Investing in 2020, Lessons from 2010

We wish all of you a joyful and healthy New Year 2020! As we embark on a new decade, we hope we will have more opportunities for wealth creation.

Let’s take some time to revisit what was predicted  in the stock market 10 years ago.  The best guide to that would be the Motilal Oswal Wealth Creation Study, which they publish every year in late December or January for the last 24 years.

To help us understand this better, let us look at forecasts made in the past, and how we can learn from them.

Wealth Creation themes in Jan 2010

Let us look at the 14^thedition which was published in Dec 2009. You can read the full reporthere.  There are three interesting points

• The fastest wealth creatorin those last five years (2004 to 2009) was Unitech! In fact, the list of top 10 stocks which grown the fastest makes for interesting reading – Unitech, Areva T&D, BF Utilities, Opto Circuits, NMDC, Shriram City Union, United Spirits, Jindal Steel, Sterling International and Chettinad Cement. How many of these firms do you remember today? Their subsequent track record of wealth creation has been abysmal
• The fastest growing sectorwas Telecom with superior profit generation, while the Banking and Finance sector lagged in comparison. As a % of wealth created the share of Banking fell from 15% (in 2004) to 9% (in 2009). Organized Retail was identified as the sector for significant scaling up (Pantaloon Retail was the top pick).
• The top recommendations for stock investinggoing forward were Bharti Airtel and Hero Honda. The study recommended them as they had high entry barriers and cheap valuations. Do you know the 10 year returns for these two stocks? For Bharti Airtel, it is 4.1 % CAGR and for Hero Honda it is even less at 3.8% CAGR

There are many more interesting insights in the report. But, we can safely say that some of the leaders of the previous decade (in particular from 2004 to 2009), could not replicate their success going forward. It also shows how difficult it is to forecast accurately.

Current Scenario in Jan 2020

2018 and 2019 have been years of extreme polarization in the Indian equity markets. The top 10 stocks have done very well (with 23% returns between Feb 18 and Nov 19). On the other hand, smaller companies have had a miserable run (Stocks ranked 501 and above have fallen on an average by 45% in the same time period).

Similarly, from a sectoral viewpoint, private banks and select consumer lending companies have done very well, while the rest of the sectors have struggled. Today the total share of construction, telecom, metals companies in the BSE Sensex is only 5%!!

Finally, from an investing style viewpoint, the growth style (investing in high quality companies e.g. Hindustan Lever) even at high valuations has given strong returns while the value style has lagged behind.

What should we be doing now?

As always, our ability to generate wealth will be determined by our long-term investment behavior. Two key things stand out

1. Emotional intelligence is key.  You should develop the patience and conviction to invest consistently over time in a diversified portfolio of companies across themes and sectors
2. The ability to look forward rather than being influenced by past returns and going overboard on recent winners is to be avoided

It is important that we diversify our portfolios across investing styles and market capitalizations. This will help us avoid being influenced by recent trends alone. As a regular reader of our blog and short messages, you would have understood by now, that it’s very difficult to predict the future with Crystal Ball, particularly in stock markets.  Things are very dynamic and it is very difficult to predict the winners even for seasoned market professionals.

Investing in a hand-picked portfolio of funds, over a long period of time will give handsome returns.  Happy investing!!