Surviving Gravity, The India Letter Update, and More... - Views on News from Equitymaster

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The Equitymaster Research Digest

Surviving Gravity, The India Letter Update, and More...
Feb 3, 2016

Bill Bonner recently told his Diary readers to '...Go ahead and panic. You may be glad you did.'
Since most of Bill's readers are outside India, this might not be bad advice.

Professor Ashwath Damodaran released some interesting facts about the recent market meltdown on his blog. According to the table, the correction in absolute US dollar terms was much lower India than in the US, UK, EU, China, and Japan. However, India was among the top five markets to lose more 20% of their market cap last month.

The Gravity of Global Markets

But are the global market downturn, the commodities slump, or the possibility of a Fed rate hike reasons to panic?

Either way, Indians did panic last month. Turns out that, apart from macro factors, poor earnings performance also unnerved investors. Of course, 'poor' is a relative term here. Investors were disappointed to see companies clocking 20-30% growth at the start of Modi government, struggling to keep up the growth. Companies fumbled to explain their poor execution after the optimistic guidance.

Fortunately for us, the gravitational pulls of the markets always bring more stock ideas to the table. The most appetizing are the stocks we have already recommended 'buy at lower prices'. The corrections that seem ridiculous during market highs become a reality, making these stocks worth revisiting. We only invest in stocks that can survive the gravity of the market.

In fact, corrections such as these provide subscribers a chance to test the stock selection processes of our various products. And we look forward to these times as an opportunity to refine our tried and tested processes.

We know that subscribers are irked when we recommend to wait to buy a good stock at a more attractive valuation. Our 'buy at lower price' recommendations get the most complaints and queries. However, for us these recommendations are as valuable as any other. For during market crashes, we simply alert you to act on them.

If you already know the business and like the logic of investment, all you need to do is...act on it.

Take the case of two The India Letter recommendations that have corrected almost 60% from their 52-week highs. These are high growth stocks with good balance sheets. A fall of this magnitude was almost unthinkable.

Now, as you know, The India Letter recommends stocks that are riding a Megatrend. And as I have explained very often, I DO NOT expect the business or the stock price to have a linear upward move. It is only natural for the business, and as a result its stock price, to have temporary downturns.

The downturn may be because of temporary headwinds or execution risks. The downturn in stock price may be due to temporary failure to meet earnings expectations or over-valuation.

We fully expected a correction in these two stocks, as I articulated in the respective recommendation reports. And that's why we recommended subscribers to take a partial exposure and increase their exposure when the stock moves lower, closer to the best buy price.

Nevertheless, several subscribers panicked when they saw the stocks correcting. They wanted to sell. There were, of course, others who were too eager to buy more of them instantly to take advantage of valuations.

We had reasons to ask both set of subscribers to wait before acting. Instead of a knee-jerk reaction to market hearsay and speculation about management wrongdoing, we wanted to hear what the management had to say. And we wanted to evaluate whether the execution risks had the potential to permanently damage the business. It is typically after such exhaustive reevaluation of our estimates that we update subscribers with our revised view on the stocks.

We updated The India Letter subscribers on these stocks via a special report earlier this week.

Again, the reason we recommend subscribers take partial exposure to high-growth and relatively high-priced stocks is because it is quite a challenge for companies to sustain growth and valuations for a prolonged period.

Therefore it is worthwhile waiting for the temporary downturns to reevaluate whether the reasons you bought the stock in the first place are intact. .

Trading Strategy Obsolescence

By the way, if you keen to evaluate trading opportunities during these volatile markets, my friends and colleagues Asad Dossani and Apurva Sheth have some advice for you.

Asad and Apurva recently explained to the attendees of Equitymaster Conference 2016 why even the most popular trading strategies can become obsolete over time.

And earlier this week, they revealed the backbone of their own trading strategies.

If weren't able to attend the Conference, you can get online access to the video recordings of the Equitymaster Conference 2016.

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