What is happening in the market? On one side, domestic institutional investors are selling left, right and centre and there are record outflows; on the other side, foreign institutional investors are buying left right and centre and there are record inflows.
I remember one of our first conversations when we said that bull markets are born in extreme pessimism and I think we have seen that. In the last few months, we have seen the phase of scepticism and now we are probably seeing a bit of optimism. But we do not really doubt the market. The biggest problem is everybody is always doubting the market and trying to find the reason it is going up. If you do not trust the market, you cannot be a successful investor. The first point is that you have to trust the market and truly believe and that is what we try to say in our article on index investing.
The index is constituted according to a methodology. It is a methodology which requires free float, market cap and other factors. Valuation is not the basic criteria for the constitution of index. For an investor who always keeps an eye on prices, what you pay value for is what you get. Index investing is not based on that.
Yes and that really fascinates us and we really feel that that is a very big factor in our style also, that it is not always about forecasting. What we perceive as value may not be value. That is what the index does very well because it only follows price. It follows market cap and it will keep down weighting and up weighting based on that. And many times, people feel that that index has included a stock very late but that is not the truth and it has excluded it after it has fallen a lot.
I would talk about some of the losers which were in the index back in 2008. There was BHEL, DLF, Reliance Communication, Suzlon, NTPC, Unitech. Almost 20% of the index was these stocks. Today they are out of the index and probably most of these stocks are down anywhere between 70% and 99%. The point we are trying to make is that what index does very well is based on price. It eliminates losers systematically. It downweights them and upweights the winners systematically regardless of the valuation and is able to find multibaggers like HDFC which was 1.7% of the index in 2008 and today it is 11% and has gone up and has been a 10 bagger. HCL Tech has been a probably a 12 or 13 bagger and Infosys has been a 6 bagger. TCS has been a 13 or 14 bagger. This has happened in the last 10 or 12 years.
A good case is something like Kotak. Kotak was included in 2011 and after the inclusion in the index is almost a 7 or 8 bagger.Bajaj Finance got included just three years ago. It is a 3 bagger. Even an Asian Paints is a 6 bagger after getting included in 2012. So the index does it very smartly. It brings in the leaders, eliminates the losers and we feel that is a very important strategy because it keeps the biases away and it does not average down. It always eliminates the loser and it keeps adding to the winner and it does not book a profit. Many people say okay when there is a profit you must book, but just think about it. If great investors like Rakesh Jhunjhunwala booked Titan or Lupin the first time it doubled, he would not be the legend he is today. So the idea is to ride the winners and cut the losers.
Outside the index, where are you investing? Last time we spoke, it was IndiaMart all the way?
Every time we come on your channel it makes a new high. Last time we spoke about some of the IT names that were coming on our screeners and we have been invested in companies like Infosys and L&T Infotech. We are still choosing some of the larger names because we feel that the tailwind is strong. They have actually benefited from Covid. They have cut the cost and growth is back. They are not so expensive. looking at the growth they are at and that is one place which has been upon our screener even today. So IT is one place.
The other very interesting thing which is coming up on our screener are the metal names. We have not yet managed to pull the trigger, it is a lot more difficult to understand these cyclicals but as a process we follow our screeners and whatever comes, we would definitely dig in and try to understand what is happening.
For many years — probably a decade — people have not really made money in some of these names and this will take a lot more time for people to realise but that happens where you do not see the biggest opportunity is there and that is what our screeners do to us. They would throw to us names which we have not looked at and we try to eliminate our biases through this process.
We are seeing the emergence of some of these metal names. We have to dig in to know whether this is for the long run or they are just a short term phenomenon.
It is interesting that metals are coming at your screener when metal prices are at a record high. Normally people like to buy metal stocks when earnings are depressed and when the cycle starts you benefit but the fact that metal stocks are coming on your screener. Why?
We follow a very specific process of screening based on a lot of factors, including prices. We believe that even if you miss the first 100% or the first 50-60-70%, it is not too late. If one can do the work and understand that okay this is something which is very sustainable. This is a trend for the next five to seven years.
We have seen some of these metal companies in the last cycle. From 2003 to 2007, some of these companies became multi-baggers. Some of them actually returned 20-30-50 times in terms of the capital appreciation. We believe that it is never too late. People always feel it has already gone up too much but I feel that is just a bias. Sometimes we could find a real value at a new high. We always say a lot of times that value could be found and a stock could be the cheapest it has ever been after it has rallied 100-200%. The idea is to make sure that you understand the business well. Is it a leader and does it have the potential to make multiple times the profits it makes today? That is what we would be focussing on.
