Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
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Motilal Oswal Dynamic Fund (Div-A) - 12.7364Motilal Oswal Dynamic Fund (Div-Q) - 11.9304Motilal Oswal Dynamic Fund (G) - 13.54Motilal Oswal Dynamic Fund-Dir (Div-A) - 13.0214Motilal Oswal Dynamic Fund-Dir (Div-Q) - 11.9237Motilal Oswal Dynamic Fund-Dir (G) - 14.1843Motilal Oswal Equity Hybrid Fund - Direct (G) - 12.2496Motilal Oswal Equity Hybrid Fund - Regular (G) - 11.8374Motilal Oswal Focused 25 Fund - Direct (D) - 18.41Motilal Oswal Focused 25 Fund - Direct (G) - 26.8181Motilal Oswal Focused 25 Fund (D) - 16.7011Motilal Oswal Focused 25 Fund (G) - 24.2378Motilal Oswal Large and Midcap Fund - Dir (D) - 10.18Motilal Oswal Large and Midcap Fund - Dir (G) - 10.18Motilal Oswal Large and Midcap Fund (D) - 9.9958Motilal Oswal Large and Midcap Fund (G) - 9.9957Motilal Oswal Liquid Fund - Direct (Div-D) RI - 10.0077Motilal Oswal Liquid Fund - Direct (Div-F) RI - 10.0081Motilal Oswal Liquid Fund - Direct (Div-M) - 10.0593Motilal Oswal Liquid Fund - Direct (Div-Q) - 10.0325Motilal Oswal Liquid Fund - Direct (Div-W) RI - 10.0096Motilal Oswal Liquid Fund - Direct (G) - 10.9026Motilal Oswal Liquid Fund - Regular (Div-D) RI - 10.0055Motilal Oswal Liquid Fund - Regular (Div-F) RI - 10.0077Motilal Oswal Liquid Fund - Regular (Div-M) - 10.0578Motilal Oswal Liquid Fund - Regular (Div-Q) - 10.0314Motilal Oswal Liquid Fund - Regular (Div-W) RI - 10.0165Motilal Oswal Liquid Fund - Regular (G) - 10.8722Motilal Oswal Long Term Equity Fund (D) - 14.9474Motilal Oswal Long Term Equity Fund (G) - 16.8692Motilal Oswal Long Term Equity Fund -Dir (D) - 16.245Motilal Oswal Long Term Equity Fund -Dir (G) - 18.2384Motilal Oswal Midcap 30 Fund (D) - 17.7946Motilal Oswal Midcap 30 Fund (G) - 24.909Motilal Oswal Midcap 30 Fund-Dir (D) - 18.2986Motilal Oswal Midcap 30 Fund-Dir (G) - 27.05Motilal Oswal Multi Asset Fund - Direct (G) - 10.1277Motilal Oswal Multi Asset Fund (G) - 10.0917Motilal Oswal Multicap 35 Fund (D) - 22.8229Motilal Oswal Multicap 35 Fund (G) - 25.9054Motilal Oswal Multicap 35 Fund-Dir(D) - 22.9266Motilal Oswal Multicap 35 Fund-Dir(G) - 27.5652Motilal Oswal Nasdaq 100 FOF - Direct (G) - 18.098Motilal Oswal Nasdaq 100 FOF - Regular (G) - 17.96Motilal Oswal Nifty 50 Index Fund - Direct (G) - 9.6931Motilal Oswal Nifty 50 Index Fund (G) - 9.66Motilal Oswal Nifty 500 Fund - Direct (G) - 10.8634Motilal Oswal Nifty 500 Fund (G) - 10.7829Motilal Oswal Nifty Bank Index Fund - Direct (G) - 8.8425Motilal Oswal Nifty Bank Index Fund (G) - 8.7775Motilal Oswal Nifty Midcap 150 Index Fund (G) - 11.4739Motilal Oswal Nifty Midcap 150 Index Fund-Dir (G) - 11.5594Motilal Oswal Nifty Next 50 Index Fund - Dir (G) - 9.5541Motilal Oswal Nifty Next 50 Index Fund (G) - 9.5017Motilal Oswal Nifty Smallcap 250 Index Fund (G) - 11.1296Motilal Oswal Nifty Smallcap 250 Index Fund-Dir(G) - 11.2131Motilal Oswal S&P 500 Index Fund - Direct (G) - 11.3669Motilal Oswal S&P 500 Index Fund (G) - 11.3269Motilal Oswal Ultra Short Term Fund - Dir (Div-D) - 9.7157Motilal Oswal Ultra Short Term Fund - Dir (Div-F) - 9.734Motilal Oswal Ultra Short Term Fund - Dir (Div-M) - 9.7226Motilal Oswal Ultra Short Term Fund - Dir (Div-Q) - 9.8623Motilal Oswal Ultra Short Term Fund - Dir (Div-W) - 9.7265Motilal Oswal Ultra Short Term Fund - Dir (G) - 13.7663Motilal Oswal Ultra Short Term Fund (Div-D) - 9.7192Motilal Oswal Ultra Short Term Fund (Div-F) - 9.7296Motilal Oswal Ultra Short Term Fund (Div-M) - 9.7197Motilal Oswal Ultra Short Term Fund (Div-Q) - 9.861Motilal Oswal Ultra Short Term Fund (Div-W) - 9.7226Motilal Oswal Ultra Short Term Fund (G) - 13.3865

Buy Right Sit Tight Insights - June 2018

Blog Blog Details
  • June 15, 2018
  • Raamdeo Agrawal|
  • Chairman, Motilal Oswal AMC

Dear investor friends,

Over the last 3 years, the Nifty Midcap Index (12% CAGR) has outperformed the Nifty (8% CAGR). However, 2018 year to date, the Midcap Index is down 14%. Thus, several Midcaps have seen prices fall by over 25% in a matter of just six months. So, what should the investor do in such a situation?

