BULL in BEAR Market

Being bull in bear market has it’s own behavioural challenges . I too had few of them in 2008/09

1) Being Greedy on price :

I set buy price so conservative that the same is never reached . Second issue is the buy price is moving goal post . It keeps going down as market goes down … Again this often made me miss many a opportunities . This behaviour was prominent after being in bear market for atleast 6 months

2) Being Greedy on Volumes

Here I started making very high volume purchases during first phase of market fall leading to hitting position limits faster and not able to take advantage of future falls . This behaviour was prominent in first phase of bear market which had come after a long bull market . The desperation to buy was so much that I was ready to pay much higher price than warranted .

This can be only being reduced and not eliminated .

I found the best way to reduce the above behavioural bias was to set Buy and Sell price for stocks and volume you want own at start of year . - Keep 75% allocation of cash to be spent for these purchases

The rest 25% needs to spend when market are @ extreme - and you get opportunities in stocks which were not part of yearly plan or @ such a low price level that you feel allocation can be increased .

This worked for me in 2013 ( small & mid caps ) / 2016 ( for metals ) / 2017 ( IT & Pharma)

But the above strategy is still a big question in 2018 - Only in 2019 or 2020 I will be able to tell if it worked or not .

Till date assessment - first cut while the strategy seemed to have worked well in stocks which I had planned to buy and had price worked out @ start of the year … but on new stocks buys I got “greedy on volumes again” and bought them @ higher prices then I should have …

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Macro Deep Dive :

Current BEAR market is attributed to rising US yields ( interest rate ) : Lets study past to understand
how Interest rate increases impacts economy and stock market

  1. 1950s : US interest rate from near zero went up post WW2 … This was golden period for both stock market and economy … Now why is it that … The central bankers in this period raised interest rate for normalisation and not to fight high inflation , so the increases were more gradual . This path enabled business make investments with more clarity and savers got REAL interest.

  2. 1970s : Sudden increases in Crude oil - led to high global inflation and central bankers had to hike interest rate in response to control Inflation … This was more drastic 21 times averaging 6.25% pa . that is what stalled the growth . High inflation meant most of early savers lost money on real basis and combo of high input cost and high interest rates meant business had trouble investing in viable business projects .

By end of 1980s US treasury bonds were paying 16% interest rates … Imagine then what interest rates would have been prevailing in India it went far higher than 20% and Rupee depreciated BIG time … Leading to crazy things like Emergency , Nationalisation etc …

A GOOD lesson was learned during 70s crisis - that rates should not increased at fast pace …

  1. In 1994 -1996 … On back of strong economic growth FED started increasing rates slowly … The impact was felt exactly 2.5 years ( from start of rate hike ) later in form of Asian crisis wherein most emerging markets went into recession . But tech boom erased the memory fast …

  2. From Mid 2004 -2006 : Again on back of good economic growth FED started hiking rates slowly - 2.5 years later market cracked and we had 2008 /2009 Great Recession . This lasted for just 1.5 years unlike 1970s which was a painful decade…

  3. In Dec 2015 Fed started hiking rate again slowly . and now after 2.5 years ie in Sept 2018 we know what is happening …
    Are there added risk like … INFLATION – > Fiscal easing through Massive Tax cuts + Trade Tariffs may increase cost of inputs and final goods … Will Fed take knee jerk reaction to inflation like in 70s . I am not sure … but it will be interesting to watch what happens in next few months

Interesting Reading :

  1. https://www.businessinsider.com/every-interest-rate-cycle-since-1970s-2015-12?IR=T#january-3-2001-to-june-29-2004-12

2)https://www.theguardian.com/business/2018/feb/10/interest-rate-rise-federal-reserve-growth-crash-richard-sylla

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Management Con Call in financial service industry - Management Confidence is still high …

I have heard couple of concalls post quarterly results … Common questions

  1. Exposure to ILFS
  2. ALM Mismatches & refinancing
  3. Gr in high interest scenario
  4. Possible NPAs and defaults

I am amazed at the extent of confidence of some of managers in saying that they are not affected “unlike others NBFC” in refinancing their business , maintaining NIMs , they have best customers and they have first charge in case of defaults .

