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December 2017

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2017 was a great year for most Stock pickers and our core Stallion portfolio was up about 100% this year against 27% for Nifty. This was a year where Low PE, High PE, High Growth, No Growth, Cyclicals, High Quality, Low Quality, Value, crypto-currency absolutely all worked and creating wealth was a easy job for Smart Investors.

 

The Secret of catching Future Multibaggers is studying Past Multibaggers, market follows a pattern, its always similar. Below are my Biggest Learnings of 2017

 

1) Never Ignore Cyclical Stocks – We at Stallion haven’t invested in Cyclical stories and commodities in our core portfolio but we invested considerable time this year in understanding previous cycles of Sugar, Paper, Chemical, Metal, Power etc between 1994-2016. Every Cyclical Cycle is broadly the same, and the maximum amount of money is made when things go from truly horrible to just getting better.

 

The Reason Cyclical Stocks run up is due to a Temporary mismatch in Demand and Supply which gets accelerated Earnings Growth for 8-16 Quarters. The Most Important Factor in Cyclicals Stocks is Timing, because over long term these stock are not going to create wealth but in the short term (1-2 Years), they can give you 5-10x gains. After studying data for 20 years, we have come a conclusion that in absolutely every Cyclical rise, the prerequisite was Insider Buying in the Entire Sector (Not just one Company), be it Sugar, Paper, Chemical, Graphite or even Steel very recently.  

 

 

2) Every Bull Market is the Same – Every Bull Market start with Money Flowing into High Quality, High Growth Stocks, Followed by High Growth and Low Quality, and Finally the best returns are made in Low Quality, Low Growth Companies. As Expected High Growth, High Quality have under performed in the latter half of this year, whereas Low Quality, High Growth was the star in the last 6 months.

 

3) IPO in Bull Market – Good Story, Strong Earnings Growth, Small Float, Perceived Longevity in a bull Market backed by a New Entrepreneur (not a Corporate house like Godrej or Reliance) are the perfect ingredients  for a Bubble. The Valuations of D-Mart, Shankara, Team Lease etc can’t be understood (unless you value them using 2027 financials ofcourse), and they can remain expensive for a long long long time till the end of this bull Market.

 

4) Bitcoin Trend – Every Old Bubble lays the Seed for the Next Bubble. In 1905 Electricity was Discovered by Thomas Edison and Electricity Manufacturing companies went up 1700x in next 10 years, which gave form to Radio in 1921. Radio was the only form of Entertainment, News and Radio Stocks went up 300x in next 7 years till 1929. The discovery of Electricity sowed seeds for Radio Bubble, Similarly Internet bubble of 2000’s layed seeds for Bitcoin in 2009 and 10-15 years from today i guarantee you that the Digital currency will be like what internet is today.

 

5) SME IPO’s –  They have created massive wealth for Investors, We took a Random sample of 30 SME’s and in 24 of them (80%) have huge Jump of Profitability right before the IPO Year (Be Smart Here). The Trend of SME IPO’s has just Started and someday within the next 10 years, there would be more SME’s than companies on the Main Exchange. A New India is being created backed by entrepreneurs who are solving problems, this is just the start though you have be a little smarter in picking up SME Stocks, PE Ratio isn’t the right matrix in SME, Management Quality is.

 

Conclusion – Our Economy is going from 2 Trillion to 5 Trillion in next 10 years, our country will make 1.5x more money than what we have created in last 70 years, there are going to be big Trends in the Market, this is our time to buckle up and catch those Trends. Markets were kind this year and we doubled our money, but we need to ride the Bull with caution as markets are running on back of Liquidity.

 

Disclaimer – Please use the above Information for education purpose only.

 

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We at Stallion Asset are keen watcher of trends around the globe, though we completely missed the Bitcoin Trend even after it always met criteria’s of a possible perfect bubble, we screwed up.

 

The 3 Most Important Criteria of a Perfect Bubble are

1) A Great Story about the Future

2) Nobody Understands how to Value it

3) The Asset In-Play should be very new to the market and scarce.

