How to Use the Lost Art of Investing in Bear Markets

Aug 29, 2023

How to Use the Lost Art of Investing in Bear Markets

I recently got two feedbacks from Hidden Treasure subscribers.

Both were starkly different in their tone and content, based on recent experiences of subscribers.

The first conveyed some dissatisfaction with the amount of gains in some of the positions.

While we appreciate the feedback, I'm a bit wary of taking either too seriously.

Why?

Two reasons.

First, they are about short term gains and not the long term.

Second, they are focused on stock price performance and not the business quality.

Wait, aren't these two related?

Well, in the long term, they are.

However, if you take shorter durations, it is more of news and money flow that determines price performance.

To be honest, we have no expertise in predicting near term performance.

For the long term gain, we put our best foot forward. We are not 100% right, but we are more right than wrong.

When we are right, the gains more than compensate for the cases where we are not.

We focus on the long term performance potential of the business. Our entry levels are such that we put the odds in our favour.

Our long term horizon ensures that the benefits of compounding accumulate over time.

It's logical and simple. But for most, it's not easy.

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You see, it's difficult to practice long term investing when there is an information deluge related to a business or the economy.

And it's not just unseasoned retail investors who face this challenge. Even seasoned analysts have succumbed to such distractions.

It's not uncommon to see them revising their target prices for the stocks they cover after every quarterly result report, when the interim performance and commentary impact short term prices.

Needless to say, the target prices are upgraded or downgraded in line with the stock performance or in line with the next hot trend.

Not enough weight is given to the long term wealth generation potential in the business, which does not vary every quarter.

What better example than 'the megatrends are here' that has sadly not been accompanied by solid fundamental stories.

Post Covid, it was the narrative around new age companies that influenced short term prices and became a magnet for retail investors' money.

Many companies, to milk this hype, went public - Zomato, Dreamfolks, Paytm, Policybazaar, and Nykaa.

Their IPOs saw subscription like never before, with retail investors hoping to make significant wealth in short term.

It did not matter that the big and early investors in these stocks were looking for an exit at the same price.

Or that the original promoter had mostly cashed out. You would be surprised to see minimal to no skin in the game in the case of many new age companies.

Or that these businesses had almost no history of showing profits.

In fact, their business models before listing seemed to be the vehicles of wealth transfer from their private investors to the public via free deliveries and discounts.

Now let's see how following the news on next big thing could trap you.

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Sample these headlines...

  • Windfall from windmills
  • Driven by a combination of tax and energy incentives around the globe, wind power is now the clear leader in alternative power generation technology.
  • Suzlon Energy chief Tulsi Tanti has made it to the list of global environment champions
  • India's Suzlon June qtr net nearly doubles

    Seem familiar?

Green capex is one of the identified pillars in the government's budget presentation this year. Renewable energy is being hailed as the next big infra theme.

Stocks directly riding these themes have witnessed great runs in a short time, further adding to growing investor interest.

More and more investors are looking for stocks that could play the solar and wind energy theme.

Now what if I tell you this may not end well, irrespective of the good news that is floating around?

You see, the headlines I shared above are from the year 2007-08.

It was again one of those years when infra was doing well. Wind energy was a megatrend. Suzlon, a hero of this trend, hogged most of the media coverage. In the short term, it did well.

But all this news flow did not support the stock price for long. The bad business economics had the final say.

chart

Suzlon is now remembered for the huge wealth destruction.

So that's the trap you set yourself up for when you follow short term price movements or news and narratives.

The reason I dug up this specific example from the history is because we are apparently in the middle of another renewable energy boom.

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And there are many companies making hay while the sun shines.

I hope you will remember the past and invest wisely this time, ensuring downside protection.

In my recent video, I talked about a smallcap riding the infra wave, that I believe is a good candidate to have on your watchlist.

Sanghvi Movers is the largest crane hiring company in India and Asia, with 55% market share. It's also the sixth largest in the world.

It has a fleet of over 400 medium to large sized cranes ranging from 20 to 1,000 MT over 130 operational job sites in India.

Now, cranes are critical for infrastructure theme to play out across industries such as wind energy, power sector, refineries, fertilizers, oil n gas, steel, metal, cement, metro, and EPC projects.

Sanghvi caters to all of these, with revenue from wind sector accounting for the biggest share of 48%.

The stock has indeed gained on positive news flow. But there is more to it.

The company is in a good place to make the most of it with its lean balance sheet, and surplus cash to capitalise on growth opportunities.

Sanghvi's debt to equity ratio is 0.34 times which is comfortable and the return on capital employed for FY23 was at 15.2%.

Now, one thing you need to keep in mind is that Sanghvi Movers is a cyclical stock.

Prior to the infra pickup last year, the stock had been in a down cycle.

However, there are some ways in which the company has made the business more resilient.

In the earlier cycles, it resorted to huge debt funded capex of upto Rs 7-8 bn in FY16-17, for the wind energy sector.

Then the downturn in the economy, especially in wind sector due regulatory changes, from bidding tariffs to reverse auctions, led to a cut down in wind power installations.

With that policy scrapped now, installations have picked momentum. More importantly, the company has diversified its business significantly beyond the wind sector.

Do note, this is not a recommendation on the stock.

For details, please watch the video below:

Warm regards,

Richa Agarwal
Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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