Fear in Stock Market is bigger than Third World War: Raamdeo Agarawal, MOFSL

"This is a golden opportunity to invest in the market but the investment will depend completely on investors understanding of value, not the price," says Raamdeo Agarawal, Chairman & Joint Founder, Motilal Oswal Financial Services Limited (MOFSL). During a candid chat with Anil Singhvi, Managing Editor, Zee Business, Agarawal said, "This is a right time to go for SIP and an investor can also opt for a short blast Systematic Investment Plan (SIP) if he thinks that the existing atmosphere will change in next 3 months or so." Edited Excerpts:

See Zee Business live streaming below:

Q: Dow has plunged more than 20% in the last 19 days and entered into the bear market. It reminds me of the great depression of 1930 when Dow fell 20% in 15 days. So, is it unprecedented and you have seen it for the first time in your life?

A: This is the first time for me. It can't be explained that a virus that has claimed lives of around 4,000 people has shut down the whole world i.e. China has closed itself and I feared the most when I came to know that car sale has dropped by 90% in the country, some 10-15 days back, but the market was at an all-time high. I think the market was ignoring its seriousness for many days even when China, the world's second-largest economy, was closed and was making new highs. The market remained ignorant on it because fewer updates on it were available. But, it had an impact after it reached Europe and Italy and now it has reached to America. Shut down is the only solution for it which has bought the world economy at a standstill. Let's consider that the 80 trillion of the world economy is shut down for two-three months and reduces the economic activity by 10% then 60-65% consumption will come down and your investment activity will come down then the economist will have to think about how to think about the situation which is unprecedented to shut down the complete economic activity for 2-3 months. This will put a no on sales of the homes, cars, discretionary spend, tourism among others. In fact, the whole tourism sector has come to standstill as there is no flying. However, this is not a permanent story and is happening just for a quarter or a certain period like two-3 months. Its antidote will be out and it will also contain in itself.

Q: Is there any similarity between 2008 and 2020 or there is some difference between the two, we fell more than 50-55% in 2008? 

A: Fall is one thing but there was a fear in 2008 but this time there is no fear, at least in my mind. It was different in 2008 because the damage that was happening then seemed to be permanent damage. There was a fear that financial institutions would survive or not. Basically, it was a credit crisis which was seizing the entire system. Conditions are not similar this time but the risk will come in different shape every time and this is a risk for the equity market. No, this is a 3D Avataar of risk and people fear the same in the stock market and you get two-three times to return from the market for the same risk. Everyone is aware that there can be a risk and it has arrived now. So, whatever you have done at the good times will only work today like the type of companies you have bought, how much has been bought, do you have leverage in them or not, do you have leverage in the company or not. All leverage machines are going to be hurt the most. The businesses that are running without leverage and on net cash will not be tensed although their business may be down for 2-3 months those whose breakeven level stands at 80% and have leverage will feel the pain.Q: Leverage is available at both places, the business as well as in the stock market. 

A: Person in the stock market will erode immediately but the business will take its time. In the stock market, in my initial days, I learnt that you can do anything here but never buy shares by borrowing. During my conversation with one of my friend, earlier this week, and had a chat on Warren Buffet, who has floated a bond of 1 billion euro at zero interest rate. My friend asked me that will you like to buy a 20-year-old bullet at zero interest rate or so, then I said I can just buy shares but will not like to buy shares after borrowing even if it is available at zero interest because I will have to return the money. Don't borrow to buy shares if you want to be tension free in the market. You will have to bear the quotation loss and I don't like it a lot - for instance, I have a portfolio of Rs100 crore and it has turned up to be Rs 90-95 crore and I will not like it. But I am more worried about the clients whose investment is falling because they might not have the same patience that I have, which may increase the pain.

Q: Your Guru, Warren Buffet, has proved his mete once again and is sitting with cash of 100-1256 billion. What have you learnt from him under such an environment?

A: The first thing is waiting for the value. Value is what you get, while the price is what you pay. Until and unless you haven't created value and don't have a sound understanding that you have created value, then don't do it. Sometimes a situation arises where you feel that everyone else is earning more than you and you are the ones sitting in the corner with nothing and you are an underperformer. So you have to do something to earn before the investor takes all the money. So, you will have to do something to save your business. These types of pressure are the enemy of true investment in the stock market. He has noticed the underperformance of 8-10 years but he kept increasing the cash flow. I am sure that he must have started buying his shares till now and if it decreases much in future, then he may even buy his own shares, which will create value in his own shares. 

Q: What people, who still have shares in their portfolio, should do now?

A: They should be silent and plan a tour and don't engage their mind on the market because it will just give stress to you, which is not required. The problem will stay a few more days but the best side is that the problem is temporary. 