I address this using the concept of Permanent Capital Loss and Quotational Loss.

Permanent Capital Loss versus Quotational Loss

In his 1962 letter to partners of Buffett Partnership, Warren Buffett writes –

It is a testimony to Warren Buffett’s wisdom and foresight that his words way back in 1962 are still as relevant today. In fact, every word of the above quote is insightful.

“I cannot promise results to partners”

Investors would do well to understand this fundamental truth about equity investing – there is no guarantee not only of returns but even safety of the capital invested. Equity investors need to be more skillful than the market to ensure the safety of capital and reasonable return on investment. Risk-averse investors should invest primarily in bank fixed deposits and that too of credible banks!

“Our investments will be chosen on the basis of value not popularity”

It is said that, in stock markets, most people know the price of everything but the value of nothing. As Warren Buffett himself has said, “Price is what we pay, Value is what we get.” Thus, before investing in any stock, it is most important to have a clear idea of its value. Mere popularity of a stock is no guarantee of its investment performance.

“We will attempt to bring the risk of permanent capital loss (not short-term quotational loss) to an absolute minimum”

This is the core of the quote. There are two kinds of risk associated with any stock –

1.       Permanent Capital Loss; and

2.       Quotational Loss.

Permanent Capital Loss

Permanent Capital Loss refers to a massive fall in stock price because the value of the underlying business is significantly eroded. The proxy for value is a company’s profits and profitability. Value erosion (i.e. lower profits), and hence, Permanent Capital Loss in a stock may happen due to a variety of reasons, both industry-specific and/or company specific.

 

Quotational Loss

Unlike Permanent Capital Loss, Quotational Loss is merely a short-term fall in the stock price with the underlying value broadly intact. Some reasons for Quotational Loss are –

·      Fall in the broader market itself

·       Very high valuations

·       A minor setback in the company’s fundamentals e.g. lower-than-expected profits for a quarter or two, fire in the company’s plant, the slight delay in the new project, etc.

Thus, Quotational Loss in a stock offers an excellent buying opportunity due to unilateral lowering of valuations. However, buying during the Quotational Loss phase demands two things from the investor –

1.    Fundamentally, a high level of conviction that the setback is temporary; and

2.    Behaviorally, a high level of courage and patience. It requires going against the popular saying, “Don’t catch a falling knife!”

Examples

Consider two companies from the same sector, IT – DSQ Software and Infosys. The profits and stock price of both companies hit a high around year 2000, led by the Y2K opportunity and dotcom boom. Post the bust, the stock price of both companies collapsed. However, DSQ went into oblivion – it reported huge losses, its stock price never recovered, and the company ended up getting de-listed. Thus, there was a Permanent Capital Loss.

In contrast to DSQ Software, Infosys’ profit went from strength to strength. As a result, its stock price recovered within two years of the dotcom bust, and soon cross the previous high. Thus, there was only a Quotational Loss.
In effect, the sharp 50% fall in stock price was a great opportunity to buy Infosys in March 2002 at P/E of 31x versus P/E of 206x in March 2000.

“… by obtaining a wide margin or safety in each commitment and a diversity of commitments”

Coming back to Buffett’s quote, there are two ways to avoid Permanent Capital Loss –

1.    At the individual stock level – By building in a wide margin of safety i.e. value significantly higher than price; and

2.    At the portfolio level – By using the principle of diversification i.e. owning a basket of stocks. This way, even in the unlikely event of a Permanent Capital Loss in any stock, the impact on the portfolio is muted.

“My wife, children and I will virtually have our entire net worth in the partnership”

This part of Buffett’s quote is not related to the topic of Permanent / Quotational Loss. Rather, it refers to an important concept called “Skin In The Game” i.e. in any active, what is the level of a person’s participation in both the gains and losses.

This topic merits a separate discussion in itself. For now, there are two key implications for investors –

1.   Choice of companies to invest in:  Investors are generally better off investing in companies where the management has high Skin In The Game i.e. management fortunes are closely linked to fortunes of the company. This is typically so in owner-managed companies or where the senior management has a significant level of compensation by way of stock options.

2. Choice of portfolio manager:  Those investors who choose to invest via mutual funds are better off checking whether their portfolio manager has high Skin In The Game. The question to be asked is – Does the portfolio manager stand to lose if I lose value in my portfolio? If the answer is yes, your money is in fairly safe hands.

In conclusion …

We come back to where we started – Several Midcaps have seen prices fall by over 25% in a matter of just six months. So, what should the investor do in such a situation? The answer –

·     Evaluate the likely reasons for the price fall.

·     If there are signs of a Permanent Capital Loss, cut your losses and run.

·     However, if it is just a Quotational Loss, back up the truck and load.
You will most likely end up with a Permanent Capital Gain!

I welcome your feedback and suggestions for improvement. Please email the same to insights@motilaloswal.com.

Raamdeo Agrawal

Chairman

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