 

This Blog is more about comparing trends than explaining what Bitcoin is, because we ourselves have a limited understanding of the future of bitcoins.

 

Remember the Trends in any asset class are always the same, only the name changes, everything else is the same.  They always start with Solid fundamentals, which the blockchain Technology has, but then speculation takes things over and rapid rally in prices gets more investors (this is happening Now) and at the end they end up holding a futuristic business  at a ridiculous price.

 

When will bitcoin Prices fall and this bubble Burst? – I have no Idea when it will happen, can be 15,000, it can happen at 25,000, we have no tool to predict the madness of the Crowd but in these are 3 main pre-requisites of a Bubble getting Over and valuation definitely has nothing to do with it.

 

1) There has to be Euphoria

2) There has to be Bad News

3) There has to be Dry up of Liquidity.

 

 

Now we obviously have well very established point 1 but euphoria can definitely become a lot lot more euphoric and it will unless you get bad news and dry up of Liquidity, the bubble wont end. It will definitely not end only because someone think its expensive. This dry up of Liquidity & Bad news can happen due a Bitcoin Exchange collapsing, a Fraud, possibility of a hack, governments screwing up, but it will happen soon.

 

The Road Ahead – The Stock Market is always futuristic and right, though they always over do it. The Price of Zee Entertainment went up 200x in 1998 and 1999 because markets believed that in the next 10 years every home would have a color TV and they would watch Zee TV, well the markets were right, but like always they overdid it and it took 16 years for Zee TV for reach its 2000 highs again. The Stock Price Corrected 95% as falling stock prices are followed by more selling.

 

Bitcoin is like the Infosys of IT Bubble, its the leader of the pack and all other new ICO’s are like the HFCL’s. I can guarantee you that you wouldn’t even hear about the name of the new ICO’s 5 years later. Remember even infosys fell 85% after the IT bubble. Again what markets believed was right that the world would be fully digital, they would search on the internet, shop on the internet but like always they overdid it in the Valuations.

 

Fun Fact- There is more than 90% Correlation between Google Search of Bitcoin and Price of bitcoins.

 

Can i Enter Bitcoin Now? – It is now a speculative bubble, its a great Example of greater fool theory, and to predict a top of a bubble is a job of the greatest fool. All I can say is that this is a trend and probably in the last few weeks or months. By the time this trend ends and you come to know, the prices will be down 35% and you would think that this would bounce back and then you would sell it . The Bounce won’t come and the prices would fall another 20-30%, and then you would think its already half, how much more will it go down and you know what would happen next.

 

How do i Know Bitcoin has Topped out – 1) Top would be made in Seconds and bitcoin will not spend time there.

2) Bitcoin will give a Dow Theory Breakdown and the pattern of Higher Tops and Higher bottoms would be broken.  There Would be a lower top made and a lower bottom.

3) Bad News and Dry of Liquidity will definitely have to happen for the bubble to end.

4) Bitcoin has never fallen more than 35% from its top after it crossed its previous high and gave a breakout, so right now your trailing stop loss would be 35% from its Highs. (Can’t Promise this will always work)

 

Conclusion – The Markets are never wrong about the Future, they just extrapolate and overdo it. Digital Currency is definitely the thing of the future and just like RBI is coming up with Lakshmi as India’s Digital Currency, every other country will come up with its own currency. We are very confident that the world would move from paper currency toward digital currency and this is definitely the Start. As far as Bitcoin goes, its a great technology, but right now at current prices its just speculation, history has been created and bitcoins will be remembered forever.

 

PS- Someone in some Book of his in 2025 would write “Crypto Currencies in 2017 were valued at 300$ Billion (can go higher), this is more than the Market value of the Entire Land in XXXX, this is worth more than the Entire Market cap of XXX Industry.”

 

Trends are always the Same, they are predictable, they are awesome, Catch one and you’re done for life.

 

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