One Day Cricket and Equity Markets

Dear Friends,

               I guess most of you understand cricket and hence tried to compare it with Equity Markets. PenguWIN has a sizeable number of investors who have done Equity Investment for the first time and hence tried to make life easier for them rather than using Financial Jargons every time, making them uneasy. The content is my IP and not lifted from any magazine or website 🙂  (Last year one of my blog content was lifted and used by a large AMC, publishing it in leading newspapers – https://penguwin.com/opportunity-cost-investment-delay/)

Scenario

World XI is playing a one day match with India XI (50 Overs Match). World XI comprises of players including Malcom Marshal, AB De Villiers, McGrath, couple of All-rounders who can bowl, captained by Wasim Akram.

India XI comprises of Tendulkar, Shewag, Rahul Dravid, Saurav Ganguly, Youraj Singh and few others, captained by Dhoni

World XI has batted first and posed a huge target of 351 for India XI to chase.

Don’t try to pick on the nuances that Malcom had retired before Yuvraj started playing Cricket for India and read with an open mind

Commentary of India chasing the target

Sachin and Shewag open the Indian Innings for India XI facing a daunting target of 351 with Sachin taking the strike. Sachin tells Shewag not to try and play rash shorts, build a partnership without losing early wickets as the score being chased is high and they need 2 to 3 big partnerships to reach the target. Sachin opens the innings facing Wasim Akram and takes a single. At the end of 2 overs both Sachin and Shewag have scored 4 each through singles and twos.

When you do systematic investments in Equity, it is almost risk free like playing grounded shots taking ones and two’s without taking too much risk. Best option for people to start in Equity Mutual funds

Now, in the third over, Shewag gets impatient with Wasim Akram’s bowling as he is not able to score even a single in first 4 balls. He goes for a hook shot trying to hit a six and gets caught before the boundary line.

When you try to make lump sum investments in Equity, you need to be cautious looking at market valuations and not try to hook the ball without settling down

Did Shewag intended to sacrifice his wicket? No, the cause was right but the bowler he chose to hook is one of the best bowlers in the world whereas he had  not settled down to play the ball.

Several investments were made by Mutual Funds, FIIs and retail  Investors even when the Sensex was at 29,000+ and  the market valuation ( Earnings/Share)  was 20% above the long term averages. Is this a mistake? No, investors thought that the Bull Run will continue for a long period and Analysts were predicting that Sensex will close above 32,000 by CY 2015 end but finally got caught on the wrong foot. The nature of Equity markets is such that no one including the Rakesh Jhunjunwalas and Warren Buffets of the world can predict correctly at all times (by fluke some get it right as there are only 3 options – Buy, Sell and hold). They can only say that the markets are slaves of earnings and the valuation is low or high. Please remember that Equity Investments should be done with a minimum of 5 years perspective (higher the better) because of the volatility in the asset class – This is not to say that Equity markets will perform only after 5 years but given the volatility, taking a 5 year perspective increases the probability of earning a sizeable CAGR (Compounded Annualised Growth Rate)

I wanted to present some important data points on Sensex returns (picked from a Financial Article).

If you had invested a lakh in Sensex in 1990, you would have made 33 times or Rs. 33 Lakhs. i.e between 1990 and 2015 the returns work out to 14.5% in 26 years. I am sure that you are aware that Active Equity Mutual Funds beat the markets by 3-5% (Alpha created by Fund Managers). Companies in Sensex will also reward the investors with Dividends and if we factor that, Sensex returns is about 16% CAGR. If you look at the returns pattern, you will be surprised:

Did not participate in best 10 days – Return is 12 times or about 10% CAGR

Did not participate in best 20 days – Return is 6 times or about 7% CAGR

Did not participate in best 30 days -Return is 3 times or about 5% CAGR

Did not participate in 40 best days – Return is 2 times or about 2.5% CAGR

You can clearly see that Equity returns are not linear and no one can predict the best days to participate. The opportunity to earn good returns can be achieved only by staying/participating in the market for a long tenure. I had shared a Morning star research results conducted in 15 countries (India is not in the 15) and their observation is that for long term investment, Equities are better than Debt. The reason cited is that the debt play is risky in the long run as it might yield returns lower than prevailing inflation whereas Equity Investments were comfortably beating Inflation 

Now Rahul Dravid joins Tendulkar to bat. In his own style, Dravid plays defensively to pick ones and twos and India makes 45 runs in the first 10 overs for 1 wicket (Shewag). Sachin is worried as Dhoni sends a message through the 12^th man asking him to accelerate, the target being high. Wasim brings the spinners and part-time bowlers as the 3 star bowers can bowl only 30 overs between them.