When management are overconfident - I am more scared … I think there are more skeletons there … otherwise why so much pressure on RBI to make PSU banks lend , why there is craze for supporting SME ( or is it supporting real estate ) . & who are NBFC these management are talking about … If financial services industry is so connected that one ILFS can cause issue what will happen when one BIG NBFC cracks …

While NBFC has been no no venture for me … I think I even need to wait till I increase exposure to private banks …

Non Leverage - Real Cash flows companies can be accumulated …

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My View is now many Sectors are bear phase and one can start SIP in them

Some sectors which are still to move to bear phase are

  1. FMCG
  2. Private Retail banks & some Retail NBFCs
  3. Insurance stocks
  4. Movie Exhibition stocks
  5. Large cap IT services

Interesting Perspective from market veteran

China Market in last 11 years have given negative returns … inspite of best GDP gr across world …

24%20AM

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Results on 1 Nov 2018

I failed to understand context of sharing these two articles in this thread . Kindly elaborate on the same …

You were bullish on HPCL

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Oh yes but price is too high to purchase the stock . I am looking to buy @ around Rs 120 odd

The following is part of discussion that I was having in another thread … It was relevant here too …

One basic theme in bull market – Leaders of last rally will not lead the next bull market rally .

So while we all have recency bias , we should try to forget stocks that grew 10 times in last rally and look what can lead the way up …

I see following themes merging you may like to spot winners and losers in these themes

  1. Increasing Power Demand/ Cost on account of increased economic activity
  2. Shift of bargaining power in financial services from Asset side to liabilities side –
  3. China Tariffs & Ganging up of Australia + Japan + US against China - Leading to shift in global supply chains
  4. Formalisation of Indian economy : RERA , GST
  5. Higher Interest rates and Higher Inflation unlike last 5 years wherein we had lower interest rates and inflation
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Sudden Reversal in last one week has surprised me … I had planned X/180 allocation from cash to equity right from Sept 2018 . Now may be for next one week I might to halt it . To review asset allocation decisions post Diwali.

Coming to Themes :: Update 3 Nov 2018

Increasing Power Demand / Cost – Interestingly after a long time I saw companies in their concall mention increase in power cost and trying to build captive power plants or wind power to hedge their power cost … This theme can play out in 2019 but one needs to watch what will happen once coal supply chain issues are sorted out and NTPC is able to run its full capacity … NTPC has ability because of its size and societal commitment to reduce Power cost for all …

For time being merchant power companies may do well and also possibility of revival of dead and out power plants may happen …

  1. Shift of Bargaining power in Financial services from asset to liabilities side – It is interesting to see corporate banks rally and management esp ICICI and AXIS more confident after a long time. Primal seems to keep crying for RBI intervention and Loss protection for NBFC while Edelweiss & IIFL have shown maturity to tone down investor expectation saying growth will be low … It will be interesting to see how this shift in bargaining power plays out . In this battle RBI is with Banks and Govt seems to side with NBFC … lets see

  2. China Tariifs – US seems to play musical game again … Iran tariff waivers , India getting two jolts - Tariff on some goods and harden stance on HI B visa , while with China it seems to ready to play ball … Well this may not play out as I thought , but still it is early days

  3. Formalisation of Indian economy : 12 point MSME program for GST compliant companies - faster loans , lower interest , faster payables , + smoother export rules … This takes formalisation to level 2 … Interesting development – Next 100 days these will be sectors to watch for … Today small enterprises get lower interest , lower corporate tax etc – Will they challenge their bigger rivals more … Are we wrong in assuming BIG corporates will gain becos of formalisation … Interesting space to watch

  4. High Interest rates & Inflation : Crude has cooled down - America is trying to diffuse trade war – This might delay inflation onset for time being … High interest play is highly dependent on FED …

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When investing in bull market you get lot of Gyan … Some gyan for bear market …

Recently Read Gyan : Busting Myths by Amit Jeswani .

