Lessons from a bear market

Investing Strategies
1

This is on behalf of myself and other valuepickr’s who are new to the markets and have never experienced a deep bear market like 2008 or before. I would love to learn from other senior valuepickr’s how the markets behave differently in a bear market?

In general I think the following observation is true:

)- Low ROE stocks fall much more than the high ROE stocks.

Love to hear what seniors have learnt and wish they knew when they were starting out. Ayush is strictly against high portfolio concentration. I think Donald is for-concentration? I know these are individual preferences – but in general I would like to learn what works best in the context of bear markets.

Inspired from:

http://www.valuepickr.com/forum/portfolio-q-a/162806509

Thanks,

-Prasanna

2

In my opinion one should not worry too much about bear market or bull market. Good companies will find ways to grow. If your time horizon is longer(10+years), then just focus on companies who are on their way from good to great. Peter Lynch mentioned once"The stock market ought to be irrelevant. I have made money in lousy markets and lost money in great market."

This sums up my investment philosophy. I have made decent money from 2009(not by playing the bounce) when I seriously started investing focusing on good businesses.

3

I have experienced 2008 and have analysed prolonged bear market from 1996-2003 (except for one boom year in 2000 due to IT led rally) . From these I feel bear market is one of the best times to buy companies with good dividend payouts, reasonable debt, does expansion plans depending on the demand in their industry…Yet these companies during bear markets will continue to trade at significant discount to book value, high dividend yield. Market valuation may look like they are just another junk stock.

These companies will come out much stronger posting multibagger returns when market sentiments improve or during bull markets. Shortlisting these potential multibaggers may be easy, but timing of bull market or when they will rise is difficult to predict for anyone. One needs to patient for atleast 2-3 years for sentiments to improve and market valuations will eventually catch up with the good performance of the company.

2 Likes
4

I was reading other threads from valuepickr;

In retrospect, It was amazing to see seniors like Donald & Hitesh recognize the market tops Oct 2010:

http://www.valuepickr.com/forum/asset-allocation-balancing-shifting/946381648

Though from what I read it seems like the actual sale might have happened near the market bottoms, unfortunately:

http://www.valuepickr.com/forum/market-entry-exit-strategies/599753380

@Donald: Can you share us your experiences with the 2010-2011 volatility? It looks like unfortunately, you shifted to 50% cash at near the market bottoms. Do you still think such market timing exercises might be fruitful? Also would love to know, your latest view on holding cash.

@Hitesh: Can you share your experience as well? Did you shift to cash?

Thanks,

-Prasanna

5

Which mkt we are now - Bull or Bear? I guess if you look at individual company then there’s never been any bear mkt except some extreme cases like 1929 in USA.

6

@Manish: Cos like Mayur Uniquoter fell to half the price during the 2008 recession. Would be great to know how senior valuepickr’s portfolio suffered during the crash and how they reacted? In retrospect we know that no reaction was necessary and market rewarded back the lost market cap, but always great to know other’s experiences.

7

Link: …/…/…/asset-allocation-balancing-shifting/946381648 Link: …/…/…/market-entry-exit-strategies/599753380

Picking up market tops is truly commendable. It is extremely difficult.

When ever market runs up substantially in a short period of time, it is perhaps a good idea to take a stock specific approach and start reducing the holdings; depending on which stock is moving much ahead of fundamentals, which ones are reaching bubble territory, and ones where they have moved beyond your targets; and moving into cash, in direct proportion to the upward momentum of the market.

Who ever stays till the end of the party; will end up paying the bill.

1 Like
8

Is it foreseeable considering Lehmann crisis in 2008?

9

Another on the same theme
September 13th – This is Elul 29 on the Biblical calendar – the last day of the Shemitah year. Many are concerned about this date because we have seen giant stock market crashes on the last day of the previous two Shemitah cycles.

On September 17th, 2001 (which was Elul 29 on the Biblical calendar), we witnessed the greatest one day stock market crash in U.S. history up until that time. The Dow plummeted 684 points, and it was a record that held for exactly seven years until the end of the next Shemitah cycle.

On September 29th, 2008 (which was also Elul 29 on the Biblical calendar), the Dow fell by an astounding 777 points, which still today remains the greatest one day stock market crash of all time.

Now we are approaching the end of another Shemitah year. So will the stock market crash on September 13th, 2015? Well, no, because that day is a Sunday. So I guarantee that the stock market will not crash on that particular day. But as Jonathan Cahn has pointed out in his book on the Shemitah, sometimes stock market crashes happen just before the end of the Shemitah year and sometimes they happen within just a few weeks after the end of the Shemitah. So we are not just looking at one particular date.

10

Bumping this old thread :). I guess we have a lot of members who have seen 2008 bear markets. Does anyone remember the early days of 2008 fall? Do you guys see a similarity?.
This time around, so far its been a gradual fall in all markets. But if you see the internet based companies or startups in the US, they are falling like crazy. The other thing is that, at least the reported earnings (indian companies) is decent in q3. How was the earning back then?

