Are You Prepared for a Market Correction?

Howard Marks often says...

• If you avoid the losers, the winners will take care of themselves.

For a legend who has made a career out of distressed debt profits, he should know.

Avoiding losses has been core to my investment philosophy ever since I articulated one more than a decade back.

Loss aversion comes easy when markets are at cyclical lows. Everyone wants an assurance of safety then.

However, referring to the possibility of losses at market peaks comes at its own cost.

As the benchmark Nifty 50 index chased the prized 20,000 level, stocks across sectors saw inflated valuations over the past few weeks.

But some sectors like railways, ship building, defence, capital goods, textiles, experienced euphoria like never before.

Positive macro factors added to the optimism. Higher GDP growth, pause in rate hikes, bullish capex plans and strong FII inflows, ensured that there was no looking back.

Now, in a bid to lock in the gains on a few recommendations, I recently recommended subscribers to book profits on a handful of stocks.

As it turned out, quite a few of the stocks belonged to the hyped sectors. So, even after my sell recommendations, the stocks kept scaling higher for days.

Since I do not attempt to time the market peak, the 'sell view' was in line with my loss aversion philosophy.

However, a few subscribers are quite upset about the missed-out gains.

This reminds me of another Howard Marks memo wherein when he referred to previous market bubbles...

• The lure of easy profits, the willingness to leave one's day job to cash in, the ability to invest blithely in money-losing companies whose business models one can't explain - all these felt like themes that had rhymed over the course of financial history, leading to bubbles and their painful bursting.

Inability to meet expectations in bull markets is something I have contended with over the past two decades.

And even at the risk of inviting the displeasure of subscribers, I recommend them to be safe than sorry.

Apart from that, all I try to do is explain my perspective on the current market dynamics.

'Stocks in watchlist' and 'stocks to be wary of' are the two baskets that are under my constant review.

These may not help me time the correction in near future accurately. But can certainly help stay better prepared for an inevitable phase of volatility.

What is Nifty 20,000 Telling Us?

As investors, whether we are living through a phase of fear or greed, it is important to identify the group of stocks that should get our attention.

For instance, the Nifty 20,000 number is meaningless unless we understand the stocks that have brought the index to this level. Also, whether they have the steam to keep the index moving higher.

Of course, bluechip stocks in the benchmark index typically tend to sport reasonable fundamentals. But there can always be exceptions. Also, one cannot lose sight of valuations.

So, when we look at the wealth creation of the Nifty 50 components over the past decade (leaving aside the new entrants), here are the three categories of stocks we come across:

• Stocks which were consistent compounders over the past decade
• Stocks that have been recent underperformers
• Stocks that have been recent outperformers

These categories allow us to create a watchlist of stocks.

Performance of Select Nifty 50 Stocks Over the Past Decade

Consistent Compounders

Nifty 50 Stock	Return over 10 years	Return over 3 years	Return over 1 year
TCS	13.55	13.6	7.33
HDFC Bank	17.89	14.8	9.26
Titan Company	30.4	40.1	20.8
Siemens	23.5	47.8	33.4

Data Source: Ace Equity

Recent Underperformers

Nifty 50 Stock	Return over 10 years	Return over 3 years	Return over 1 year
Reliance Ind	20.1	5.2	3.8
Hind. Unilever	15.1	5.5	-1.7
Kotak Mah. Bank	17.6	10.8	-6.0
Maruti Suzuki	23.1	13.6	18.0
Asian Paints	22.1	17.0	-5.0
Nestle India	16.1	10.7	16.7
Pidilite Inds.	26.6	19.3	-11.7
SBI	13.6	42.9	6.6
Infosys	14.58	16.01	-3.89
Bajaj Finance	51.69	27.76	1.44
ICICI Bank	19.04	38.21	7.83

Data Source: Ace Equity

Recent Outperformers

Nifty 50 Stock	Return over 10 years	Return over 3 years	Return over 1 year
ITC	7.3	34.5	35.2
Larsen & Toubro	17.9	46.7	47.5
HCL Technologies	17.2	21.1	34.1
Axis Bank	16.8	30.8	24.9
Sun Pharma.Inds.	7.3	31.0	28.1
NTPC	7.5	39.2	46.1
O N G C	-0.3	35.8	36.9
Tata Motors	6.8	63.9	40.8

Data Source: Ace Equity

Watchlist Stocks at Nifty 20,000

It took the Nifty 11 years to touch 5,000.

The next 5,000 points to Nifty 10,000 took 10 years (2008 to 2017).

And finally, the next 5,000 points to Nifty 15,000 took just 4 years (2018 to 2021).

My research says that from the current 20,000 levels, the Nifty 50 index could climb the next 20,000 points much sooner, albeit after some volatility in the interim.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)