Myth #1 -

There is absolutely no doubt that Warren Buffet is one of the best investors the world has ever seen but there is a common myth that he buys stocks and holds it forever as he himself once said that his favorite holding period is forever. As per Research done by John Hughes (Prof at University of California) of his holdings from 1980-2006 (Twenty six years) he found that the average holding period for Warren Buffet was only 1 year, with approximately ONLY 20% of stocks held for more than two years. About approximately 30% of stocks were sold within six months of purchase.

A lot of Investors know that Warren Buffett owns Shares of Coca-Cola but only a few Investors know that the Stock price of Coke was 43$ in 1998 and the Stock price is Same at 43$ today. (20 years later).

Conclusion of Myth #1- Warren Buffet only holds 20% of Stocks for more than 2 years and not all good companies are good stocks.

Myth #2 – Indian Equity is the Best Asset Class Ever-

Nifty Started in 1994 and since then it has given a return of 10% CAGR which is 3% higher than the prevailing FD Rates of 7% but did you know that in 1995 the FD Rates of SBI was 13%. You could have easily beaten the Index by investing in a long Term Fixed Deposit. Secondly, you might have seen people comparing Gold and Sensex. When Nifty Started in 1994, the Sensex was 4400 and Gold was also 4400. Today Sensex is at 35000 whereas Gold is at 32000, not a lot of difference!

Conclusion Myth #2 – Diversified Asset Allocation decreases volatility of Returns though overall portfolio returns were not impacted much

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The Research done by John Hughes is cooked. Earlier one of the VP member had provided explanation how John Hughes is wrong.

Yes, Coke is still at 43$ today but what is the purchase price is important. If it is 1$ then one can hold it for 20 years for dividend though there is no price appreciation.

Kindly share link wherein John Hughes is wrong . It is useful in this context .

I did not understand what purchase price has to do with point made - ie 20 years of zero return.

SSRN-id16350611.pdf (303.0 KB)

“Over Confidence, Under Reaction & Warren Buffett’s Investments” is the paper published by john Huges regarding Buffett’s holding time which proves that he held most of his stocks for approximately a year. He held his stake in only 20% of the companies in the portfolio for at least 2 years.

Panel B: Holding period lengths and numbers of stocks held by Berkshire Hathaway

But my question is “Does only these 3% of the companies in the portfolio which is held for >50 quarters (>12.5 yrs) determined the higher CAGR of BH ?” Because the paper does not specify the percentage weightage of stocks to total portfolio but only the percentage of number of stocks to total stocks in the PF. Am i right with my interpretation ?

Even RJ got higher CAGR in the past 10 yr due to just 1 stock - Titan which may be < 3% of his portfolio in terms of number of stocks held but constitutes 56% of PF in terms of networth.

This is how WB performed vis a vis S&P across decades . Since he started giving gyan on moat , 20 stocks etc his performance started dipping . Pre 1990s he was more of Value investor who used to buy undervalued stocks and sell when stock reaches its full value or was over valued …

Now the above holding is from 1980s to 2006 …

13%20PM

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I think it is not due to his concentration on moat but due to larger AUM that BH was unable to buy small & midcaps. Buffet has mentioned that he can make 50% p.a. if fund size is small($100 million). But still he has managed to beat the market in any 10 yr period. Anyway… we have deviated from actual discussion point.

Yes. The discussion is about John Huges argument that buffet investment strategy is not a buy & Hold strategy.

Yes paper does not indicate proportion of > 50 quarter stocks . One may have to go through BRH annual letter YOY and find which stocks were consistent across years and then compute their returns …

But the point I highlighted was related to that … till 1980s Buffett was value investor and did not follow BUY and HOLD strategy . His returns were significantly higher .

Post that his returns mirror index and minor alpha is on account of dividends which BRH withholds . .

On Higher AUM being only reason for underperformance .I think it is incorrect . I think the real reason is WB has moved into wealth preservation mode and that is right thing for him to do because of his age and also age profile of his long term investors .

AUM even in 2018 is < 300 billion which is small versus size of global investment market ( which was estimated to be @ $ 200 trillion in 2010 )

Corporate Bank gets hit again … Both assets and liabilities may move out of corporate banks … Loan gr will be lower as 25% of good loan market logs out .

Icici and Axis will be hit?