The global order for investment management firms have changed in the last 5 years. Index investing now more or less accounts for 20-40% of the global capital deployed whether through index funds, ETFs or index-hugging funds. Since, an index does not have a cash allocation, there is no buffer when it starts going down. While going up, it feeds into the frenzy and the index constituents get more than their fair share of capital flows. And no once complains. When the tide reverses, the exact opposite happens. Stocks fall because they have fallen a lot. A virtuous cycle turns into a vicious cycle.
This is what we are seeing now.
The way it possibly ends is when other investors (discretionary / quant / alpha-oriented funds) decide that some factor they are tracking (could be valuations, could be any other metric like volatility, global macro, relative strength, overbought/oversold indicators etc) is now in their comfort zone and start buying. The other possibility is that large investors will get scared of the fall in the indices and full out money thereby starving the passive funds of their fuel.
This is a reason why we are seeing such increased volatility in the global markets.
From a fundamental perspective, earnings are going to be severely hit, supply chains dented (maybe permanently for some, which I have discussed in my previous post). People still are trying to assess how bad things are going to be.
One thing I am sure. We will now be extrapolating our fears.
No one said investing was easy. Equity gets a risk premium. Yes. A risk premium. Because it is risky!!
To end let me quote, my friend and fellow VP member @zygo23554:
This virus is Godâs wrath that brings to the fore fragilities and frailities in your health, relationships and portfolios.
Fear yourself, not the virus. All it does is show you the mirror so you realize who you truly are.
Till date mostly rally lead by some financial banks/NBFC. Given the very high valuation and negative news from this sector (IL&FS, Yes, etc), will there be change in leaders who can lead next rally? what your thoughts on this?
Below is thought from someone who had experienced bull & bear cycle.
How is the quant portfolio performing wrt the conservative portfolio?
If the quant is giving a sell signal and the stock is in lower circuit with no buyer then how will you rebalance?
Any learning so far.
Thank you
I received on whats-app. Donât know who is the author of the quote. But similar philosophy mentioned in âThoughtful Investorâ book as told by @amrutayan
TCS has been one of the best wealth creators in the last decade, so I donât agree that IT sector has not done well post Y2K. Obviously you will not find IT companies at the crazy valuations that they had during Y2K but there are enough counter examples
There are hundreds of examples where individual stocks continue to do well irrespective of bull-bear cycles. What tends to happen is if there is a large bubble in any particular sector that sector takes a much longer period to cool off. So, there is no basis for thinking that individual stocks that had done well in the past can no longer do well.
In fact, I would still tend to think that once the near term problems of Coronavirus is over, stocks like Bajaj Finance will come back as one of the strongest businesses. Whether it gets the vaulted valuation any time soon, I donât want to guess, but the business is more likely to do well.
Note down and remember all those who are asking for the markets to be shut. Then think about the kind of investor who would want a market shutdown. When the markets were going up none of these guys cam and said markets should be shut, we are making too much profits.
These are people whose investing temperament is suspect in my eyes. I would keep my distance from them in the future, specially if they are market gurus, advisers, fund managers etc.
For those who question why the markets should be open when everything else is closed, the simple reason is that i) markets are completely digitally operated these days and ii) you need to provide the comfort of getting out for people to get in. The reason we have issues related to labour employment in this country is primarily because you are not sure if you can fire an employee when the going gets tough. If you are assured of it, you would probably be much more comfortable hiring people. Same principle here. If you know that my exit may get constrained, then you will think 10 times before investing.
Equity investing carries RISK. That is why you get a RISK PREMIUM in the returns. You cannot wish away the risk and only ask for great returns.
Yes, our tendencies to be asymmetric about our profits and losses makes us this way. You have provided a great heuristic to measure temperament
Markets maybe halted or shutdown if the exchange fears counterparty risk. Not sure how many remember the 1982 BSE shutdown because Reliance shortsellers could not square up.
Markets also provide liquidity to the seller and value to the buyer. Someone sitting with cash would love to trade his cash to a desperate liquidity seeker and buy a stock at terrific bargains. Thatâs a very real and useful function of the markets. On the other hand folks who want it stopped are worried about unrealized losses or incentives linked with it, like fees linked to NAV, which reduces upon mtm losses.
Origin - Dan Brown
Come into my trading room - Alexander Elder
The Triumph of Contrarian Investing - Ned Davis
Broker, Trader, Lawyer, Spy - Eamon Javers
According to this article, there are around a 100 people from NSE and BSE who are traveling everyday just to keep the markets open and functioning.
Now if this is true, do you still maintain the position of judging those who are asking for markets to be shut? What if some of these come in contact with an infected person and lead to hundreds of cases and some deaths?
If bankers around the country can be going to branches and keeping banking system operational, if people across the country are working on getting daily supplies to the local kirana stores, if the entire police force is working, then 100 people who are following social distancing to keep exchanges operational is absolutely imperative.
The people who were clamouring for the shutting down of the exchanges are nowhere to be seen now in the last 2 days since the market has started rallying. Very clearly they were scared of losing money and the concern for people was just a facade.
I was surprised after listening Basant on Zee Business newsâŚhe was asking to run campaign #bazarbandhkaro to put pressure on Govt to shutdown stock market. Why such irrational behavior by so call mature advisor?
In bull they pull everyone and in bear they hide âŚ
(Moderator please donât remove this messageâŚthis is fact and we should support facts)
Why would anyone want to shut down the share market? The biggest advantage of share market is its liquidity. If they think the shares would go much lower than the fair value, they should rather use the opportunity to buy stocks. great investors like warren buffet make their money during these periods. If they followed value investing concept of keeping some money aside to utilize in downturns( which they preach) they will not be complaining to close the market now.
He also advised investors to to buy in March or else we would regret missed opportunity. Clearly is is among those investors who underestimated the impact of corona and didnât sell his investments in time. Now he is worried his own investments would be soon down to very low values.