Q: What makes you think that this is a temporary problem? Do you think the stress will end as soon as the corona is omitted? 

A: Obviously. China - where the problem came into existence - is shutting down its hospitals because the number of cases has reduced sharply to 10-20 cases.

Q: It means it may end in the next two months?

A: It is a belief but it is uncharted territory and is unprecedented. Coronavirus has created a problem in which it has changed our behaviour. And, doctor social media is scaring off people and is able to scare even those who are not into the habit of being afraid. Same is happening in the case of the market, people are tracking Dow and Futures. But they are forgetting that there are only 50-60 cases in India, which is the best-managed kind of situation right now but the fear looks as if there are 5-10 lakh cases of the virus. This is the fear of the market, not the coronavirus. I can just say that the fear in the market is bigger than the third World War. Just be rational and the most important thing right now is to keep your mind stable. 

Q: Shall people who have some cash should invest in this situation?

A: This is a golden opportunity for people to invest in shares right now.

Q: But there is a confusion that should they invest right now of should wait for more decline?

A: They can choose a SIP for the purpose. It totally depends upon your understanding of the value, not the price, which is falling daily. You will have to identify the value of the stock that is available at a price of Rs 2,000 today, i.e. what is its value Rs 3,000 or Rs1,500 or Rs 1,000. Every expectation of the value will be reached in this market. If you want to buy at the lowest, then do not enter the market as that is just for liars and fraudulent guys who just make stories that they bought it at the lowest. You should buy it at a good price. Good price according to me is that if a particular thing should be priced at Rs100 and I am getting it at Rs90 today but after I bought it, the price went down to Rs80, which means I should buy more shares and if it goes down to Rs75 than I should buy some more and then just relax. The value will increase eventually. But no one can predict the time when it will reverse and the form of reversal as in V-chape, U-shape or L-shape. You are in complete uncharted kind of situation. It is unprecedented in which the global economy like America, China, Italy and Korea among others are shut down. And, visas are being cancelled to get in or get out, both sides. It will continue for a month or two and will create a panic situation in the market. Even, we are not aware of the way the investors will behave as no one is aware of the direction in which the fear will move but the intensity of fear is very high at present. This is the right time to go for a SIP. One can also go for a short blast SIP if he feels that it will end in the next 3 months. I can just say that don't try to time the market. 

Q: Bear Market has a life of 204 days on Dow, i.e. 9 months, and 150-160 days on S&P after which these indices come out from the bear market. If we take nine months as the benchmark then do you think that the next three months are perfect to invest in the market and wait for the next 3-5 years?

A: Do what you understand. Don't fear after getting a value. 

Q: Should the investor go for the mutual fund if he is not able to understand?

A: Yes. Mutual Fund is a tool and it is being done at our end. I have noticed in a mutual fund that even the fund managers opt for something that is popular or some analyst recommends it. You will get an edge, where your understanding is better than the market. The market will pull down almost everyone but you will have to understand that this company has been hit forcefully and you should have this understanding. 

Q: Can you name the stocks or sector that will run after the there is an improvement in the atmosphere and a vaccine for corona is discovered?

A: My style of working is based on QGLP. This is a time when you will get to know about the good stocks. The stocks that remain good even under tough conditions are good. For instance, the banks that are losing their valuation at present are bad and those who have a minor impact or is standing firm is good. So, the market will differentiate. Similarly, good companies will maintain their prices and will face small correction and this is your true friend under a bad situation. That's why I need an investment vehicle that just don't be good at good times but remains firm even under bad situations. It is going to happen with good companies, which are termed as outstanding companies and they are not available at low prices even at bad times. So, I will advise you to buy expensive companies even at bad times, it doesn't mean that buy something that is available at Rs10 by paying Rs20 but you can buy it if it is available at Rs10. This is a great time to buy high-quality companies time is a friend of good companies but equally bad for bad companies. It is a golden opportunity to buy for people who are sitting with cash as this is the right time to invest in their dream companies as they are available 20-30% lower than their actual price. This is time to build a quality portfolio. 

Q: Tata Motors is available in double-digit and ITC is at its lowest of 8-10 years. But there is a confusion that should I take Tata Motors at Rs 75 or go for Maruti at Rs 5,000?

A: It totally depends on understanding. If I have an understanding of Maruti but not about Tata Motors then I will go for Maruti. I am saying that I don't understand Tata Motors and it doesn't mean that it is a bad stock. Work as per your understanding because at the end you are your judge as well as a lawyer in the court. You will win only if your understanding is better than the understanding of the market. You know something about the company and its future, which the market doesn't know.