Renown equity investor RAMESH DAMANI presented these views at the Morningstar Investment Conference in Mumbai, on September 18, 2019.
Bear markets are painful.
Bear markets can be long and painful and can take away a lot of our wealth that we've created so assiduously during a bull market. That is a reality every equity investor must live with.
The Japanese bull market ended in 1989, but what a ride it was; the Nikkei went from 1,000 to 39,000. Valuations were crazily excessive. When the market began to fall, it went to a low of about 7,000 - 8,000. Even today, it's well below the highs achieved in 1989. So, almost a generation later, the Nikkei is still significantly below where its 1989 peak.
On September 3, 1929, the U.S. stock market peaked at 381. The correction took it 40, which is almost a 90% correction. It didn't get back anywhere close to that level until 1952.
The more the exuberance, the longer the time it will take to come back to its previous peaks.
Bull markets – be it geographies or asset classes, typically go up 4x to 5x. The Japanese bull market went up 30x. We started our bull market at about 18,000. We're around 38,000 right now (September 2019). So, it really hasn't gone up the typical normal of what great bull markets go up.
But no bull market lasts forever, and when the market falls, it's pretty bad; it could fall 30% to 80%. Bull markets end badly. Stock prices collapse. The question to be answered is: How much time does it take to come back to the new highs that the market made?
The Nikkei made a top in 1989; it still hasn't reached a new high. NASDAQ peaked to 5,000 during the 2000 run, bottomed out at 1,100. It took 180 months, that's almost 15 years, before it crossed the peak of 5,000.
During 1972-1974 many of the Nifty 50 stocks in the U.S. fell drastically. The S&P peaked on January 5, 1973 and fell 48% in next 22 months. The following bear market lasted until 1982; it took almost 10 years for the market to recover from the 1974 peak. The most advanced market in the world, between 1966 and 1982, produced an annual return of only 1.5%.
The more the exuberance, the longer the time it will take to come back to its previous peaks.
Innovation triumphs over fear.
The long-term trend of markets is always up. It could be years of moving sideways and not making money, but ultimately stocks move up and make money for those who stayed put. Human innovation and human ingenuity triumphs over fear, which is prevalent at bear markets.
No matter how bad things look, they do get better. Because markets are the triumph of the optimists.
Longer the stability, greater the subsequent volatility.
Oil that traded in a band from 10 to 30. Then it broke out and went to 140. A lot of stocks, a lot of valuations that remain in the band for long periods of time, ultimately, when they breakout a breakout or breakdown, create excessive volatility.
The Hong Kong dollar is pegged to the U.S. dollar for the last 30 years has remained in a very tight band for the last 30 years. Now, given the different trajectories of the economy - Hong Kong follows China, America follows its own beat, it is possible that the peg can break, so the 7.8 to the dollar which has been pegged almost for the period of 30, 40 years can break. Once that happens, there will be huge upward or downward revision in the valuations of the subsequent currencies. So, anything that stays in the long, long trending zone, when it breaks out or breaks down from the valuation, tends to have very, very sharp moves.
Very, very few businesses have permanent moats.
There are a few exceptions, but businesses don’t have permanent moats. Which do you think has been the best-performing stock in the world over the last 90 years?
Philip Morris.
A cigarette company, despite cigarette smoking having gone down. The return has been the best in Philip Morris because the dividends that the company throws out, when reinvested, gives you more gains. It's the free cash flow and dividends that have been particularly good in terms of returns.
It is not always obvious which companies will outperform.
Since this is a reality, don’t underestimate diversification.
The Nifty 50 stocks of the U.S. stock market were decimated. But three did very well - Coca Cola, McDonald's and Walmart; the latter being a superstar stock.
As long as there's diversification among high-quality companies, the risk of permanent capital impairment is minimal.
The winners make up for a number of losers.
Starting valuations matter.
It's very important that you buy a stock cheap in order to make returns over the subsequent 5 or 10 years.
If you bought Infosys at the peak of the bull run in 2000, you didn't make money for the next 10 years. If you bought Wipro at the peak valuation in 2000, when Azim Premji had become the second richest individual in the world, you haven't made money even today in that stock. If you bought Hindustan Lever in 2003-2004, you probably now (September 2019) made money; but for the period of 10 years, you did not.
You cannot pay any price for any stock, no matter how good. No matter how great the company is. It's amazing how investors forget that during the heat of a bull run. There is an inverse relationship between the P/E ratio and the subsequent long-term performance.
But once you get hold of a good stock, you can't cash out with a Rs 10 profit or a Rs 20 profit. We saw Infosys go from a Rs 30 crore market cap to almost Rs 1 lakh crore market cap during this bull run.
Learn to ride your winners.
Other insights from the Morningstar Investment Conference
