I began to turn bearish on equity markets in mid-2007. By the end of that year, I was convinced a financial disaster was round the corner. I stopped just short of collaring people at street corners to tell them Armageddon was nigh; but I know that my single topic of party conversation was how overhyped and overpriced our markets were.
At a practical level, this meant that I had to figure out what to do with the substantial and varied portfolio of equities I manage. My first instinct was to sack the lot, put the bulk of the proceeds into bank fixed deposits (FDs) and use the rest to buy gold. And, just for fun, shortsell the Nifty.
Looking back over the events of the past two years, this would have been a winning strategy—my FDs would have made roughly 20 per cent cumulative and gold over 40 per cent. The Nifty, even after the exhilarating gains of the last eight weeks, is 10 per cent below the 4,000 levels it was at in May 2007. So, depending on the allocation of my portfolio to FDs, gold and Nifty short sales, I would have gained in the region of 20 per cent. Since the index lost 10 per cent, my relative return would be 30 per cent.
This strategy would have developed one major hiccup. Between May 2007 and January 2008, the Nifty soared 50 per cent, from 4,000 to over 6,000. If I had allocated a substantial portion of my funds to shorting the Nifty, the losses therein would have forced me to liquidate positions, perhaps even encash gold or FDs. It would have questioned my entire strategy, and most importantly, given me sleepless nights.
Luckily, I focused on the shares I held and ignored the Nifty, since I had few index stocks. As the markets roared, some of my holdings got into overvalued territory (including Trent, Titan, NIIT, and KPIT Cummins). Much as I liked their businesses, I encashed shares which I felt were overpriced. And, to the extent it became more difficult to find shares that were apparently undervalued, I moved cash into gold (about 8 per cent) and FDs (about 10 per cent).
Through this period, the FMCG sector was out of favour. This allowed me to find reasonably priced stocks with strong brand names that seemed extremely cheap to me. Two became complete winners—GSK Consumer Healthcare and Britannia.
Buying (and recommending as Stock Picks) GSK when it was just below Rs 600 and Britannia at around Rs 1,100, I was able to ride two years of extreme volatility without being overly perturbed. Britannia never went below my purchase price. Though GSK did, it didn’t stay below Rs 500 for more than a couple of days, so that the worst paper loss I had was under 20 per cent. As I write, GSK rules at Rs 840, for a return of 40 per cent in two years. Britannia is trading in the range of Rs 1,550-1,600. Investing in these shares not only gave one an excellent absolute return, but also kept one away from the trauma of extreme volatility.
Mind you, there were stocks that didn’t do quite as well. Tata Tea, which I have often recommended (and still do) was about Rs 725 two years ago and is now barely Rs 700. Additionally, it saw some wild gyrations in 2008. Despite the odd dud, though, my portfolio value swayed a lot less than the markets.
The lesson of the last two years is quite clear. If you are not a trader by nature, forget about the markets and the Nifty; dwell instead on individual stocks. Take the trouble to understand a few companies. Hold their shares through times of trouble, and if you dare, even add to your positions when the markets are troubled. Your knowledge and focus will help shield you from the withering winds of volatility.
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