Market Meltdown, the Virus, and our Actionables

Donald · March 23, 2020, 11:56am

Beginning of March, around Holi started speaking to some Market veterans I resonate with and who have seen 2-3 market cycles of this nature. Till then even I was in the sanguine camp, and largely ignoring the “extreme danger” “completely uncharted territory” signs being regularly planted by one of our most experienced members @deepinsight

I quickly realised the response that came almost universally from these astute folks was clear. This is no time to be DEFINITIVE. It was time to create and preserve ammunition. We need to have a better grip on 3 things before we take a position either way

a) Is the India curve going to turn exponential
b) When will the western curve flatten out/elongate - what timeframes
c) Combined economic response of all countries/central banks

Till then we should acknowledge we DON’T KNOW! Watch closely with care to identify above for a better grip on a continuously evolving situation - where no rules, apply. I had some ammunition, but not enough, so decided to purge Portfolio of all non-core bets.

Our @hitesh2710 summed it up nicely, on actions of some trigger-happy friends
There are no additional benefits on being the first-off to buy even if we get it right. Once the sentiments change they will be evident and clear to see. Next 2 weeks remain crucial for india as community transmission/containing takes centre stage.

I’m taking the liberty of selectively quoting Akash Prakash from this BS article Market Meltdown and the Virus! 17 Mar 2020. [Will write to him for permission]

This, however, is unlikely to be a typical recession, as it is a sudden stop to the global economy. Many sectors are going to face severe stress, as consumption evaporates and supply chains collapse. We have no idea how long this will go on. The central banks cannot solve this crisis. It requires action from government. This is primarily a public health crisis, which will morph into a financial crisis. Before this ends, we will most likely see bailouts of the airlines, hospitality and leisure industries.

For India, if we can manage to keep the virus under control, then this will be a buying opportunity. India benefits from lower oil prices, enhanced global liquidity and record low rates. We have been in a slowdown for more than a year, and are not as closely aligned to global supply chains as other countries. The huge redemptions in the EM world (last month has seen outflows of $36 billion) have hit India equally hard, as much of these are passive flows. Some of the tail risks for India are finally being addressed. Much of the corporate clean-up has been done. Valuations are coming into a more sensible range.

If India sees a spiral in cases, then we have a problem. Otherwise, this is a buying opportunity, with a significant longer-term upside. Take a breath and hold your nerve.

The other side of the coin now. There are many friends invested primarily in small caps. They knew they have to purge heavily, but it is very very difficult to have that inner conviction when you see such daily big routs, while hoping against hope for some respite like last Friday’s. Ammunition can be gathered, but at very heavy drawdowns!

I got back to the same seniors to ask what should one do if in that position, in such an unknowable situation like current. Again it was mostly a common refrain that at such times, we have to look at a decent survival first, to fight another day - which by all accounts - if we extend the timeframe - there is huge huge opportunity down the line, which can set you up for the next decade. One can also sell other assets from the overall asset allocation pie to take advantage. Take Loans from family (at zero interest). But all that can happen only if you bite the bullet and ACT to take losses on the chin, bravely. Yes, it takes guts, they said. Inaction is easy, but can be damaging, psychologically.

If you read Rajshekhar Iyer (I am sooo impressed) Interview in Masterclass With Super Investors, by Saurabh Basrar and Vishal Mittal, you might find very useful practical actionable guidelines on limiting drawdown losses. In essence this is what he says " Drawdown Management requires good risk management processes, and decisive decision-making. You have to survive to succeed. He has elaborated quite a lot on how he built his drawdown risk management processes.

They also say this is also the opportunity to work very hard at preparing ourselves for the coming opportunity - but with a peaceful, calm mind. They said you can do that, only if you are at peace, having purged portfolio of all non-core. That’s the only way to sleep well at night, rise up every day with renewed energy, dedicated to do a good job - for the next phase of the market.

I can certainly tell you from my personal experience of last 2 weeks, that yes I have slept very well since having purged my portfolio of non-core bets, with losses.

VP’s most experienced, but reclusive member @deepinsight put it this way, again today.
Wait for things to play out. Wait for personal clarity. See who are the eventual winners. Only then invest.
Presently the time is only to survive and play the losers game.
You win the losers game by not making mistakes!

I am hoping to get the more experienced Market hands to open up here, and advise the community on how to handle current situation, better. The Community will be grateful for it, and their showered blessing will see them prosper more in the next phase of market!

Will try and Invite more seniors inside and outside to contribute here. I am sorry that despite my pushing & pleading I could not make that happen (earlier). And I was too reluctant to pen down anything myself, without getting some inner conviction for myself, which I evidently have now .

hnk_so · March 23, 2020, 12:37pm

@Donald Thanks for starting this right thread at right time to get inputs from all experts, which could be helpful for all members of this forum!

One more thought - normally after each big crash (Bear market) there will be change in leaders which could lead next bull market. Someone who had experienced past bear and bull cycle has following comments -

What’s your thought on next promising leaders / sector? Will Financial no longer leaders in next run?

