I seek the pre-emptive pardon of the reader before you go any further. What I am about to say might sound unsympathetic and exploitative during these times of duress…
Yes, we are witnessing a global meltdown and stocks are plummeting irrespective of the sectors and analysts are even predicting a global recession. However, if mankind survives, this greatest challenge of the modern times, it offers us a golden opportunity to make the right investments. Without going to the technical analysis or any complicated financial theories, a fundamental analysis of human life will make us see this opportunity.
Any marketing course commences with the fact that best marketers do not create needs, rather they only service pre-existing needs better. The need for entertainment was always perennial for mankind. Marketers across ages ceaselessly innovated to meet those needs profitably. Be it the gladiator arenas from the Roman empire to Cinemas to NetFlix, products or the offering changed, but needs remained.
So, if humanity survives, we will still need to eat, travel, save, cleanse, etc. What is happening right now is a mix of sector specific crashes together with a sentiment based total meltdown. Stocks of airlines are trading at decade lows understandably with the demand plummeting. But the stocks of manufacturers of industrial alcohol are also at rock bottom despite the unprecedented spike in the demand of sanitizers. Even the airlines’ demand will return to normalcy after the crisis, as people will still need to travel.
Does this mean we go and invest in any airline company, sugar manufacturer or pharmaceutical? It will be quite stupid, as we can forecast with reasonable accuracy that several them will go bankrupt in the coming months unable to manage the cash crisis and the temporary demand stagnation.
The question is what and who will survive in the long run? The answer lies in the basics…
1. Focus on needs and then sectors – As I mentioned, certain needs of humans can’t be done away with for long. So, any sector servicing a fundamental need should be worth it, like energy, airlines, chemicals, etc. I am not including food because it is not expected that their stocks will crash to a magnitude of significance. There is lot of hype on e-commerce. But let us always remember, an e-commerce stand alone does not service a need but rather it adds value to a need; be it delivery of food, mobile or garments. Hence, focusing on core is the key.
2. Invest in the ones who know what they are doing – Not all will survive but the best will, and thrive. Identifying the best is what all the analysts spend time on. But sticking to the standard simple rules of analysis should suffice –
a. history is the best predictor of the future (debatable but still the majority follows the rule)
b. if you are doing it better than your peers consistently, then you must be doing something right.
c. do you have the means to survive in the short run and the long run?
3. Fundamental decline vs Sentimental decline – Has the company gone down due to its own doing or due to the fact that it followed the curve of the market? If it is the latter, then obviously the market risk should take the company up as well. This can be identified by drawing out a correlation between the ratio of sellers to buyers in the market vs stock price, or linking price movements to an event like the WHO announcement of the Pandemic or Trumps Europe travel ban or Lockdown, etc.
So how do we juxtapose the above rules into action…
1. Visit any financial analytics website. A prime example would be Money Control.
2. Choose your sector and analyze the companies for below basics.
a. Estimate your Profitability Consistency. It can be any ratio – NP%/ GP % or whatever, but consistency is paramount. The ratio aids us to fathom if they know the job.
b. Book Value Vs Market Value.
c. Liquidity Ratios and Debt Ratios to see if the company will survive.
d. The stock price movement and the identification of breaks. Has it been a steady decline or linked to the corona outbreak or the oil price crash or the Trump announcement, and so on?
You wouldn’t even need to put all the above data in to a spread sheet to get the answers. Just smart reading of the plethora of information out there will suffice. It may appear simplistic but some of the best investment decisions I made was by reading comments and debates of other people regarding a company in a social medial platform. The information over there is more valuable at times than what a certified analyst can share. Now, wherever you see the biggest deviation, I say put the money in. It appears all too simple and naïve but that is the power of human sentiments and human needs. One could cause illogical slumps or hikes; while the other is permanent. Rarely do we come across an opportunity like this and picking the right stocks will help us reap the same. I keep hearing things like all the banks are doomed in India or that it is the end of the oil era, or the airlines industry will bite the dust and many more apocalyptic statements. But if all the banks are shut, then how will the medium of exchange and savings-investments facilitation continue, or what will we fill in our cars and how will we fly? It is axiomatic that post corona, people are definitely not going to stop doing these. So make the best use of this time when you are pretending to “work” from home while your actual focus is on ensuring that the Skype status remains “ Available”.