New Year 2020 began with great promise. Markets were at all-time high in January 2020 with early signs of economic recovery on the back of benign macro indicators, the government’s tax cuts and RBI’s expansionary policy. After the incidents of 2018 and 2019, there was finally a seed of belief that economic growth and the elusive earnings cycle, better known as “Karan Arjun”, would finally come back. The spread of COVID19 and scary data emerging from countries like Italy, Spain and then UK followed by USA resulted in panic in the global markets and looked like Karan Arjun would be delayed by a couple of decades in real, just like in the reel. Pardon the hyperbole, but a 40% decline in Nifty with an unprecedented USD 10 bn FPI outflow in first 3 weeks of March 2020 did suggest something just along those lines.
Usually analysts have a bear case, a bull case and a base case and one sees an artificially narrow range of variables defining these outcomes, often devoid of real-world unpredictability. It happens very rarely that there is a choice to be made between two crystal clear options like ‘the world will come to an end” case and “the world will not come to an end” case. Remember those last few days of March 2020?
Somebody posted on FaceBook recently asking for a one-word characterization of the year 2020. I replied “Masterclass”. This is a year that will be referenced by many a stock market warrior in the years to come.
So, let me share what I learnt in 2020 with a short story of my interaction with an equity investor. This is one exemplar, but we know this is what is happening with many.
There was an investor who invested somewhere in March 2015 when Nifty was close to 9,000 and by end February 2020 when five years were over, the investor had a return of about 12% CAGR in a large and midcap fund; about 4% CAGR ahead of the Nifty 500 TRI index like to like basis. When this investor spoke to me in early April 2020, obviously she didn’t care for the position in February 2020. When I got the call, she was quite upset because the five-year CAGR was 4%. What is long term and what is the use of investing if return is less than FD rates after five years?
I referred to historic portfolio values as at various dates and explained as recently as February 2020, one saw about 12% compounded. By end March 2020, it did not matter what one was holding, everything collapsed; there was a 35-40% decline. Arithmetically the entire five-year CAGR declined by 7-8%. She was unhappy and over the next few months I had to stay connected and make efforts to avoid redemption at an inopportune juncture. Ultimately, the investor prevailed, and she redeemed in early November when Nifty crossed the Jan-Feb 2020 peak levels. The return had improved from 4% to 10%. Now, the saddest part of the story. If the investor had waited for a few more days or say till end of 2020, the now five and three fourths years CAGR would have been more than the earlier 12% noted in February 2020. What are the learnings?
Get back in the saddle.