Surviving the 2008 Stock Market Meltdown – Part Deux

Posted on April 3, 2011

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In part 1 of this story, I had set the context in which I made the decision to invest in 10 stocks on 30 Jan 2008. As I had noted there, making the decision to invest just before the meltdown was not hard to live with; one could always rationalize the decision by saying that the future is unknown and difficult to predict with any accuracy.  The harder part was watching your investment go down in value every day for almost 15 months and stopping yourself from following the herd and selling.

The 10 stocks that I chose to invest in and the price at which I bought these stocks are in the table below.

Stock Price Stock Price Stock Price
Ajanta Pharma Ltd. 85 Eastern Silk Industries Ltd. 214 Excel Crop Care Ltd. 108
FCS Software Solutions Ltd. 86 Kamdhenu Ispat Ltd. 36 LT Foods Ltd. 67
Pitti Laminations Ltd. 58 PAE Ltd. 30 Su-Raj Diamonds & Jewellery Ltd. 64
Surya Pharmaceutical Ltd. 115        

As is obvious from their names, these stocks represent a wide spectrum of industries – pharmaceuticals, software services, agrochemicals, auto ancillary, etc. What was common to these stocks was my assertion, based on analysis, that they all represented well run companies with:

  1. a strong track record, in the recent past, of delivering positive earnings and a consistent growth in earnings,
  2. a strong balance sheet with minimal leverage demonstrated by their debt and working capital requirements,
  3. and importantly, were available at prices that represented significant discounts to what I considered their fair values.

These assertions were put to severe tests in the following 5 quarters. Considering what was going on in the broader market, the first 2 quarters after I made the investment were actually not too bad . My portfolio lost about 20% in 1Q08 and managed to stay flat in 2Q08. The real fall started from 3Q08 and by the time it had done falling in 1Q09, my investment had lost a whopping 59% of its value – Rs. 100 had become Rs. 41. I would be lying if I said that all through this time I was happy and confident. There were many bouts of fear and wanting to run and it was as if there were two investors inside my head – one that wanted to cut the losses and run and the other that continued to believe the analysis that had led me to buy these stocks in the first instance. I am glad that the latter investor prevailed.

When I was a little child, my doctor had this wonderful poster in his waiting room that said – If good times don’t last neither do bad times. Even this shall pass. Nothing can be more appropriate to what happens on a stock market and what happened during the period 2008-09 and specifically in the second half of 2009. As the sub prime crisis in the US waned and the general sense of panic receded, investors realized that stock prices had been mercilessly beaten and good companies were now available at a huge discount to their true value. Investors now started to make up for lost time, grabbing all the stock that they could buy. In the last 9 months of 2009, buying frenzy pushed the index to almost double its value. It was during this period that my 2008 investments began to recover and by the time 2009 was done, my investments had posted a nice 11% growth over the price I bought them at. This growth looks even better when you realise that inspite of the frenzy in the last 9 months of 2009, the Nifty still closed almost 15% below its value at the beginning of 2008. The chart above tells the tale graphically.

I had learnt two important lessons:

  • the value investing approach does indeed help identify stocks that will deliver, over the medium term, more than adequate returns, and more importantly
  • I need to trust my analysis-led stock picks, even in the face of near total panic in the market and serious short term losses.

The first lesson you could learn from a book but the second one has to be learnt by feeling scared and then conquering your fears.

I continue to base my stock picking on the value investing approach and now as I manage the funds of private investment trusts, I hope I can deliver similar if not better results.

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