You can tell a person from the heroes they worship. I worship Timothy Dexter.
An eccentric entrepreneur of the 1700s, he made bets that had no logic. But they turned out to be gifts of Providence.
For example, he was tricked into sending coal to Newcastle. Newcastle in England was the womb of coal. It was a move of the demented. But miners in Newcastle went on a flash strike, coal prices shot up, and Dexter made a tonne.
His business rivals suggested sending bed-warming pans — a winter tool — to tropical West Indies. His ship captain sold them as molasses ladles. Dexter made out again.
My Dexter moment came in the spring of 1991. At the foothills of the Harshad Mehta boom, I spied an opportunity in a company called Karnataka Ball Bearings. The company did not seem to be having a great market for its ball bearings or whatever it is that it made. Hence, it was making massive losses. Then one fine day, it announced it was closing down.
A shifty trader sidled up to me in the trading ring of the BSE and whispered: “Buy KBB.” I asked why. “It’s a sure thing: When it was operating, it was making huge losses. But now that it has closed down, the losses will shrink — heck, it might even turn profitable. And, by the way, I have some stock I can sell you.” I was a callow youth. My inner Dexter was seduced by the trenchant logic. It was God’s own stock. Of course, it was a set-up.
I bought at ₹5. Clearly, that low-IQ bull market thought the same and the stock went up to 150 or something. My moderately better IQ had me sell. I had my first fortune. You can be right for the wrong reasons and yet get rich. Mastering this is a rare skill.
I have since always believed that great fortunes are often the result of good fortune.
The reason I mention this little story is this: Can we call the Harshad bull market an actual bull market? Or a pseudo-bull market funded by public-sector banks, into a handful of stocks? A market that was played by a bunch of insiders (and Dexters like me)? Nah, it was just a tiny, rigged wave. Dr Manmohan Singh was denied credit. That would come later.
See exhibit 1. The earnings bars for the 1996-2000 tell a story. They are flat to declining. Corporate India was hurting real bad. Only one sector blew the lights out: Tech.
Again, it was an incestuous bunch of players who backstabbed each other all day on the trading screen, and backslapped at Geoffrey’s all night that made all the money. It met almost no test of a good bull market — depth, breadth, durability.
The inspiration for this piece came from the most cerebral sell-side economist in India, Dhananjay Sinha, who said to me, “India has had just two periods of profit growth”. And he shared the data the next day.
Onwards into memory lane. The bull market 1 that started in May, 2003 seemed different. It was coming out of 11 years of zero returns. It met all the tests — it was broad and inclusive, large and small caps all did fabulously. And it was durable. (See exhibit 2)
Our first real bull market delivered 50 per cent on the Nifty 50 and 76.5 per cent on the BSE Small Cap CAGR in rupee terms between 2003 and 2008. But, believe it or not, it delivered even more in dollar terms, as the rupee strengthened from 47 to 39 in the same period.
This was also an emerging market bull market, but India did better than most — 9 per cent GDP growth at 1 per cent fiscal deficit, with no long term capital gains tax, created lore about some investors that endures till today. But as I always say, there are no great investors, there are only great bull markets. That era was the real deal. Dr MMS would not be denied.
And then, our stock market engine idled for almost a decade. Till Covid.
And that’s when our second bull market in 36 years started. It met some tests but flunked a few.
For example, one of the key tests I apply to judge the quality of a bull market is something I call Time Shift Return Dispersion. It simply means that a true bull market should not require you to get your timing down to needle-point precision. So, the question becomes: Suppose you entered that bull market one month before or one month after the absolute bottom, what would your returns be compared with those of somebody who got the absolute bottom right. Exhibit 3 answers that: The 03-07 bull market return dispersion (Exhibit 3) is minimal. It did not really matter when you entered: One month before the bottom, you made 48.9 per cent. One month after the bottom, you made 47.8 per cent.
But now we come to the lower intestine of this bull market analysis.
As exhibit 1 shows, there was indeed a sharp growth in the NIFTY earnings per share (EPS) from FY22 onwards. However, some things are important to knead in: We had a corporate tax cut in FY20. That had approximately a 20 per cent positive impact down the road on EPS.
But there is a bigger accounting chimera that happened in FY22: The NIFTY EPS started reporting consolidated earnings. Before that, they were standalone. Exhibit 1 shows you the difference: The change in EPS accounting increased NIFTY EPS growth by around 40-45 per cent. The consolidation reduced, through a spectral shimmer, the PE of the market.
Of course, we also saw a post-Covid bump in government capex via fiscal deficits that remained very high for years after Covid. (And the fiscal deficit is winding down leading to a flattening of the capex). Exhibit 4 shows how how reality eventually wins over surreality.
Vivek Kaul, in his eye-opening piece in News Laundry, The case of the missing ₹80 lakh crore: who shrunk India’s consumption economy? helpfully filled up the other blank, the one of consumption size. As it turns out, by the government’s own revised GDP numbers, with the new base year of 2022-23, our consumption has been lower by a tad below $1 trillion over 4 years. You read that right.
Bull markets are often based on fiction, fantasy, fairy tales. But bear markets are always based on facts, figures, fundamentals.
Our second bull market is not Ben Johnson but it certainly has Maradona’s infamous “Hand of God”.
One final concerning fact, as exhibit 2 shows, is that the aggregate returns between bull market 1 and 2 have reduced sharply. In bull market 1, we got 50 per cent CAGR from large caps, and 76 per cent CAGR from small caps. In bull market 2, these same index returns have declined 36 per cent to 32 per cent from large caps and to 50 per cent from small caps.
Our bull market returns plane has shifted disturbingly down. The next bull market, whenever that happens, will probably deliver even lower aggregate returns. A larger base, negligible innovation, and ageing companies depending largely on domestic markets will contribute to this. Unless something changes.
Measured over the last 10-12 years, the NIFTY has delivered only around pre-tax 10 per cent. In dollar terms, it halves, despite reasonable GDP growth.
Foreign institutional investors, with their uncaged capital, see these data. If this is what India promises, and exits are plentiful because of systematic investment plan flows, it would be foolish not to take money off the table. Capital gains tax is only a pimple — the lack of long-term returns is the tumour.
So, here it is: The Indian stock market mythos of 36 years is wrapped in a diaphanous negligee, lashed together by a delicate, etheric sash of 1.6 bull markets.
To make money from here on will require a ground invasion, trench by trench, rather than carpet bombing. Way more difficult.
Indian investors should probably switch their Gods from Buffett to Dexter.
The writer is a well-known investor and founder of GQ FinXRay, an AI company. Shlok Rathod contributed to the data in the article