This is where your next multi-bagger can come from
(Feb 12, 2015)
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In this issue:
» Which MFs have the highest cash currently?
» What should India not learn from China?
» A startling way by which Americans are induced to save more
» ...and more!
Not knowing where to start can be a huge handicap in investing. After all, there are around 5,000 listed companies in India. And whittling down this huge list to a manageable few is one of the biggest challenges an investor faces.
Fortunately, there's help at hand in the form of this famous Warren Buffett statement. He had once opined that the key to successful investing is nothing but being fearful when others are greedy and greedy when others are fearful.
As much as this applies to the general market, it can come in quite handy when dealing with individual sectors too. In other words, looking for opportunities in sectors that investors are most fearful about can certainly lead to successful investing if Buffett's statement is to be believed.
And nowhere right now is the fear more widespread than in the oil and gas space we believe. Indeed, the pace at which the bottom has fallen out of the crude market can make even the most seasoned investors jittery. What's perhaps sending more shivers down their spine are the forecasts doing the rounds that the worst may not be over yet. Just the other day, we wrote about how one of the leading financial institutions is actually predicting crude prices to fall as low as US$ 20 per barrel!
Little wonder, any stock that is even remotely connected to the oil and gas space is being sent to the cleaners. As a matter of fact, quite a few of them are trading at their 52-week lows. So, is it time to invoke the famous Buffett statement we just highlighted and start turning greedy for these stocks that have fear written all over it? Yes, we certainly think so.
But wait, didn't we just say that crude prices can fall to as low as US$ 20 per barrel? We certainly did but please note that these forecasts always need to be taken with a pinch of salt. If you will remember, these are the very same experts who were predicting crude prices to touch US$ 150 per barrel. This was when crude was hovering around US$ 100 a few months back. And now, this another outrageous forecast from them.
Mind you, the future will always look bleak and uncertain when one invests based on fear. However, it needs to be understood that this approach can also lead to some of the biggest winners in your portfolio.
For just as there is a chance for oil price to go down, there's a greater possibility of it to revert to its long term trend. This could then lead to huge gains for the stocks associated with this space. Therefore, as long as you are willing to suffer a small loss in exchange for an outsized return of the order of few hundred percent, you should invest in such stocks 9 times out of 10 we believe.
As a matter of fact, this is exactly what some sceptics told us about a year back. Some of you would be aware we launched a recommendation service called Microcap Millionaires based on a similar fear based approach where the stocks were so beaten down that no one was willing to look at them.
However, we felt that the downside to upside ratio was so much in our favour that as a group these stocks had a great chance of outperforming,
Well, one year down the line, we believe we are having the last laugh. Some of the stocks in the portfolio have gone on to give as much as 325%, 165%, 164% and 147% and that too in a year or less.
The biggest underperformer is just down around 27%, underscoring the point there could be the occasional small losses but the gains will more than make up for this.
Now, with fear gripping the oil and gas space, this is one sector we will certainly look at to recommend our next set of stocks. Therefore, quite likely that the next multi bagger in this portfolio could come from this space. Well, do watch out for our next issue of the Microcap Millionaires to know whether this is the case or not.
Do you think it's better to look for multi baggers in sectors that are currently beaten down?
Let us know your comments or share your views in the Equitymaster Club.
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There are of course different reasons behind why a mutual fund could be sitting on high levels of cash. One of course is the fact that the fund is looking for an opportune time to enter the market or in other words time it. Then high cash levels could also be an indication that the manager thinks that a significant correction is round the corner and therefore, in order to take care of redemptions, it is better to hold cash.
And last but not the least, it could simply mean that the fund manager is not finding enough good quality stocks at the valuation he deems fit and is therefore, hesitant to deploy the money at high valuations. Well, the chart of the day below highlights funds that are sitting on the largest amount of cash as a percentage of total assets and having an asset size of a minimum of Rs 1 bn.
As can be seen, with cash levels of more than 30%, the Quantum Long Term Equity Fund tops the list. However, being part of the same group, we can certainly vouch for the fact that the high cash levels here are a result of the fund sticking to its discipline of being value investors and with value almost absent in today's markets, the fund does not mind sitting on high levels of cash. And mind you even investors in such funds should not mind this as this is one of the better reasons to sit on cash instead of things like trying to time the market or anticipate a correction which is impossible to do on a sustainable basis according to us.
Mutual Funds sitting on significant cash
The western world suffers from savings illiteracy syndrome. Perhaps, Americans could be amongst the top if an index is constructed depicting saving habits of western countries. It is known that US citizens typically love debt. But you would be surprised to know that their saving habits are so frightful that one in four people save no money for emergency at all. Instead of saving they prefer to enjoy the thrill of betting on lottery tickets. Last year, Americans spent about US$ 220 per person on lotto tickets. Imagine betting on an uncertain outcome when you have nothing saved for a rainy day.
What do you think the government would have done to stop such a practice if it prevailed in India? Probably nothing; and the individual would have been left to fend on its own.
However, in the US some institutions have introduced a strategy to inculcate savings habit amongst people. And towards that they plan to give prizes to individuals for holding money in their savings account. Imagine an incentive to earn money for saving money in your bank account! In fact, a bill was passed recently to allow certain states launch such prize winning saving programs.
This reveals the spend thrift mentality of the Americans. In fact, their love for debt and insufficient savings is what led to the subprime crisis. Initiating a prize winning program as an incentive to save more will probably help increase savings rate to an extent. It is an uncharacteristic step taken by the government. Only time will tell if it is able to attract vulnerable mindset of the citizens. Perhaps, savings is an area where US should learn from India.
Earlier we spoke about what US should learn from India. Let us now see what India should not learn from China. The dragon nation has bagged the hat for being the fastest growing nation on earth and if India wants that crown it needs to be careful that it does not emulate this Asian giant blindly. Else it too may land in a soup. For one, China's growth so far was boosted by infrastructure and housing boom. However, we know that there are many ghost cities in China. This indicates overspending that led to a surge in debt of state banks. Secondly, China's label as a low cost manufacturing destination meant it had become an export hub. This made its economy highly vulnerable to the slowdown in global demand. While it has recently decided to focus more on domestic spending, after it recorded the slowest growth in 25 years, the transition may not be smooth.
Now considering that India is facing a dearth of infrastructure, the government has renewed its focus here. However, India needs to be careful to ensure that PSU banks lending to this sector are judicious. Further, in line with China's focus on reviving domestic demand and PM Modi's vision of 'Make in India', we may well see our country emerge as the next manufacturing hub. However, India should be careful that it is not overexposed to exports else it too may become vulnerable to global demand supply shocks.
Thus, while China's tag of fastest growing nation is indeed appealing, India should be careful to not fall prey to the trap that the dragon nation is finding itself in currently.
The Indian stock markets are trading flat today. At the time of writing the BSE-Sensex was trading up by around 10 points, while the NSE-Nifty was up by 13 points. Gains were largely seen in power and realty stocks. However, most Asian markets were trading in the red at the time of writing. European stock markets, however, opened in the green today.
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett
|| Today's investing mantra
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