Tag - #Stock Market

#Truth about investing 102-Efficiency and behavior

This is taken from a presentation by Howard Marks Co-Founder of Oaktree Capital. This is the second in the series of articles. Mr Marks makes concise and incisive comments about the art of investing that can help amateur and professional investors alike.                                                      

Most investors behave pro-cyclically, to their own detriment.

In a rising market, even fundamentally weak companies look great technically. Fear of Missing Out (FOMO) kicks in, making people more optimistic and causing them to purchase at market highs. When the inverse is true, their pessimism grows, encouraging them to sell at cyclical lows. As a result, the retail investor is left with equities with high purchase prices but poor fundamentals.

Cyclical ups and downs don’t go on forever. But at the extremes, most investors act as if they will.

At market extremes, emotions- fear and greed are at their highest levels. People buy at market highs and sell at market lows. When people start believing in trends rather than market cycles, that’s when behavioral mistakes occur. It is usually best to ignore the current market and stick to the fundamentals at sky high emotions.

It’s important to practice “contrarian” behavior and do the opposite of what others do at the extremes.

Market does not trade at extreme ends for a long time. When there is a widespread notion that there is no risk, investors believe it is safe to engage in dangerous behaviour. Acting contrary to the market during phases of soaring emotions might provide us with optimum entry and exit points. As a result, we must sell when others are greedy and purchase when they are fearful.

While not all markets are efficient – and none are 100% efficient – the concept of market efficiency must not be ignored. In the search for market inefficiencies, it helps to get to a market early, before it becomes understood, popular and respectable.

Humans are predisposed to identify patterns and exploit them; however, these patterns and trends are already priced in by the markets. Higher the efficiency of the market the faster are the patterns and trends priced in. In established markets, however, efficiency diminishes the frequency and scale of opportunities to overcome the consensus and identify mispricing or inefficiencies. The sooner you invest in an inefficient market, the easier it is to profit as markets become more efficient. If the other investors are few, inexperienced, or prejudiced, you will have the first mover advantage; as Warren Buffet correctly stated, “First comes the inventor, then the imitator, and last the fool.”

Source: Howard Marks- Truth About investing.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Demand growth visible despite price hikes – Blue Star

Update on the Indian Equity Market:

On Wednesday, NIFTY ended lower at 17,629 (-1.1%). All the sectors were losers today led by METAL (-3.0%), PSUBANK (-1.9%), and PHARMA (-1.9%). Among the stocks, TATACONSUM (+2.5%), ONGC (+2.2%), and UPL (+1.7%) led the gainers while HINDALCO (-4%), SBILIFE (-3.6%), and INDUSINDBK (-3.4%) led the losers.

Excerpts of an interview with Mr. B Thiagarajan, MD, Blue Star with CNBC TV18 on 5th October 2021:

  • The sales of room air conditioners in the month of Sep-21 were better than last year (Sep-20) and have reached the pre-pandemic levels.
  • The summer season, which is the strongest quarter for the company, was impacted by the second COVID-19 wave. It will be extremely tough for the company to make up for it in 2QFY22E and 3QFY22E.
  • However, demand from the month of Jul-21 has been considerably higher than industry expectations. As people are working from home and spending more time in their homes, they are renovating and upgrading their houses which could be the reason for robust demand. The company anticipates strong demand throughout the next festival season.
  • In 1QFY22, Bluestar was at 35% of pre-pandemic levels and in Sep-21 have reached the pre-pandemic levels.
  • The company is getting growth from first-time buyers, as the number of first-time purchasers has considerably grown. Despite the price seen in the months of Jan-21, Apr-21and Sep-21 the demand is not impacted. 50 percent of buyers used consumer finance schemes.
  • In terms of price hikes, there was an average rise of roughly 4% in the month of Sep-21.
  • On a YoY basis, the company anticipates a 1% decrease in margins due to raw material inflation, which would be compensated by operating costs. Hence the overall EBIT/PBT Margins would not be impacted.
  • The firm does not anticipate any significant increases in freight and commodities in the near term.
  • The B2B segment is performing well in the manufacturing sector. There are also various infrastructure projects like metro railway project and data center which are important segments for Bluestar. It includes air conditioning and electro-mechanical work. The company is closely tracking this segment and participating actively in the enquiries.
  • In the B2B segment, the important sector is building which includes offices and light commercial or retail (shops, showrooms, boutiques, and restaurants). Such kind of infrastructure is built upon in many Tier-3/4/5 cities. The manufacturing, commercial segment, and buildings account for 30%, 40%, and 30% of the B2B segment revenues respectively.

Asset Multiplier Comments

  • There has been a bounce-back in demand starting from July-21 which will likely be reflected in 2QFY22 sales numbers. However, a complete recovery will likely be visible in 1QFY23E.
  • Upcoming investments in infrastructure and a recovery in real estate bode well for the company that predominantly services large infra-projects. The Company will have the added benefits of PLI Schemes, New Greenfield Project in FY23 adding to top-line growth and margin improvement.

Consensus Estimate: (Source: market screener website)

  • The closing price of BLUESTAR was ₹ 871/- as of 06-Oct-2021. It traded at 52x/33x/27x the consensus earnings per share estimate of ₹ 17/26/32 for FY22E/FY23E/FY24E respectively.
  • The consensus target price of ₹ 845/- implies a PE multiple of 26x on FY24E EPS of ₹ 32/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”


Learn to love momentum

Joachim Clement writes on his blog that the global bull market in equities is seemingly never going to end and investors wonder about what they should do who have missed the boat and only partially invested in the current bull market.

The usual fear is that if they invest now, they might be investing at the top of the market. Another argument is that every asset class seems overvalued. Given extremely low-interest rates, bonds don’t seem a viable option, stocks aren’t cheap either and many alternative asset classes like infrastructure or REITs have become expensive as well. There comes a point when avoiding an asset class on valuation grounds or for fear of an imminent bear market becomes counterproductive. By standing on the sidelines for too long the opportunity costs in terms of foregone returns can become so big that it may take you years and even decades to make up for them.

Value investors and long-term investors, in general, tend to look down on traders, but there are a few things that long-term investors can and should learn from them. First of all, they should learn that time in the market is more important than timing the market. One can only make money if one is invested. But being invested comes with the inevitable risk of drawdowns, which can be short-term in nature like in the US at the end of 2018, or a massive global bear market like in 2008. To deal with these risks of decline in share prices it is important to learn from short-term investors to respect and even love momentum. If price momentum goes against your position for too long, you should sell the position and buy it back at a later point in time when price momentum is more favourable again.

The maximum declines between 1998 and 2019 have also been massively reduced, showing that these momentum-driven strategies can help you avoid severe losses. If you are worried today about high valuations or the possible end of the current bull market, then the most important thing for you is to get into the market with a sensible plan to get out when momentum turns. But this is fine-tuning. The most important thing for investors today is not to be afraid of the bull market.