The outperformers 2020

Welcome to the Mad Hatters Party a.k.a investors going overboard on 'quality' companies

The market has been behaving erratically but amid the insanity here are some sane observations 

Shutterstock

“The idea that the future is unpredictable is undermined every day by the ease with which the past is explained.”

Nobel Laureate Daniel Kahneman’s eloquent quote renders this story completely irrelevant. You can stop reading now. Or, be a creature of habit and continue, simply to feed your curiosity or to sound intelligent in your next Zoom party. But please do so knowing fully well that this is an attempt to decode the past that is unexplainable and divine a future that is unpredictable. 

There is no certainty in investing. Sorry, in life. And, therefore, in investing too. At 90, even after beating the Index every single time (every 10 years over the past fifty years), an investing wizard’s future performance can be questioned and the past scrutinized. You know whom we are talking about. Well, no one on Planet Earth has been skillful enough to beat the stock market over really long periods, and the one who has done so, we are yet to prove was all skill. 

Right place, right time is chance. Right call is right only in hindsight. Welcome to the world of investing. Let me get down to business now. 

For, dissuading the rare few who still care to read will not do any good to an already broken media model. How are we scribes supposed to pay our bills?

That 225-word rant is in response to the recovery the market has seen post COVID-19, as if the pandemic and the death-like stillness of the lockdown never happened. Just a few months ago, in March 2020, the market had cracked under the global pandemic and it felt like we are headed into another Great Depression. The scale of the catastrophe was staggering, like seen only in sci-fi movies. The Nifty lost 40% in value over the first three months of the year, without a pause. Then, snap. The gloom dissipated and the Index rebounded with a vengeance. Who would have guessed? But, of course, everyone has figured out exactly why! We have fallen comfortably back into our delusion of an ordered, reasonable world.

 

We are delighted to present to you another edition of The Outperformers, except that our enthusiasm is muted by the fact that over FY15-FY20, the Nifty delivered a meager 0.03% return. What the market had gained over 57 months was wiped out in three months as the stock market got all jittery about the global pandemic during the first quarter of the calendar year. But after March 23, when the Nifty hit an intraday low of 7,511, it has been a dramatic recovery, with some companies bouncing back higher than others.

Barring the COVID-19 impact, what has characterized the performance of stocks over the past five years is how investors have gone overboard on “quality” companies, those with high predictability in earnings and high return on equity, versus the not-so-pretty-looking businesses. In a way it has been a self-fulfilling prophecy – since good-quality companies performed, fund managers who held them attracted more inflows, which they promptly ploughed back into the same stocks and, by virtue of that very gain, the stocks’ weightages went up in the indices, attracting even more attention from investors. 

But then, the stock market overextending is nothing new. Neither is the polarization of performance. Post-COVID, the market seems set on a corrective course with some of the good-quality names lagging in performance with the hitherto ignored sectors such as pharmaceuticals making a comeback. 

The depressed sectors in the market include core economy stocks, corporate banks and, of course, public sector companies, some of which are in good businesses that are unlikely to be disrupted. But they battle a massive perception bias because of the governance standards upheld by the promoter, the government. The same is the trouble with certain banks. With every year springing new unpleasant surprises, there is much skepticism around when they will make a comeback. 

While a lot of price destruction has happened, for value to get unlocked calls for unlimited patience, which few investors can afford. With no sign of how long the waiting period could be, will the rewards of staying invested in these stocks justify the opportunity cost of avoiding others?