Sachin tells David that he will go for the shots as it is very difficult to score when the 3 pacers bowl (Akram, McGrath and Marshal) and Rahul can play the anchor role till the end. Sachin hits boundaries and sixes with the score moving to 140 in 20 overs. Unfortunately he gets out in the 21^st over, caught by the wicket keeper, though he was playing well without taking risks.

You can play safely through SIPs but if you are looking at building a huge corpus, SIPs alone cannot help unless you start early in life with a huge monthly contribution and step up the SIP every year.

Currently the market is trading at 15% below the long term averages (EPS) and conducive for Lumpsum investment. This is akin to going for shots and clear the boundaries, when the bowlers are weak. When you were willing to invest when Sensex was 29000, what stops you investing at 25000? If we still play defensively, not going for big shots, then there is no way you will reach the target of 351. The fundamentals of Indian economy are good but the stock market behaves in a bizarre manner like a voting machine (Most of the states in India vote for one party and repent for 5 years and in the next election chose the other to repent more than the first. Good example is the Tamilnadu story where people vote for AIADMK and DMK alternatively, ending up miserable) similar to investing big when the market valuations were high but not using the opportunity that is present when the valuations are attractive.  However like a weighting machine that shows the correct weight without any deviation, Markets do reward the long term investors who have waited patiently unlike investors who try and cut the loses and exit when the markets are down, thereby forming a bad impression of Equity markets

Please remember that Indices may be dragged down because of companies like Tata Steel and Hindalco that are performing poorly as the commodity prices are at a 10 year low, fund managers exit these stocks unless it is a contra theme fund. In most cases actively managed MFs fall lesser than Sensex that carries such baggage.

Couple of wickets are lost as Indian batsmen try to clear the fence but get caught in the deep mid-wicket and long leg as they are not clear whether to settle down or start hitting from the first ball. Being a middle order batsman is quite difficult and more so when you chase a huge total.

Similarly investors need to have a strategy and plan as how to build wealth. Instead, investors enter the market in highs and exit when the market is low and complain saying equity market participation is like gambling.  Trying to score runs is also risky compared to playing it defensively. Playing defensively will take you nowhere when chasing huge targets. India chased 334 in 60 overs against England at Lords in 1975 when Indians were not used to one day cricket. Gavaskar was not out for 36 runs in 174 balls and India made only 132 for 3 in their 60 overs. 

Dhoni is yet to bat and sends the 12^th man again to pass on the message to Dravid, asking him accelerate the score as the required run rate has crossed 10 per over.

You can’t make it to the playing 11, if you do not perform and even big cricketers   have been dropped. As Financial advisors, we construct Equity portfolios for investors with the objective of getting optimum returns with a risk appetite suitable for the investors and if the fund underperforms, as part of the review process, give them some time to turn around else eject them out. There are some very great funds which have been performing well for many years in the past but under the radar now for lack of performance with the possibility of getting eliminated from the portfolio. I remember even players like Dravid were observed and put under pressure due to underperformance in one day cricket  (Don’t remember when).

There are some popular players in India who performed consistently well in Ranji Trophy and league matches but did not make it to Indian One day squad (I remember a popular Tamilnadu player but do not want to name) or just played couple of matches for India (could not establish himself in the international cricket). If you make small investments or start late to build wealth, then you will not be able to achieve the desired corpus for all your goals and have and to compromise some.  

I leave it to you to guess the result of the match  – India XI or World XI ?.

Thanks for reading this patiently and have a nice weekend!   

 <Blog # PenguWIN 1037 – One Day Cricket and Equity Markets>