While the markets seem to charging ahead, one cannot help but feel the froth is too much. And while there have been a lot of discussions on this forum about various stocks, I feel we also need to discuss on how to spot a bear.
I have spent only about a decade investing, and this level of optimism and euphoria is quite startling. A lot of my friends who have never invested are now in the markets thanks to the gazillion apps out there.
How do we start looking for the bears? Personally I am keeping a check on the shares I own, and for non-core stocks I intend to sell the second I am uncomfortable. What would be a better strategy?
How much to leave in?
Many of us here are long term investors, but in the end price does matter. A 50% correction in a stock can eat into your pf. Do we encash a bit, or trust our conviction completely. I am happy to ride many of my core stocks, but might decide to reduce on some of them.
Alternate assets?
The biggest problem today is that thereâs no alternate asset which looks good. Unless I see a real estate potential within my investment size, and it is a steal, thereâs no point, despite loans being super cheap. I prefer to add small sgbs as and when the lots come out, but nowhere close to my equity level. I am happy with my emergency fund levels, so donât see the point of more FDs. Whatâs the alternative?
In a scenario like this where valuations are high but there are also no alternate investments, market is unlikely to crash 50% but may go through time correction for 2-3 years. So staying put with good companies seems like a good thing to do.
The broad market neednât correct by 50%. Thatâs an event no one can predict. I mean individual shares. Many of them run by quite a bit, and could give back what they have gained. Figuring out support/comfort levels is the tough part.
50% fall is not a correction but a crash. Whenever it happens we all will be caught off gaurd. Mar 2020, how many of us trimmed positions before that. Also its rare and occurs once in 8 to 10 years.
Sideways, time correction and minor correction of 5 to 10% is however possible. IMHO remain invested in mid caps with good earnings and price momentum.
Expect Healthy Corrections (not crash) once US Fed starts tapering bond purchases. With inflation already overshooting, it could be sooner than expected.
Just listening to the Intelligent Investor audiobook. [Mr. Market is bipolar. He is there for your convenience. Buy when he is depressed and sell/hold when he is exuberant.]
I wish Mr. Market followed the same pattern but Grahamâs tricks mostly work only on market extremes which are hard to predict anyway. Though fundamentals are still intact, the game has changed so much, thanks to democratic access to financial data because of internet.
MarketSmith provides the current condition of the Market whether the Market is in Uptrend, Downtrend. There must be similar services will be available from other players.
I am not sure how much the game has changed. In March 2020, so many stocks were trading at [1/2nd, 1/3rd, 1/5th] of the current price. It just seemed too easy to just buy so many good cos back then. As long as human nature doesnât change, what Graham said (ex. Margin of safety) will stay relevant far into the future.
Even though Market extremes are hard to predict we sort of know when we are in one. However, we often end up convincing ourselves that it can get worse or it can get better to our detriment.
There is no point guessing where the markets will be tomorrow or day after. All we need to look at if there are any great companies which are available for cheap and unfortunately at the moment they are massively overvalued because of ultra low interest rates and excessive money printing in developed world specially indian and US markets are overvalued or lets say risk reward is not in our favour at the moment.
But if we look around chinese market is extremely cheap at the moment so I went ahead and Invested in the big names like Alibaba and Tencent while there is always a risk with chinese govt staying with big names considerably reduces risks.
We just donât know how long this game will continue. people have been waiting from 2014 for the crash. When the inevitable crash did happen US FED dumped ocean of free money and created one of the ferocious V-shaped recovery ever seen in the history.
if you keep waiting for crash then you will eventually give into the FOMO and worst it generally happens at the peak.
Diversify yourself into world markets, Find great companies which are beaten down due to bad sentiments but still have good business potential.
SAP was beaten down several months back now Alibaba tomorrow something else. We just donât know what these central banks up to but they are doing big dis service to we common people. When this debt bubble collapses the crash will be ferocious and when that happens we never known. It might as well continue throughout our generation. If they can do it for last 15 years they can do it as well for next 15 years, no one knows.
So buy great companies which are cheap. tap other markets. Donât fall for the mutual fund managers who every day shouts market is fairly valued etcâŚ
There is no timeline as such it all depends on events. If US inflation runs out of control then we are looking at prolonged bear market. Shall the interest rates raise even to 2% we are looking at massive correction in risk assets. Remember If something can go up in straight line it can come down also in straight line and most often thatâs how it ended in the past so letâs see how this one is going to be.
