Never waste a down-turn!

Invest when pessimism is all pervasive.

These are golden words, but only with respect to past corrections. But not so golden for the current one. When you read it in the investment biopics or in blog posts about past corrections, these words hit you with such an inspiration that you get locked and loaded for the next correction. But, ironically, when the next correction comes and presents opportunities, one sees more desperation than inspiration. The golden words are no longer cool when it comes to the present corrections. Why?

May be because, one sees happy ending in the past corrections or in investment biopics. But, present corrections are not about past, they are about future. When future is unclear, it is not as inspiring, though we all know the ending will be no different from past corrections. No down-cycles in the past had ended in any other way, however long they were. Yet, narrative is so negative that it numbs one into inaction and more often into despair. It is always both fascinating and amusing at once, to see this diverging psychological trend between past and present corrections.

Now, let us take a look at the below chart.


This is not a complex chart. It is a simple one with a clear underlying pattern that runs for fifteen long years. As per this, every time, when small-cap index has fallen by a significant percentage, the subsequent three-year return for the index has been equally substantial. There is no reason to believe that coming years will be any different. One should expect a sharp bounce in small-caps in the coming years.

If there is going to be such a big pay-off, why there is no mad rush? May be everyone is,

  • Waiting for the cloud to clear
  • Waiting for the bottom
  • Waiting because of inability (emotional) to digest notional losses
  • Waiting for others to make the first move
  • Waiting for stability

No one wants to do the waiting that is most crucial. That is, waiting in the market. That is key to value creation. As they say, money is made in waiting, not outside, but inside the market. As the past cycles indicate, by waiting outside, very big part of the rally will be missed when the music starts. It eventually ends up either as a perpetual wait or as a punishing late entry. Either way one misses out the large part of the upside.

Want to end this note with my favorite quote from Morgan Housel. It said, “All past corrections look like an opportunity, while all present and future corrections look like a risk”. At some point in future, the current correction in small-caps would be seen as a one-time life-time opportunity for sure. Do you want to see it as a missed one or amassed one? Of course, if anyone lets it slip, there will be no one else to blame but himself.

Happy Value Investing!!

Nirmala Put?


There is a new buzz word in the market. When you utter that, bulls get emboldened and bears get panicky. It is not Greenspan-Put or Fed-Put. It is a Put with a traditional and local flavor. Guessed it right. It is Nirmala Put!

With the successful surgical strike on bears with her secretly guarded tax reforms, one is not sure, bears will ever attempt any adventure in future, esp. after losing much of what they made over last few quarters (short-sellers got slaughtered in the so called surgical strike). With Nirmala Put acting as back-stop for domestic issues, bears can at best hope for some global melt-down to get back to their business. If global cues do not favor them, one may be slowly looking at good times, esp. when positive incremental news-flow is on cards from domestic economy i.e. be it auto numbers or discretionary consumption or FMCG volumes etc., sequential numbers are likely to turn positive in the festive season. Good news on the monsoon (so on rural growth) couldn’t have come at a better time. This doesn’t, in any way, mean that the liquidity or NBFC crisis is behind us. The overhang of Yes Bank, DHFL & India Bull Housing etc. will continue to weigh on the markets for a while. But, with strong signaling effect (bazooka) coming from the Govt. that they are ready to go to any extent to revive the economy, such overhangs are unlikely to have a lasting impact

The hope is that the reform measures may not stop with the tax cuts. With Govt. under pressure to raise non-tax revenues so as to end the year with a respectable fiscal deficit, one may see a huge pick-up in pace of strategic divestment (privatization) and asset monetization. One should expect more business friendly measures in the coming weeks and months.

So far, the rally has been limited to the big boys. It is yet to percolate down to the much neglected mortals like small-caps. It is a question of time before the tide turns for the tiny ones. But when that happens, rally will surprise on the upside as it did on the downside. Interesting times to watch out for!

Biggest take-away from FM’s Boost!!


Financial markets are all about signaling, not so much about materiality. The biggest mis-step in the FM’s maiden budget was not so much about any particular measure, but about signaling. By taxing FPI through additional surcharge, they couldn’t have done anything worse on signaling, though materially the amount involved was less than 400 cr. No surprise that it took away 20000cr+ from the equity markets in terms of FII outflows since the time budget was presented (till 23rd Aug).

In a big relief, Govt. last week reversed some of those key mis-steps they had taken in the budget. There were many measures in the so called mini-budget that was announced last Friday. Though there were many steps of merit, the key take-away from the mini-budget is not anything about any steps, but again the signaling effect. It came in the form of Govt’s willingness to listen, humility to accept the mis-steps and ability to do the course correction. In our view this is the biggest take away from the booster shot from FM. This signaling effect can change the medium to long-term landscape of the market quite materially, though global cues will continue to dictate the trend in the immediate term.

Of course, for bears, there is no shortage of ammunition. Besides US-China trade war hiccups, there is a new found love with the inverted yield in US and its association with recession. It is another matter that not many inversions were followed by recessions (at least we had two such inversions in the last 4 years), though all recessions were preceded by inverted yield. Having said that global bears have their hands full to keep the markets edgy in the short-term. For India, having under-performed the global markets quite significantly this year so far on account domestic mis-steps, some catch-up (to cover this year’s under-performance) may be on cards, esp. if the festive season brings the much needed turn in the news-flow for the economy!!