Perplexity Puzzles & Paradoxes...

"I like the stock market because it is the only place where people can go in a $100,000 car and park it in front of a $10,000 house."

                                                                                                             - Will Rogers

Very relatable for the current markets? I guess it is always relatable for any market situation, but when there is bull run then this effect will multiply due to FOMO in retail investors.

 

Nowadays people looking more for the news and data on the stock market, getting more lured by its AURA, and following blindly. Recent news of opening of 171 million DEMAT accounts which were more by 4 million than last month (July 24), and number is increasing suggest the retail participations in the Equity market.

There is nothing wrong or right in incremental number of DEMAT accounts, but the concern can be, those who are investing are they getting lured by bull equity markets? or are they interested in listing gains of IPOs? or are they getting attracted by derivatives for fast returns? or there is endless greed of making money in short time? In my view, the answer is YES to all the questions above. What more concerning is, new retail investors who are investing, are they doing the analysis or getting help of experts of investments or just investing because someone from close loop is investing? That is really hard to find out. 

Recent news of IPO where company were trying raise the fund of around 12 Crs but IPO got subscribed by 400 times shows pure greed of the investors.

I truly believe that equity investments can be done with 2 mindsets, one is with mindset of gambling and the other is making consistent money and growing the wealth. Now a days 1st mindset has become more popular. Yes I am saying it openly because without that the IPO news or listing gains of IPOs we could have not seen. The current listing gains investors getting are mostly due to demand and supply mismatch, of course there are good ipos but retail clients will hardly get them. 

It has been 3 years out of 5, since when I actually recorded the data on the daily basis, for the first 2 years data recording was not done in the manner that I am doing now a days. But in the recent past I have observed that big players (FIIs specifically) also maintaining the more liquidity than the previous days. They are also participating in derivatives trades with more n more number of contracts than usual. That may be for control of the market, when DIIs are floating with liquid cash.

When the markets are with full of liquidity, high PE ratios are common across the stocks. Currently market is facing the issue of overvaluation. Many stocks are really overvalued and has grown tremendously. Stocks specially from Mid and Small cap space are more overvalued than the stocks which are in Large caps. One important reason that Diis (MFs, PMS) houses are maintaining the liquidity under the full limits per category assigned by SEBI is because incremental money is coming but stocks are overvalued. There many and more stocks which have given more than 100% returns in single year from mid and small caps space, some of them are with really good fundamentals and good prospect as far as India's growth is concerned, On the other hand company like HDFC bank, which is fundamentally strong is showing range bound activity since last 3 years. 

Now coming to our title of perplexity puzzles & paradoxes.. In our zero sum game, perplexity puzzles are nothing but as below:

1. Should I invest in the stock market for making fast returns or for making consistent returns?

2. Should I invest in the stock market at such high valuations?

3. Should I restructure the portfolio to the undervalued stocks or keep the stocks for longer term so that  I can also be part of the stories that if you have invested Rs.100000 in 2010 then you could have made this......?

4. Should I just replicate the PMS or mutual funds stocks in my portfolio and make the returns  accordingly?

Paradoxes will be:

1. Market returns are humongous, irrespective of the valuations, indexes are showing ATH after regular intervals.

2. Invest in any  major stock floating around the groups, stock is just giving back the returns irrespective of the fundamentals and technicals of it.

3. Invest for short term either in small caps / in micros or even in penny stocks and IPOs for huge profits in short time because of the recent past is with great experience.

4. Invest, invest and invest as market is in bull run.

These are common talking points now a day as a wealth managers we are facing, may be more but not less.

If you see closely, even in confusion and decisions, greed factor is majorly driving the sentiments of specially retail investors. I am not blaming retail investors for the greed factor as market has performed really well in recent past. From last 4 years, markets are just touching new highs in regular intervals.

Recent past has showed us that there is no limit to even growth of the stock price in bull run, in that conditions the TRUE RETURNS of the equity (XIRR) which are in the range of 12% to 20% depend on the category, does not make any sense, which is why the expectations of even retail investors who were looking for 15% growth rate are gone up to 25% to 50% returns of stock investments.

For all of the 8 points of confusion Vs. stubbornness, the decisions will be taken by investors with their individual mindsets. So there is nothing right or wrong relying of our own individual thought process as far as it is restricted to individual portfolios. But as far as markets are concerns I must say, Perplexity Puzzles and paradoxes is restricted to retail investors only. For big investors, when there is big money at risk, there is no confusion to follow the right valuations of the stocks. Irrespective of the fundamentals, technicals and future growth of the company based on the govt. budgets, big money will always respect the valuations of the stocks.  That is why so many fundamentally good stocks irrespective of their growth and future order book are showing negativity. And same is the reason the sectoral shifts are happening on faster pace from big players.

For overvaluation of the stock and money outflow from Fiis, I would like to give the example of the shipping stock- Cochin Shipyard. The stocks touched 52 weeks high of  Rs.2979.45 in the month of July 2024. Which was 369% returns in just 1 year if invested in sept 2023. 

Now currently stock has fallen by 38.36% from its 52 week high value. Of course gain vs. fall in one year suggests still huge profits in falling stock. Also fundamentally stock is very good. Let me remind you, govt. has allocated similar funds or more to shipping sector in this current financial year too. 

So here the dilemma for retail investors to those who have entered a year back is 'to hold or sell the stock'. For new investors or short term retail investors /traders dilemma will be as the fundamentals are good, technicals soon will touch the strong support should we buy for up trend as it may go back again near to its 5 week high. 

WHAT A PERPLEXITY, "Kya karu kya na karu ye kaisi mushkil hai...."

Now lets see what big players are doing. Last quarter FIIs reduced their holding by 0.29% while prop desk has reduced the holdings by 0.24% in last quarter. while mutual fund houses have added the holdings by 0.04%. So Net outflow from big players is -0.49%. Let me remind you again about the strong fundamentals and promised govt. expenditures for the stock and sector.

** I am here not suggesting any trade activity in the mentioned stock but want to show how valuations plays important role for the prices. 

Coming back to data, lets see the data which I share on monthly basis of big players activities.

1. Sectoral Shifts:

                                                Data source: NSDL FPI monitor  

For the 1st fortnight we can see the negativity in the month of Aug 2024, while second half of the month was positive in terms of inflows. Telecommunications, information technology, services, consumer durables were among the top gainers while selling happened in miscellaneous stocks.. 

2. Countrywise FPI monitor:

A welcoming move by NSDL, they have added another column recently which suggest equity mutual funds investments of  country wise FPIs. Singapore FPIs showed confidence in Indian Stock market while Japanese FPIs were negative in our markets. FPIs from Ireland chosen safe route of investment in equity via mutual funds.

Source: NSDL FPI Monitor

 3. Monthly FPI Net investments:

Here too, more elaborated data from NSDL, they are showing the mutual fund allocations in all categories along with AIFs of FPIs. Data Suggest we are still positive as far as FPI money flow is concerned.

That is all from my side for this blog. Please do share your feedbacks/ comments/ critics/ mistakes in comment section. Share this blog with others if you find valuable. Lets help another retail investors for making good returns in Equity. 

Disclaimer: The data taken for the analysis is publically available and you can cross check it with your own capacity. No transactional suggestions in any segment of the market with this blog. Please take the expert advice before any action in stock market. I am sharing my personal opinion and this is not from any institutional research deck.