Never mess with nature and economics the end result is always disastrous but they take time to show up.
Keep buying great stocks at discount rates you will do good in the long run.
We all know predicting market direction is futile. No one knows, even the experts.
Sharing my thoughts and lessons learnt-
When the portfolio corrects, psychological impact is more severe than financial impact. In some of the previous corrections, I stayed away from the market as I did not want to see a sea of red. Corrections are opportunities to swap laggards with winners - hence exactly the wrong time not to be looking at the portfolio.
I have seen people converting to cash when they perceive that market is overheated, wanting to deploy when it cools down. This does not work for me. I will probably end up watching as the market recovers. Staying in the market taking some pain is the only way for me to enjoy the gains. I was almost 100% invested in trough Demon, Small cap correction starting Jan 2018, ILFS fiasco and March 2020 corrections, which helped.
This is not to say asset allocation is not correct - one should balance based on what one is comfortable with, but the strategy of moving in and out of cash with market levels does not work, at least for me.
These are the times to tighten the process and ask more questions. Rising prices make everything look beautiful. Narratives will emerge and analysts will discover virtue in companies they did not touch in the past - just human nature as we have a need to rationalize what we see. The way to protect the portfolio ( to the extent possible) is to ask âSo whatâ more often. In 2017, multiple times I came close to buying Shankara Building Products as it was touted as Indiaâs Home Depot. âSo whatâ approach saved me a great deal of money and psychological pain.
Finally if you are one of those who monitor net worth on a regular basis and make certain decisions based on that, applying a hair cut to the Equity portfolio value at times like these will help you make more rational decisions.
US inflation is set to rise Mid August- Bloomberg. India interest rate expected to make a u turn. Covid 3 rd wave is showing early signs ( June-July nos stagnating). Retail investment is at its peak with zerodha enabling trading at finger tips. Nifty PE is near 40 standalone and near 30 consolidated. Time to invest cautiously.
I have seen some signs around me that had me concerned.
Over the last few weeks I have experienced some peculiar discussions. Some of my friends/colleagues, who never showed interest in the stock market, have suddenly started âinvestingâ in the market. And these stock discussions come out of nowhere. One minute we are discussing about work and suddenly I am asked: âAre you investing in the stock market? You should do it as it will help you deal with the rising inflation and fuel prices. Try this xxxx stockâ. They even have justifications ready for buying the shares of a company. A friend bought a penny stock of some tea company with the reasoning that people drink more tea in the monsoon and winters. The stock price will surely rise for the next couple of quarters. I have no clue how the tea industry works but this reasoning absolutely baffled me.
The barrage of IPOs coming to the market. People are willing to apply for an IPO of any unknown company just because of FOMO. Whatâs worse is that they have justifications ready even if the company has never made a profit.
I have been following a youtube channel which was touting itself as a value investing channel last year. But over the last couple of months the same channel is focussing on âgrowthâ by saying that value is the past and that âan investor should always evolve based on the market conditions or risk falling behind. Companies of the future are digital-based and current models of valuation do not apply to themâ. To me, that particular explanation felt like an elaborated version of âthis time it is differentâ.
Personally, I have stopped investing actively. I will continue with passive investments and SIPs.
I think it would be good to reduce the amount that goes into SIPs as well. Why not follow the strategy of investing a higher amount when Mr. Market is depressed and smaller amount when Mr. Market is exuberant. For example, if person X is able to save 50K per month for investment, invest 50K when the market is hitting all time lows and 5K or zero when market hits all time highs.
Just watch this indicator when the volume and price goes up in Pharma counters one can assume market fall has started. If the fall is heavy, pharma counters can also fall but not much . When pharma counters stagnate then there is reversal on the cars. Back tested in Mar 2020 fall. But I am a TA and I can reasonably follow the trends and spot the reversals.
This will ensure invest more at low levels and fixed at high levels. Not investing or reducing at high levels is also not worth it as you never know how long bull market will continue and being on sidelines can be frustrating.
Yes I will upload a video on Alembic classic case of the recent fall where I will explain the concepts clarly. It will be under the thread Bull Therapy Pl give me few days time