11

interesting discussion. But for better illustration please take a look at
the 30 year performance of Berkshire Hathaway and plot it on a graph. Or
better still, plot the Sensex’s path on a graph since inception.

While at it we must examine each and every company we own. What matters is
whether they can compound at a minimum of 20-25 per cent annually. The next
step to consider is their valuation.

Even Infosys which was the best performing company in the late 1990s had a
trailing PE of 75/80. I don’t know if the stock ever returned to its old
price level.

12

Even though the recent fall is likely to be termed as a correction in a bull market instead of the beginning of a bear market - I’m sure all of us have learnt some valuable lessons especially folks with less than 5-6 years experience in the market.

But the primary and the most important lesson that I’ve learnt is around having sufficient Margin of Safety (MoS) when taking an investment call on any company. Pretty much based on Warren Buffett’s golden rules-

  1. Never lose money (always seek capital protection first)
  2. Never forget rule#1

Now this is something I obviously should have thought harder about before taking certain investment decisions but paying tuition fee will probably always remain the best teacher (thankful of experiencing so many ups and downs in the market within 2-3 years of my investing career itself). Also if certain black swan events were to take place - no MoS would be good enough so I’d exclude those factors from my analysis. (Ex: Buffett has mentioned such an uninsurable risk in his latest Berkshire letter about a nuclear war and how the chances of that risk increase with each year we have without a major war.)

So different people have different tools/methods to assess their MoS (3-5 yr earnings CAGR, Revenue CAGR, FCF based intrinsic value, future industry outlook - demand/supply, div. yield, P/E, PEG, D/E, etc. and can be any combination of these factors, etc.)

Now I have a few preliminary factors to filter my major investment decisions (~10% of portfolio) such as Industry outlook, Business Category - All weather/cyclical, Revenue/PAT CAGR, history of dividend payouts, RoE trend, Management integrity - basic checks (Shareholding patterns, etc), Valuation (earlier willing to pay upto 25 P/E Fwd earnings for secular growth) and a couple of other qualitative and quantitative filters.

Not that I understated valuation earlier, but the recent fall has firmly reinforced the belief that valuation is about as important a filter as any other in the investment checklist and should almost weigh 30-50% in the final investment decision.

Thus with all other investment criteria being ticked, I believe (for now at least) buying companies with the following MoS checks should provide optimal capital protection (should almost never lead to more than 50% fall in market value otherwise the investment thesis is most likely wrong in the first place) with decent capital appreciation opportunities -

  1. PEG < 1
  2. P/E (TTM) band of 15-19 on the high side (from no.1 - this automatically means Revenue and PAT CAGR have to be more than 20 for at least 3-5 years, would initiate small purchases around P/E 18-19 and buy aggressively at levels of P/E 15)
  3. Dividend Yield > 1%
  4. Debt/Equity (<.5 - Excluding financial companies)

So whether you’re a Gillette/Eicher/Blue Dart/Jubilant or any other company with a great management and a 100% visibility (just hypothetical) on future earnings growth - I’m not going to touch you or even waste a second of my time at your crazy 50-100 P/Es. I’m simply not going to pay up for such projected growth. Btw I’ve never held these companies or Page or any such company btw. I’m happy to miss any number of such companies no matter the opportunity costs. All you need is to identify 3-5 companies at the right valuations to make a lifetime! This could also mean sitting on cash for extended periods of time (1,2,3,4,5 years) - but that’s what all the great investors talk about - waiting for a big fat pitch / only swing your bat 1-2 times in a year!!! So this has meant me moving into 25% cash after the run-up this week - happy to watch the Nifty take out 9,10,11 thousand and let everyone get rich but I’m not going to swing till these MoS conditions are met!

And believe me great companies can also be found at decent valuations - HDFC (not the bank) was trading at 3.1 times book value, 17 P/E, 1.5% div yield till about last week.

Seeking a high MoS is also most likely an attempt to mask my inability to comprehensively analyse financial statements with detailed scrutiny of all minor details and connect the dots to detect lollapalooza effects in companies like so many brilliant people on this forum.

Excited to begin this second phase of my investing journey!!!

19 Likes
13

Excellent post worth reading.l will write this post in my diary as permanent notes.Thanks once again.

Nitin Choudhary

14

the lesson I learned is that after identifying a company which I feel is a good investment, ( and feel so called great company) compare the growth in profit in last 3 years and the increase in share price in last 3 years.

If the price is moving aggressively than the actual profits, then it is time to call it a day, saw this in the recent corrections ,

15

I know that i am writing in a old thread…also it is very difficult to predict bear market
I think Indian markets have more headwinds than tailwinds
Rising fiscal deficit from crude prices…already interest rates are raising in the system…its just a matter of time RBI raise it…not so good earnings recovery

Any other indicators which can make us to assume bear market?