investing approach and temperament.

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Like my friend, the ordinary, small winner is obsessed primarily about recovering his cost after he sees his investments plunge in a bear market.

So, he will continue to hold on to stocks even if they don't deserve to be in the portfolio, even if better quality stocks with greater return potential may be up for grabs.

But in the long run, we have seen that such emotion-driven behaviour hardly serves the real purpose behind investing in stocks - making supernormal returns.

Step Two - Looking Beyond the Here and Now

The other key difference that I've observed between small winners and big winners in the stock markets is the range of their vision.

The small winner is myopic - focusing mostly on the "here" and "now".

He's not a truly long-term investor. His mood, expectations, outlook and investing decisions are mostly shaped by the recent market events and price movements.

For instance, many investors are looking at the smallcap rebound purely from a 2020 perspective.

There's a battery of market commentators making a list of predictions and tips for 2020. I believe that is more for entertainment than serious money-making.

The big winner in the stock markets, on the other hand, is looking where very few people are looking - at big, long-term trends and companies that are poised to be great value creators in the long run.

In fact, I was watching some interesting interviews of stock market veterans like Ruchir Sharma and Aswath Damodaran last month.

And neither of them talked about what's going to happen in 2020. Their focus was not on the next four quarters, but rather the next decade.

In his interview, Ruchir Sharma showed some very intriguing data on decadal trends. Every decade has had a big winner - a certain market...or a certain asset class.

In the 1970s' decade, it was commodities that ruled the roost.

In the 1980s' decade, it was Japan.

1990s' belonged to the USA.

2000s' decade belonged to emerging markets.

The previous decade belonged to the USA.

The markets that dominated the decade went up 5-10 times.

Coming to stocks...

The top 10 stocks of any decade have delivered average gains of 2,100%!

Now, here's the other insightful detail...

The winners of one decade have struggled in the next decade. Even in the Indian stock markets, we've seen similar trends. Every decade produces its own unique set of multibaggers.

You can't just latch on to the winners of the past and expect them to continue to be multibaggers in the next decade too.

Over the last two years, a lot of investors dumped small and midcap stocks and took refuge in large, bluechip companies.

As I explained earlier, in bearish markets investors focus more on 'return of capital' than 'return on capital'. And it's not at all a bad idea to have a sizeable amount of your corpus in safe, bluechip companies.

But buying these stocks simply because they became safe havens over the last two years is not the wisest thing to do.

The question that we must be asking is - Which companies will be the big winners of the next decade?

I believe it is this thought process that will determine the big winners of the new decade that has just commenced.

Warm regards,

Ankit Shah
Ankit Shah
Editor, Equitymaster Insider
Equitymaster Agora Research Private Limited (Research Analyst)

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