Risk and resilience for your portfolio of stocks
08-Feb-2024 •Dhirendra Kumar
I have no idea where the Paytm story is heading. As my readers know well, even minus the regulatory troubles, I didn't have any great opinion of Paytm, either as an investment or as a business. Now, with the RBI coming down like a ton of bricks on Paytm Bank, things are much, much worse.
In the first three days after RBI's action, the Paytm stock dropped by a cumulative 43 per cent. For a widely held stock with a large market capitalisation - Rs 42,000 crore before the drop - that's a pretty big wipeout. Despite widespread scepticism about Paytm, as many as 70 equity mutual funds and many other kinds of institutional investors own some of it. Plenty of individuals, too. A 43 per cent drop in three sessions is probably quite rare for such a stock and, in fact, may never have happened earlier outside of a general marketwide rout.
Even so, today, this page is not really about Paytm at all but about what investors should do when a stock they have invested in gets Paytm'ed, which is a new sense in which 'Paytm' can be used as a verb. On the face of it, this theme is deceptively similar to what I wrote about just last week, which was based on the (much smaller) drop in the stock price of HDFC Bank. HDFC Bank's stock fell a total of 15 per cent in mid-Jan and has since settled at that lower level. Of course, since HDFC Bank is a giant, its 15 per cent market drop amounts to Rs 1.77 lakh crore, far more than Paytm's entire market cap.
The two cases are fundamentally different. In HDFC Bank's case, I had essentially said that established companies have built up significant business momentum over time. Their size and success are no accident - they stem from deep strengths that take years to erode. Market leaders are resilient - a cyclical decline does not negate their intrinsic advantages and capabilities to eventually bounce back and thrive again.
Does this apply to Paytm? Clearly, it does not. 'Market leader' does not quite have the same meaning when a company has never made a profit and, in fact, is in a business where no one has ever made a profit. On top of this, when a regulator shifts the ground from under your feet, then investors have to take a long, hard look at the investment. So, what is the solution to sudden shocks that a stock can have?
The answer is that old and boring one - diversification. Investors should build a balanced portfolio across sectors and companies rather than betting too heavily on a single stock. This cushions the impact when any one company faces trouble. But that's not all. Diversification isn't just about spreading your investments across different sectors or asset classes. It's also about understanding the inherent risks and potential of each investment within your portfolio. In fact, when I look at the exposure of the 70 mutual funds that hold Paytm, I see a live demo of this. The median holding in Paytm is less than 1 per cent, while only 8 funds are above 2 per cent. At a time when the rest of the market is booming, even a severe fall is well-cushioned by the rest of the portfolios.
I would say that it's only individuals who get influenced (finfluenced?) by lucrative tales and lose sight of the underlying principles of safe investing. Based on some examples I have, they were the ones who were holding 10-20 per cent because they believed that Paytm was on the mend as a business and was good for big gains.
However, like I said, this is not about Paytm at all. One can never ignore diversification, nor other basics like asset allocation, rebalancing and cost averaging. Times like these - when the markets are zooming up - are always the most dangerous. Now is when we are most prone to get careless. Whatever happens with Paytm will happen. Make sure the basics of your investments are in place.
Also read: Mechanical rules for investing