Here's What I Recommend in the Stock Market Bloodbath

Sep 27, 2022

Heres What I Recommend in the Stock Market Bloodbath

Investing is simple, but not easy.

Yesterday was a stark reminder of this.

Amid fears of recession in the US and a hawkish stance on interest rates by Fed, the markets ended deep in the red.

The fickle FIIs that shopped for Rs 510 bn last month, have sold US$ 1 bn of shares in last eight sessions.

The correction in the smallcaps is even more brutal. While the smallcap index is down 3.3%, some smallcaps have witnessed a single day correction of up to 10% even.

If you have decent money invested in stocks, I believe you are keeping a tab on all headline news which is gloomy enough to make you panic.

You might even be influenced to dump all your shares, thinking the bad news could become worse.

To be honest, I have no idea about where the markets could be in the near term. In more than a decade of investing experience, I have realised one thing: You can't predict or control anything in the near term. Market timing never works consistently.

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The only tools you could rely on are a long term investing approach, a prudent asset allocation strategy, and acting when the odds turn in your favour. That is, when the quality stocks are available cheap enough to give you good returns.

Allow me to take you through a real example to explain this.


This is the performance of a stock, Kabra Extrusiontechnik, that I recommended in Hidden Treasure, in January 2018, with a horizon of three to five years.

I liked the company's 60% market share in pipe extrusion machinery. It had strong in-house R&D and long-term technical tie ups with leading players across the globe.

It was a leader in making machines that make plastic pipes and packaging films. These end products cater to multiple industries - agriculture, irrigation, housing, infrastructure, construction, telecom and flexible packaging.

Its clients included names like Astral PolytechnikSupreme Industries, Ashirvad Pipes, Finolex Industries and Mexichem, to some of which it was the sole supplier.

I expected the focus on infrastructure, sanitary facilities, agriculture, rise in urbanisation, growth in affordable housing, and growing preference to plastic pipes over iron pipes (thus boosting replacement demand) would be the key growth factors.

The packaging film industry too was expected to grow at a healthy rate, driven by the food industry, personal care, and pharma products.

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With its debt free balance sheet, it seemed well placed to ride the potential growth opportunities.

I did not know the recommendation would coincide with smallcap index peaking, and the onset of its downward movement in the market. By August 2019, the smallcap index was down 39%.

The stock itself was down by over 50% by then. I continued holding through the fall, as my faith in the management and business fundamentals was still intact. I was willing to wait for the valuations to catch up.

When Covid hit in March 2020, the stock was down 73%.

That's a big fall indeed.

You may not spot that drastic fall on the chart. That's because of upward trajectory of the stock in last two years, that makes 73% fall look like a blip.

So what led to the rise?

Well, what happened thereafter was pick up in the infra cycle. The sentiment for smallcaps also turned positive.

And the markets finally factored in company's entry into electric vehicle (EV) battery charging space.

Kabra had tied up with a leading European technology player in 2018 to design smart battery management systems for EVs and other energy storage applications. The division has already turned positive within a short period since launch. It has been a game changer for the company.

When the sentiments for smallcaps were negative, none of the business specifics mattered. But as always, it's only a matter of time before valuations start factoring in the fundamentals.

You can not predict when exactly it will happen.

Value Stocks: Stocks with Limited Downside but Good Upside Potential

But what you can indeed work on is the business prospects in light of ongoing industry developments, getting in at the right valuations with enough margin of safety.

Markets may be rewarding or punitive in the short term. You can't control that. You better develop a capacity to suffer in case it is the latter. Only then can you expect to profit from multibagger stocks.

A prudent asset allocation strategy and long-term investment horizon helps you develop that. If you have that, a sharp correction in the markets seems more like an opportunity than a phase to fear.

In the coming days, if the correction continues, a lot of print space and prime time is likely to be wasted on predicting macros and cycles and taking cues from it to pick stocks. This is a highly complicated exercise that no one has been consistently good at.

In fact, it reminds me of the famous saying by John Kenneth Galbraith:

  • 'There are two kinds of forecasters: Those who don't know, and those who don't know they don't know.'

Instead, if you could spend the same amount of time, energy and effort in spotting structural shifts in the economy and industries and the companies that could benefit, you will be much better off in terms of investment returns.

In my recent video, I am talking of one such structural shift, that could create huge wealth for companies in India.

If you look beyond the mainstream news, there is a lot to be positive about the Indian economy and Indian stock markets in the long term.

The global giants are optimistic and are betting on India. Nestle's planned investment in India is Rs 50 bn for next three and a half years. This compares to Rs 80 bn of investment in last six decades.

In fact, this is not an isolated case. If capex plans of corporates are anything to go by, we are in a capex upcycle. Last time this happened in 2003-07, the Sensex was up seven times.

The bottomline: There is a lot to be optimistic about India. The daily price movements won't factor this in. Buy you must focus on the long term. And use any correction as an opportunity to enter quality stocks.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure

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