The Indian share markets have been bathing in a sea of red.
The epicentre of these shock waves lies in the failure of two US banks - Silicon Valley Bank and Signature Bank. These are the biggest banking failures since the global financial crisis in 2008.
To avoid a contagion like 2008, the depositors have been assured they will be protected. But that could not save the sell off in the US banking stocks.
Markets are rightfully worried, as the event comes along with weak global cues.
The BSE Sensex lost 900 points yesterday, down 1.5%. The Smallcap index was down 2.1%. The correction could go deeper if global macroeconomic data isn't positive.
Are you waiting for more correction to invest in the markets? I know some of my subscribers are considering this as the following query suggests: 'Should I wait for the markets to correct to buy stocks, considering the fears of a global slowdown?'
So allow me to share my view on the impact of SVB's failure on the Indian stock market, and the right investment strategy in the current times.
Before I go ahead, here's a question for you...
If I offer you a bunch of fundamentally strong companies, run by solid management teams, would you consider investing in the Sensex 30 stocks at levels suggested on the right most side of the chart below?
I would not be surprised if you are hesitant.
Psychologically, when you see markets at all-time highs, especially after a big fall that seems like deep crevice, you may want to wait for a better time.
Well, the chart above marks Sensex's trajectory for almost 15 years, from January 2000 to January 2015.
Here's what the next few years looked like...
This timespan includes events that compete for being the worst investors' nightmare - Subprime crisis, demonetization, the pandemic, and the ensuing inflation and supply chain distortions.
The CAGR (compound annual growth rate) returns from the peak in the previous chart until now are clearly better than being in the cash. What looked like a deep crevice in the first chart seems like a blip now, that you might not even notice.
Not to mention this is the trajectory of the benchmark index. A careful selection of quality businesses at reasonable, if not cheap valuations could have landed you multibagger stocks with even better returns.
Theoretically, you could have made better returns indeed by entering at later corrections. But that's assuming the quality stocks did correct to the same extent, and had you not been paralyzed by 'What if things go worse' or 'Let me wait for a better entry point'.
Here's the thing. No one can time the markets perfectly all the time. Those who are right are often so by chance (it's always a 50% probability).
Even if you have the rare foresight to connect all dots and variables to know market moods, it would be challenging to replicate this exercise for the individual businesses in the short term.
Coming to the view on the markets...
We are currently at the right most point in the chart above. Depending on the Fed's stance and the global economic scenario, there could be a near term correction due from here. There's almost a 50% chance of it.
But considering the structural shifts and policy tailwinds in India, I would expect history to repeat itself.
A few years from now, the current levels of Sensex could be dwarfed by the fresh peaks.
As I have shared before, in my view, the base case scenario could be a 15% CAGR growth for earnings. At median PE multiple of 20x for the Sensex, this amounts to over 1 lakh level for the Sensex in 5 years.
That's a CAGR of 13%. The upside in individual stocks, that rank higher on quality and growth prospects, could be much higher.
When it comes to quality and growth stocks, long term horizon can work for you, if and only if your entry valuations have enough margin of safety. And margin of safety is a concept that you should approach from a stock valuation and business perspective, and not from 'where will markets be next week or month or even year'.
Now this discussion is incomplete if I do not dig deeper into the concept of margin of safety in growth and quality stocks.
After all, it remains a well understood concept only in theory and not so much in practice.
There are extreme conservationists who would not look at a stock if it trades above a price to book value of one.
There are cautious growth investors who would be okay entering at a PE of 25, but not beyond that.
Then there are ones who would be okay with entering at high multiples as long as PEG ratio, that is, PE ratio to growth rate is close to or less than one.
Some are fine taking staggered positions as long as the PE multiple is not too far from long term median average multiples. For instance, if a stock has been trading at a 5 year median multiple of 40 times, they will take solace in historical multiples and would be okay paying that much.
In this video, I have shared how to arrive at a fair price for a wonderful company, and three stocks that I believe are well placed to grow in the long term.
Hope you enjoy watching it.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com