Equity market was volatile during the month, closing slightly positive, on the back of weak corporate results for the December quarter. The Nifty was up 1.1% for the month. Our portfolio performed well, with some of our large holdings showing strength in a weak market. Given the strong rally in the markets over the past year, there is some concern among investors about whether the strength in stocks is sustainable. What the future holds is difficult to predict. On the other hand, some statistical evidence and the corresponding actions we take should help you in assessing risks at this stage.
Markets on an aggregate basis are not super-expensive. Compared to the valuations seen in 2008, the Nifty is trading within the historical valuation range, though it is trading above the historic median multiples. It is important to note here that even when markets is expensive, individual stock may trade at valuations very different from the market. Take the example of stocks like Hindustan Unilever, Hero Motors, Nestle or Cipla. These are large and well known businesses, where reasonable amount of capital can be deployed. From Jan 2008, the Sensex fell nearly 65%. On the other hand, these stocks fell less than 15% from their Jan 2008 prices levels in the ensuing bear market and are currently trading nearly 3 times the price that they were trading at in Jan 2008. One has seen numerous instances when some high quality companies can trade at sensible prices, even while the broad market is statistically expensive. We get surprised when we go back in time and review these valuations. We continue to believe that as investors we must focus on the individual quality and valuations of the companies we invest in, rather than try to time the market.
On the portfolio front, we continuously monitor the valuation of companies in our portfolio. Most of the companies in the portfolio continue to be great businesses – in some of these, the stock price may have run up sharply and the current price reflects an exaggerated valuation. In these situations, we either reduce or sell the holding, in order to reduce the risks to the portfolio. Typically these sales are long term in nature and therefore tax free as per Indian tax laws. Meanwhile we continue our search for good companies trading at sensible prices and do this regardless of the market level. If there are no good opportunities available, we can wait. Given the volatility in stock markets, opportunity does knock on the door of the patient money. Since we are interested in buying very few companies, which fit our test of quality, we could see a few opportunities to buy at most points in the market. Just need to be a bit patient at times.
We have repeatedly seen that focusing on individual stocks, and their valuations, makes a lot more sense than trying to take a call on the market. Timing the market is very difficult to do, and it is nearly impossible to get it right consistently. Markets are designed to be volatile – a long term investor must understand that there will be the inevitable mark to market drawdowns, and the patient investor should ride these out, in order to hope to reap the rewards of long term investing. Moreover, excessive trading comes with transaction costs and taxes which beat down the overall return over time.