The Thoughtful Investor
Identifying The Next Big Trend
“Most investors remain focused on trying to find the next big trend rather than participate in the ongoing one.”- Basant Maheshwari
Somewhere, there is always a bull market: in some asset class. In the 1970’s when Dow Jones was going nowhere, gold, silver and crude oil were hitting new highs.
Whatever happens globally happens in India. For example:- If in the 1980’s investors made a lot of money in the MNC’s names like Colgate, Nestle, Hindustan Unilever, that’s because the business of these consumer companies had rewarded shareholders in the U.S and Europe.
New Sector for each bull market. The bull run always happens in stocks that were not the leaders of the previously concluded bull markets and would normally come from new sectors. For example, cement led a bull run in 1992, but it was IT companies who led the bull run in 2000.
Above average growth of company and industry. One should look at the revenue growth of most of the companies in a specific sector. For example:- when software was becoming a trend, most of the IT companies including Infosys and Wipro showed high revenue growth.
Scale of opportunity: A scalable business is one where there is scope to grow the business as much through volumes as by pricing. Investors should also try to estimate the market size in relation to the leading player in the segment.
First generation entrepreneurs: Most Companies that start a new trend are incubated by first generation entrepreneurs. For example :- Google, Infosys, etc.
Stocks hitting all time high: Focus on the sector where most of the stocks have started to hit new all time highs. Wealth is also created by buying at high and selling it at a higher price.
Small Market Capitalization: Most of the bull market stocks will be sector leaders having small market capitalization. Companies like Page Industries, TTK Prestige were small companies to start with.
Relatively Expensive Valuation: The actual threat to a bull market stock is not excessive valuation but slowing growth as valuations remain expensive and then over-stretched till such a time that the company keeps delivering above average rates of growth.
Illiquid and unpopular: It suggests investors are willing to take a long term view without undergoing quick buy-sell decisions. Unpopularity suggests it is not actively followed by the analysts of the research houses of Dalal Street.
Lack of entry barriers: A spate of IPO’s towards the end of the run is important and with very high entry barriers it will become difficult for new companies to join in.
Bear market IPOs: In a bull market if there are 10 IPOs, maybe 9 out of them will be bad, but in a bear market if there are five IPOs, one of them would have the potential to become a multibagger.
Pickaxe and Shovel Theme - The development and spread of the internet increased the efficiency levels in the user sectors of the economy. So the author uses HDFC Bank as an example as it was the direct beneficiary of the computerisation and internet drive.