Be fearful when others are greedy and greedy when others are fearful. – Warren Buffet
Highlights! Taking the Scuttlebutt Investing approach in these testing times of COVID-19 induced Dalal Street Bloodbath
- Understanding this is not a financial crisis, rather a health crisis
- Coronavirus-induced market crash – Understanding the systematic risk
- Need of the hour – Basic Common Sense and Average Intelligence
- The scuttlebutt investing approach
- Financial discipline during market panic
- Serious wealth creation opportunity in the coming days
Coronavirus lockdown unleashed its wrath upon the Dalal Street with what we can essentially call a negative bias. We are bound to feel as if the world is going to collapse with the sheer selling force seen in the past one week amidst rampant negative news coming from India. What we, as investors, should be doing is thinking whether some of the businesses will even be able to survive after this fearful price correction wave and aftermath of disruption the virus has caused.
Understanding this is not a financial crisis, rather a health crisis which needs to be managed rather than wait and watch as a wave of active cases rise without appropriate medical workforce and devices. Hence, breaking the chain by enforcing lockdown is the only effective measure. But the byproduct of this fightback is forcing almost all of the businesses to lock down their economic activity.
Scuttlebutt Investing to overcome Systematic Risk like the Dalal Street Bloodbath
We, individual investors, are naïve. As investors we need to understand, this is a systematic risk which has never occurred in human history. Where humans are fighting against an invisible opponent, these types of systematic shocks have little bearing on those businesses whose services/products will resume with consumer demand coming back on stream.
In such bloodbath, similar to what the Dalal Street experienced, scuttlebutt investing helps. Scuttlebutt investing was coined by Philip fisher in his book “Common Stocks and Uncommon Profit” and was perfected by Peter Lynch, Fund manager at Fidelity Investments between 1977 – 1990 averaging 29% return annually. He speaks greatly about his style of investing the book “One up on the Wall Street”.
People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.Peter Lynch, One Up On Wall Street
Current Situation requires Basic Common Sense and Average Intelligence
Current situation requires basic common sense and average intelligence to build a portfolio of consumer businesses or buying what product/services one knows. Prices have corrected 30-40%, this correction translates into a great buying opportunity for the first time investor. Scuttlebutt investing is fairly holistic and understanding the consumer trend going on. For instance Question yourself –
- Will one be drawn towards the movie exhibition halls to watch next Avenger or Iron Man movie?
- Can you stop eating groceries?
- Not buy consumer durable?
- Is drinking good alcohol in your essentials?
- Can you stop using your banking services?
- Stop ordering fast food online?
- IT services may gain traction from here on?
- Air & Railway Travel will face struggles?
- Infrastructure construction can halt for next 5years?
- Stock Market will close down? Price Discovery will be stopped?
We, as individual investors, should not be looking at what will happen to the portfolio in the next two months. But instantly the question comes up – The current price will be available at a 20-30% or possibly 50% discount in next 10-15 days. One need to understand whether these businesses will survive after the situation subdues. That’s where discipline comes in.
Financial Discipline during Market Panic
One need not hurry to buy into stocks all at once. Stick to an action plan. What I learnt by reading big investors is the financial discipline during current prevailing times (extreme fear). One does need to initiate portfolio building during panic. However, one needs to stick to the financial prudence of investing in this 50-70% discounted, once in a lifetime prices of the companies.
|Company||Sector||Stock Price Correction 2020||Stock Price Correction 2008|
|Havells Ltd||Consumer Durable||25% (peak of ₹660)||80% over 12 months|
|HDFC Bank||Financial Services||40% (peak of ₹1280)||48% over 12 months|
|ICICI Bank||Financial Services||48% (peak of ₹540)||75% over 12 months|
|Kotak Bank||Financial Services||58% (peak of ₹1700)||73% over 12 months|
|Motilal Oswal||Financial Services||45% (peak of ₹888)||85% over 12 months|
|State Bank Of India||Financial Services||45% (peak of ₹335)||48% over 12 months|
|Hindustan Unilever||Consumer Staples||11% (peak of ₹2292)||10% over 12 months|
|Britannia Ltd||Consumer Staples||24% (peak of ₹3232)||Flat|
|Zydus Wellness||Consumer Staples||23% (peak of ₹1560)||Not listed|
|Radico Khaitan||Alcoholic Beverages||44% ( peak of ₹435)||56% over 12 months|
|Jubilant Foodworks (Dominos)||Consumer Food||32% (peak of ₹1955)||Not listed|
|PVR Ltd||Movie Exhibition||41% (peak of ₹2070)||73% over 12 months|
|NESCO Ltd||Exhibition||47% (peak of ₹770)||Not listed|
|Bharti Airtel Ltd||Telecom||18% (peak of ₹585)||26% over 12 months|
|Inox Leisure||Movie Exhibition||45% (peak of ₹475)||86% over 12 months|
|Delta Corp||Gambling||72% (peak of ₹200)||78% over 12 months|
|IRCTC Ltd||Rail – Transport||56% (peak of ₹1950)||Not listed|
|United Spirit||Alcohol Beverages||34% (peak of ₹730)||54% over 12 months|
|Interglobe Aviation||Air – Transport||40% (peak of ₹1360)||Not listed|
(Note: These are not stock recommendation only for education purpose) Consult your financial advisor before taking any action.
All these companies are more than 100 years old and market leaders in their respective industry. They have a virtual monopoly, high cash piles, low debt, and consumer-centric products/services run by phenomenal business managers. Above are some business examples whose services, in the past and going forward, we might be using or will eventually after the lockdown.
Financial prudence in the next 45-60days will lead to serious wealth creation over 2-3years
World has seen outbreaks of viruses such as HIV, Spanish Flu and SARS. Till date we haven’t discovered cures for HIV and SARS, but still we are living keeping these deadly viruses at bay. Sapiens will overpower COVID-19 as well. We need to remember this not the end of the world. Following financial prudence of building the portfolio with 5-5% of positions in select stocks over the period of next 45-60 days can lead to some serious wealth creation.
At the end, what I can suggest by looking at my grandfather’s portfolio was that he made his investing style boring on normal days and interesting when he saw the panic on the streets. The way he operated was – he used to build portfolios among 20 stocks building marginal positions, holding gunpowder (liquid cash) of around 30%. He invested 3% of the total portfolio depending on the business he ranked best by reading about the management and not tuning into the media channels about daily follow-ups. The secret to this successful investment career was control over his thought process and financial prudence of staying invested in days/weeks/months of pessimism. He invested and stayed invested for more than 35 years.
Anirudh Sehgal is an investor and equity researcher.