Art of Saying No!

If you’re trying to build a portfolio of ten-fifteen stocks from over two thousand listed stocks available in India, the art of saying no is essential. Investing is the art of saying no to a stock in as little time as possible. This allows you to spend your time researching the stocks which matter to your portfolio.

Whenever you come across a stock, either on TV/Twitter or through a colleague in office, you must quickly find atleast one reason within ten seconds to not buy it. That’s it. If you are clear within the first few seconds that you have atleast one reason to not buy it, don’t buy it even if it’s the most favourite stock of the season. The reasons can be anything from I hate the product to I don’t know what it does to I don’t want to be in that sector etc. This is a very strong tool which decreases the chance of making a mistake.

Let me illustrate some stocks and why I don’t buy them. My favourite is Bajaj Finance. I remember walking in a Levi’s store and seeing a Bajaj Finance emi option there to buy jeans. I was stunned. This company lends money to people who can’t buy a two thousand rupees jeans on cash and allow them to buy ten thousand rupees worth of clothes on credit in five EMI. This is height of subprime. Now let’s dig it further. Somebody who is buying jeans on EMI is certainly also buying another pair of shoes and the latest iPhone on EMI and is also spending a lot of time chilling in cafe’s he certainly can’t afford without this easy access to credit. So one fine day when his accumulated EMI will be larger than his net take-home salary and he can’t pay his multiple credit cards bill, even using Cred, he will have to make a default on payment. The amount of money lent to this kind of junk borrowers is pushing Bajaj Finance and it’s look-alike’s credit growth and thus share prices to moon.

However, I’m not sure how these people are still not defaulting fifteen months into lockdown like situation. Last year, the government walked in and prevented NPA recognition but the same is not available this year. So somewhere down the line, these companies are sitting on NPA time bombs, waiting to blow up. Hence, when the day of judgement is here, I’m sure all these fancy subprime lenders will bite the dust. This is so 2008 like to my comfort. Hence, even if Bajaj Finance goes to 1lakh a share, I don’t buy it.

Coming to the chemical names. These companies have caught Investor frenzy over the last one year or so on the basis of anti China syndrome. However, as a professionally qualified Chemical Engineer who never knew anyone in his college who wanted to work for any of these companies as chemical engineer, I don’t even look at these shares. For us, they are dud businesses kept artificially up due to a special liking by certain MF+PMS who have cornered the float and are driving up the prices to sell it to retail later. They are clear avoid to me.

Not liking to work for a company equals not wanting to buy it’s shares has made me not buy indian IT stocks as well. I have certainly missed out on a lot of good steady earnings play but as I said, all you have to buy is 10-15 companies and even after not holding a single pharma/IT/Chemical/NBFC/Private Banks, I’m still able to remain fully invested and make decent returns on my money and thus remain pretty content.

One recent frenzy is a prime example of how pseudo-quality can be dangerous. The Adani group stocks have rocketed to the stratosphere in the past twelve months and a lot of MF are now waking up to buy them at any price to shore up NAVs. However, the test of smell says a lot of junk is being sold as gold. Some of the companies especially Adani Green have business models with all major historic peers in Bankruptcy. Remember Suzlon? Now they’re operating in Renewable segments with promise of the land of honey and milk and 72 virgins in future with no present returns justifying the valuations. Any major private player who has ventured in power, especially renewable energy has gone bankrupt in India. RPower, Suzlon are prime examples. I see no reason why Adani Green will be able to recover all the money it’s supposed to be investing in its upcoming power plants. Also, the rise of this group rhymes a lot with ADAG group in 2006-08 when RCom became a part of Sensex within three months of listing and RInfra, RCapital, RPower all promised to conquer India. The guy was also the richest man in India,albeit briefly. History rhymes, a lot! Within five years of being a part of Nifty and Sensex, RCom, RInfra, RCapital and every other group company went bankrupt and the guy almost went to Jail for not paying money back.

Once you begin to say no to stocks quickly, you’ll have more time to study and think about the companies you wish to own or already have in your portfolio. You should be disciplined about the businesses you want to own. This let’s the noise die down and whenever you’re staring at a rising stock on Twitter, you know if it’s for real or just another shipwreck, waiting to happen.