My Thoughts On Investing In 2017, 2018, And Beyond (Video)

by: Vishal Khandelwal

I was on ET Now Wednesday to share my thoughts on investing in 2017 and 2018. While I managed to duck their questions on specific stocks, you can see the nervousness on my face even when I talk about a few old names.

Here is the video of the chat (click here if you are not able to watch the video below)

Here are some notes from my talk that I prepared just to make the task a bit easier for you –

1. Thoughts on 2017: We have seen most of everything run up in 2017, including cyclical stocks, those already starting 2017 with excessive valuations, shady promoters, dubious numbers etc. Volatility has been low, however. Risk-taking raised its head again. And the biggest risk that 2017 has brought with itself is the sense that there is no risk on the horizon. With 20% gain on the Sensex and with many stocks multiplying more than 2x, it may seem like a great year for people who remained invested to enjoy these gains. But the flipside is that 2017 seems to have made investors complacent.

Overall, 2017 leaves us with a lot of tough questions, which makes me uncomfortable as we enter 2018.

There are just two risks in investing – one, the risk of losing money permanently, and two, the risk of missing opportunities. I think, if 2018 reflects what happened in 2017, we will be speeding further towards the first risk. Don’t forget investors have short memories, and 2008 is already almost 10 years behind us.

2. Thoughts on 2018: Howard Marks says that the investment business is full of people who got famous for being right once in a row. I don’t want to be one of those persons, and thus I won’t venture out predicting anything about the stock market in 2018, except that they will remain volatile. So, stock prices will continue to move up and down.

People will remain greedy and envious of others making money faster, or losing money slower. They will continue to want effortless money. And if the markets continue to rise, the sins of envy and the fear of missing out will be enhanced to a much greater degree. In short, nothing will change. And I will be proven right.

3. Themes I’m watching out for: It’s difficult to generalize, but I’m looking at –

  • Select pockets in the broader consumption theme – businesses that will be ancillary to any improvement in consumption demand, like media, consumer goods, auto ancillaries, etc.
  • Business changing track – like low margin commodity type players moving into high margin segments, or companies shifting from B2B to B2C.
  • Companies that are shedding flab off their balance sheets and becoming asset-light.

4. Themes I’ll be avoiding: Some general stuff here –

  • Popular stocks with high growth expectations built in, especially from the over-heated mid and small-cap spaces.
  • Capital intensive business models, where the return on capital historically has been poor.
  • Managements who have been capital destroyers in the past.

5. Do’s and don’ts for investors: A few pointers worth taking note of –

  • Be very careful in buying into the most popular stocks and stories. Investing, as they say, is a popularity contest. And the most dangerous thing is to buy something at the peak of its popularity.
  • Avoid giving in to FOMO or the fear of missing out, which I think is the greatest killer of investor returns. It’s fine seeing your friends, especially the ones shouting it out on Twitter and other social media, get richer faster from the stocks they own that you don’t. If you have been in the stock market for long, you may have witnessed people who had never invested before piling into stocks, unknown and unworthy, just out of the fear of missing out. If yes, you also know how that ended.
  • Spend less time looking at the stock market and more time reading history of financial markets, bubbles, manias, and crashes. And not five or ten-year histories, but 100 and 500 years. (Books – Irrational Exuberance, The Great Crash 1929, Manias, Panics, and Crashes, Extraordinary Popular Delusions)
  • Fortunes are made by buying right and holding on. So, the most important things investors must be doing is to stick with high quality businesses till the time they remain good, and not just because those have run up in prices. If your financial goal is 10 years down the line, don’t aim to book profit now, especially when you own high quality businesses. Thomas Phelps wrote in his book – To make money in stocks you must have “the vision to see them, the courage to buy them and the patience to hold them.” Patience is the rarest of the three, but it pays off in the long run.
  • Don’t venture beyond your circle of competence i.e., things you understand. And don’t venture out because you cannot stand seeing others making money fast. Buffett said, “Nothing sedates rationality like large doses of effortless money.” Watch out for that risk of excessive irrationality that has already crept in.
  • Allocate well. Most of your long-term money must be in equities, but don’t ignore the risks that come with equity investing and thus try to understand the downside before the upside. Always ask what could go wrong, and factor that while making your decisions.
  • Realize that investing is mostly a losers’ game. So, to win, you must avoid losing. And how do you do that? Avoid making mistakes that get most people into trouble in investing, like trading a lot, borrowing to invest, investing into things you don’t understand, buying into bad businesses and managements, and buying what’s popular etc.
  • Try to avoid big mistakes, but don’t fear making the small ones. I read somewhere recently that being right is the enemy of staying right. This is because being right makes you overconfident, which may lead you to big mistakes.

6. Good business expensive or bad business cheap?
That’s simple! For me, it’s always about good quality business at reasonable valuations. If I’m not able to find them, I will keep searching instead of allocating money to bad businesses or managements just because those are available cheap. Cash provides options, so I would rather hold on to it when I don’t have a good use of it.

I have been hearing people now looking to chor (crooked) managements to benefit from the valuation arbitrage their companies provide. This reminds me of the game of Russian roulette where you have a gun with six chambers and just one bullet. Would you play the game if I offer you a few crore rupees? If you say no, you are smart because you will be rich on five occasions, but will become a statistic on the sixth – a statistic that the world won’t remember fondly.

Specific to investing with bad managements, I am reminded of Thomas Phelps who wrote in his book 100 to 1 in the Stock Market – “Remember that a man who will steal for you, will steal from you.” In short, I would avoid bad businesses and bad managements at any valuations.

7. Books: Three best books I read/re-read in 2017 –

  1. Principles – Ray Dalio
  2. All I Want To Know Is Where I’m Going To Die So I’ll Never Go There – Peter Bevelin
  3. Poor Charlie’s Almanack – Peter Kaufman