The Point of Capitulation

I was writing this in my journal yesterday that the point of capitulation was either yesterday or very near. And I believe we have just hit that point in morning trades of today. Market sold off massively from the word go and all bottoms fell off in the small and mid cap before a sharp recovery pulled certain stocks way back in green in the second half.

What I mean by the title is that when markets fall significantly and relentlessly; when no logical explanations to describe the carnage sounds reasonable; when all buying the dips fail and the entire world is shit scared to take the name of the word Stocks/Equity; that is the exact point when major bottoms are made.

So imagine this scenario- S Naren of the ICICI MF went around the town dissing the SIPs in not just Small and Mid caps but in equity itself; fear was being spread that the SIP Sahi nahi hai and you’re going to lose all your money in SIP to a public which has just put in 26000 crore plus in January 2025 through SIPs! Imagine the BCCI stopping kids from playing cricket. 

Ive had a thumb-rule to predict the market. When the Hindi newspaper Dainik Bhaskar puts the fall in Sensex on its front page, it’s the bottom or we are almost there. What I mean by this is when a general newspaper not interested in stock markets to sell itself wants to tell its readers who are not the regular consumer of financial news that there is panic in the markets, the panic has basically hit the roof.

So that aside; here is my views on the markets:

India is undergoing a massive shift from being an also ran economy to a major first world type economy with extreme pockets of wealth driving the opulent and luxury consumption through the roof while the aspiring middle class will try to a- imitate the rich by buying better goods and services and also thanks to the structural shift in savings behaviour, will put a larger portion of their disposable savings into market linked products- MF, Direct Stocks, Insurance, etc.

Ive also learnt a few things in my journey of now seven plus years of investing that an individual investor is inherently advantaged against a fund manager trying to beat an index due to sheer compliance issues and as well as compulsion to mirror/beat an artificial index. So an individual investor can very well buy one or two good stocks and compound at superlative rates and beat the pants off anyone else in the markets.

Also, and this is entirely my opinion that you have to have larger stakes in what you own. You can hardly follow 10 companies in detail and are best suited to hold less than 10 stocks at a time with good concentration in each one of them to allow yourself to move higher up the value chain, as the stocks do well. It makes no sense to have 20 shares of a stock which went up 20x.

So Ive been pretty heavy in concentrating my portfolio as you’ve read all this while and Im also trying to examine what my style actually is. So for me, the most important thing is to buy and hold really profitable businesses with simple operations, zero to near zero debt, high dividend payouts and good margins. This sound pretty easy, isn’t it. 

Now look around and count the fanciest stocks which have ruled the roost in the last two years- Dixon, Kaynes, Zomato, Waree, RAdico Khaitan, Ethos, ManKind, PB Fintech, etc. Add to this the railway and defence PSU and some metal stocks. I owned none of them. Not a single share.

And how have I performed? Well, my portfolio was up 100% in CY 2024 and 120% in CY 2023; zero % in 2022 and close to 100% in CY 2021. How’s that for a simple idea.

The logic is simple. One stock can and will change your life. For me, it was BSE. Now some of you will argue what’s so great about owning a stock which went up 30x since Covid bottom? The patience to hold and not selling your winners when it fell over 60% during Covid, 60% again in 2022 and over 35% in 2024 isn’t that simple, is it? That’s the boring job of looking at the stock through the eyes of an owner and feeling that you partly own a business that’s doing well and stock price will eventually recover as long as the business does well.

Now a lot of my friends ask me what exactly a full time investor does when you only trade once every few weeks, if not less than once a month? The simple answer is that to allow your businesses to grow requires patience and the time at hand is utilised to simply learn through reading.

So right now, as the blood on the street is pretty warm, here is what I am trying to do over the next few years, hopefully:

I would love to own any business which fulfils the above criterion of either catering to India’s luxury consumption or financialisation theme. I would, however, not own them unless the price is at a range wherein I can at least hope for a 2-3x in 3 years or less. Anything which has run up a lot or is too pricey is a big no. Plus, anything which doesn’t payout good dividends is a no. The idea is simple- if Im putting my funds in a stock for two-three years and I generally don’t book profits, dividends is a way to generate some real cashflow. Also, it’s the only way to examine the truthfulness of a company’s financials. If the EPS is real, dividends will flow. 

So currently, among all the financials, I am most bullish on the AMC stocks. They have got zero returns for the past 5+ years while their PAT have gone up close to 2-2.5x. This means the P/E has contracted substantially and is in a zone where earnings are going up 25-30% Yo-Y with rising dividends ( NAM and HDFC AMC trade at 2.5-4% yield currently), even the slightest re-rating will result in the stocks going up 2-3x in a short span of time. 

Will this mean that I will miss a lot of Dixons, Bajaj Finance, Page or other multi-baggers? YES! Totally. The key, however, is to think like a businessman. If only one of your stock does well, you will be a very wealthy person in 10-15 years. So why try to buy 50 stocks and act like a fund manager. Remember, you are here to generate wealth, not to beat an index! 

Disclaimer- The views expressed in this blog are personal opinions and are shared for educational and informational purposes only. They should not be considered as financial, investment, or legal advice. I write primarily to document my own learning and thinking process. I am not a SEBI-registered investment adviser, research analyst, or financial influencer, and no part of this blog should be seen as a recommendation to buy, sell, or hold any security. Please do your own research or consult a qualified professional before making any financial decisions.