On This Day - 12 OCTOBER 2018
Just Like Amazon and Flipkart, the Stock Market is Offering Great Deals... It's Time to Buy
Welcome to the Great Indian Festival Sale.
It's that time of the year when both e-commerce giants - Amazon and Flipkart - go crazy.
I look forward to this craziness and keep my shopping cart and wish list filled in anticipation.
I love these discounts. They make me happy. I can tell you many stories of buying great products marked down by 40-50%.
Even though they're temporary, I know they will happen every year. So, all I need to do is have patience and keep my wallet ready for the right moment.
But this is difficult. During the year, I encounter many cravings to buy something that is 'in fashion' and I end up paying full price for it.
And when the sale comes around, I regret my decision when I see the same product available at a 40% discount.
Of course, I'm not alone.
People do this all the time especially in the stock market.
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Investors love to buy a stock when it is hot and in fashion. They buy when there is a lot of optimism around. And the result is - they over pay.
But there's good news today. The Indian stock market is in a way, behaving just like these e-commerce giants and offering great discounts.
Don't Panic & Buy High Quality Stocks for the Long-Term
With multiple headwinds ranging from rising oil prices, the falling rupee, global trade wars, the carnage in non-banking financials, and the IL&FS episode, it's no wonder the markets are tumbling.
The pain is way more in small and mid-caps. Most of these stocks are available at deep discounts from their recent highs.
There are winds of pessimism around and that is the best time when a true value investor wakes up.
People seem to have lost faith in the Indian stock market. They were optimistic a few months ago.
But I see things differently. In the last three months, Sarvajeet and I at Smart Money Secrets, have met many companies across sectors.
The mood of these companies is quite positive. Most of them expect a good earnings recovery this year. Most of them have paid off most of their debt and have a strong balance sheet.
Some are confident that the revival in their growth is sustainable and will last many years.
We are quite confident that earnings may surprise the market on the upside, as the outlook is quite bleak right now.
So currently, in this market correction, we expect earnings to revive and that means the underlying businesses are reasonably valued. All this means, it's a good time to buy.
Ongoing Correction + Earnings Revival = Attractive Valuations = Good time to Enter
Remember, it is almost impossible to predict the bottom or top of the market.
All we can do is look at individual businesses and see if they are available at reasonable valuations.
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We believe, this is a very good time to opt for a staggered approach to buying high quality companies with proven moats.
And in markets like this, even after buying into the right business, there could be an immediate correction in the stock price.
But if the business does well over a long run, the stock price will take care of itself.
The e-commerce sale comes every year but the stock market sale comes after some big intervals.
Once it is around though, you should buy aggressively.
Chart of the Day
All throughout history, every market correction has a compelling reason behind it.
While Indian markets were at their peak valuations and were vulnerable to corrections anyway, the blame this time is on IL&FS.
The complete collapse of IL&FS group will mean a huge default of Rs 910 billion. This is a big mess.
However, the government has taken over and new board is now in place. This is a bit of silver lining to this problem.
But guess what - there are way more cockroaches then initially thought.
As per IL&FS's annual report, there were group companies in the range of 176-251, however the new board has clarified that there are more than 340 group entities! That means more pain than anyone initially thought.
As the chart below shows, it is really the IL&FS group companies that are in a painful situation.
Even If IL&FS Group Brought This Correction, this is Right Time to Buy & Sit Tight!
In fact, the new board believes the actual liabilities could be understated and has appointed the Serious Investigation Office (SFIO) for forensic audit. This will also help to identify if there was any fraud involved.
In the short-run, this event along with many other triggers have bought a lot of pain to the stock market.
But we at Smart Money Secrets believe, this is the right time to buy the best quality companies for the long-term.
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets
PS: Kunal Thanvi, editor of Smart Money Secrets, is the Sherlock Holmes of investing. He is on a mission to reveal the top picks of India's best investors to you. For clean, high quality stock recommendations that won't put your wealth at risk, subscribe to Kunal's Smart Money Secrets.
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