What Cricket World Cup 2019 Taught Investors
To investors and cricket fans, this world cup taught a thing or two about predictions, competition, and disappointment.
Sport teaches us multiple lessons, about life, about investing, and if you are an Indian cricket fan, this world cup taught a thing or two about handling disappointment as well.
Fortune Favours The Prepared Mind
Australia was put in to bat by England in the round-robin match. The ball was fizzing around, teasing the bat-edges of openers Aaron Finch and David Warner, who battled on bravely, skilfully, and slowly turned the tide once the sun peeped out. Who could have foretold a 123-run partnership in conditions heavily loaded in the bowlers’ favour? But the Aussie openers achieved it, and half the game was won then and there.
They had prepared themselves for some tough opening overs, and braving them out would enable them to score later.
Therein lies a lesson in investing. If you have faith in the fundamentals of a business, and know the business well, let the portfolio ride through tough times. It happened during demonetisation lows for companies like Maruti and Bajaj Finance. Investors who kept their faith in the sound fundamentals of these companies saw the stocks rise 29 percent and 40 percent respectively from their lows in less than three months. Since then, Bajaj Finance has gone on to give returns of nearly 5x from those demonitisation lows and Maruti more than doubled over a 20 month period, before cooling off in 2019.
Don’t Write-Off The Mercurial, But Bet At Your Own Risk
After the loss to India, Pakistan was written off. No sir, said the Pakistan team. They showed that while they can be pedestrian on a number of days, they can often upset the best in the business. In England, South Africa, and New Zealand, they managed to upstage some fairly strong teams. Having said that, they didn't make it. They lost out on the semi-final spot only due to an inferior net run rate. That is the story of a number of stocks. They are mercurial, show promise when least-expected, but don't make safe investment bets.
High-beta stocks can deliver some fantastic quarterly results now and then. However, if investors bought them as safe, secure stocks which will keep on giving strong returns, people are often in for a rude shock.
Sterlite Tech and Delta Corp are among companies that fit this bill. Both stocks currently trade around the Rs 160/share mark, and have halved from their 52-week high.
Don’t Try And Predict Mr Market
If the English cricket team was a stock, the price would have plummeted after the losses to Sri Lanka and Australia, and just when it looked like the bottom would fall out, it’s climbed all the way back to the top. England’s first final in 27 years!
The English team started off the tournament as the team to beat, but the performance was erratic when least expected. Suddenly people found it difficult to predict what would the team do on a given day.
In the same fashion, investors have made the mistake of predicting what the market would do, or what a particular stock would do and have been caught on the wrong foot.
Those that believed that the demonetisation fall would continue because businesses would change for the worse, were caught out by the subsequent bounceback. On the flip side, some believed that stocks like Page Industries, Eicher Motors and MRF would just continue to rise because their growth was perpetual. Similar was the belief that NBFCs would continue to get sky-high valuations despite the risky nature of the business which got exposed after the IL&FS defaults. All are examples of investors trying to predict Mr Market and found wanting.
Take All Competition Seriously
India learned this the hard way. Every expert, every fan would have thought of the semi-final as half won even before it began: a New Zealand team which had lost three games in a row in the run-up to the semi-final, against the toppers of the round-robin stage. I am not saying that Kohli & co ignored New Zealand, but most fans, including yours truly, thought of this match as one in the pocket. However, it was not to be. And New Zealand ended up beating a stronger team, at the stage which mattered.
In the same breath, must mention Bangladesh beating South Africa as an upset from which South Africa just could not recover, throughout the World Cup. Over a longer curve, South Africa are arguably amongst the giants in world cricket, while Bangaldesh is a team that is only now on the rise. The Tigers managed to punch above their weight and beat the Proteas.
Similarly, many an investor has ignored small changes in business models or economic scenarios, where smaller competition has come in to create issues for the larger companies.
Page Industries seeing some competition from Van Heusen and DKNY, Symphony facing competition from new entrants like Havells, and you have your answers. Growth rates have come off, partially due to the high base as well, and so have the valuations. Investors would be well-served to monitor these situations closely.
Quality Triumphs, Usually
In all walks of life, you would have quality usually doing well. As it has in this World Cup. We had some of the best cricketers turn on their game and perform to near-perfection. At the end of the round-robin matches, the top 5 bowlers list had Mitchell Starc and Jasprit Bumrah, arguably the top bowlers in world cricket, with the batting charts being topped by players like Rohit Sharma, David Warner, and Shakib Al Hasan, again the top players of their respective teams.
Look around the world, and you will see quality prevail. The Dow Jones Index has names like American Express and Microsoft hitting new highs and the DAX in Germany has stocks like Adidas and SAP hitting new highs. This holds true in India too, with the companies like Bajaj Finance, Kotak Mahindra Bank, Hindustan Unilever and HDFC Bank outdoing their peers in the last 12-18 months.
A Life Lesson
I would end this, as I usually do, with a life lesson. It pays to not brashly make judgments that you can't take back, as Sanjay Manjrekar, ex-cricketer-turned-commentator, found out the hard way. After calling Ravindra Jadeja a “bits-and-pieces player” who would not be his choice, Manjrekar had to eat his words, and his pride, because he chose to denounce another's abilities publicly. Never a good idea.
Niraj Shah is Markets Editor at BloombergQuint.