Donald · March 23, 2020, 1:05pm

Books recommended by Rajshekhar Iyer, relevant reading for now.
Drawdown Management - Nicholas Darvas, How I made $2 MIllion in the Stock Market

He further says recognising when the bull market is over is very important if you don’t want to give up a large portion of the gains made in the bull market. Figuring out this requires a good understanding of history. Books that might help are Andrew Smithers Valuing Wall Street, Russel Napier’s Anatomy of a Bear Market, and Martin Zweig’s Winning on Wall Street.

Finally, Your biggest enemy in search of a fortune may be your own thinking patterns. He says probably the best book I read on this has been Trading in the Zone by Mark Douglas. Despite its title, it will prove as useful for investors as for traders.

Advise to New Investors is the last section of his interview. and paved with Gold for Newbies. Excellent must read to inculcate right habits, and get exposed to key investment success management concepts/practices. Btw, many of the recommended books for important success concepts laid out by him are referenced in this section

In another section he says "One of the books I highly recommend is Psycho-Cybernetics by Maxwell Maltz. It’s about self-image and how the brain is a machine that can be used efficiently or inefficiently. Its an outstanding book, particularly for younger people.

@dineshssairam - If i remember correctly, you like reading a lot and provide summaries to enhance your learning - do you want to take this challenge on? - and help educate the Community on the usefulness of content that comes so highly recommended by Rajshekhar Iyer

tommy123 · March 23, 2020, 1:29pm

@Donald - thanks for this. This came at the right time as we are hitting fresh lows everyday. I agree with whatever you have mentioned above. Only someone with loads of experience and someone who is not rigid can take such bold moves during unprecedented times. I have sold out 70% of my portfolio with some heavy losses in the past one month and for sure feeling better that I got rid of loosers. I still have 30% in equity which are companies which have stood the test of time so far but have started correcting today to the levels which I am really uncomfortable with. You can call these as my core portfolio. However with the uncertainty in the cards, I feel the bottom is long way from here. How are you playing your core portfolio? Should we take losses and enter again like other stocks or its okay to hold certain portion in equity with the hope that even this shall pass? How do we draw a line when everything is correcting? Looking forward to hear your thoughts.

Donald · March 23, 2020, 2:14pm

This is the first time I am managing a BIG drawdown situation - hopefully with eyes & years open.

In 2008, I was a newbie invested in good name large caps luckily, had zero idea when to sell or not to sell, decided to do nothing, as these were good businesses, which should be doing well 2-3 years down the line. Luckily it worked, perhaps aided by the fact that the recovery of the bear market was fast by May 2009.

A better perspective again is from the Rajshekhar Iyer interview, that I would like to share again. "In Nov 2008, after the Lehman Crisis, Titan stock price had fallen to the same level as in 2005, but the profits and turnover were up 100%, since that time. As a buyer, I had that margin of safety at my buy price. Maybe someone who was holding that stock need not have sold. Theoretically, you can say that he could have sold the stock, and bought it back later, but in practice it is more difficult than it seems in theory.

So we have to be very careful in what we define as core bets. In my book, they are businesses I have a very good grip on, have high regard for Management Quality to do what is necessary to survive the current situation, have the financial strength to emerge stronger than competition; where I see the Industry is Stable, and the durability of Competitive Advantage is certain (extending to 5 years at least); so I can easily stay invested in the business for 2-3 years, even if the Stock Market closes, without losing any sleep. Should Mr Market significantly offer better and better bargains - say another 30% cheaper - will be delighted to lap up more - my favourite toys are getting cheaper!!

rishit.05 · March 23, 2020, 3:02pm

Hi guys

This is how I think about the situation :

To me, there are 3 kind of bear markets

Structural – Country and hence GDP is in decline. Inflation could be increasing dramatically, policies could be weak and the justice system probably flawed. Obviously, It is best to avoid investing in such countries
Cyclical – This happens when the leverage in the system is extremely high and a situation of over supply is created through mindless capex. This was the situation in 2009. Usually Sensex earnings would have grown well in the past, market cap/GDP, PE and other macro indicators would indicate optimism
Demand side – This is mostly an event based shock that dramatically increases the uncertainty in the near term. People are confused and in the chaos, action freezes. Examples would be Demonetization, GST, War, Health issues amongst others

Based on the above, it is clear to me that we are experiencing a demand slowdown based on a completely unpredictable event. The claim of the Sensex being overvalued (before the coronavirus scare) on a PE basis does not make sense, since we did not experience an increase in earnings in the recent past. Which is why on a P/B, Market cap/GDP or dividend yield basis, at best we were fairly valued.

I am currently witnessing two kinds of portfolios;

The investor was already fully invested before the Coronavirus scare. In this case it would make sense to switch from weaker business models to stronger ones, keeping in mind the valuation differentials. And then just sit tight, shut shop and do some other work in life until this scare is over and done with
The process of the investor enabled him/her to raise some cash in 2017, when markets were expensive in general or the person has currently accumulated cash through another source (a job, liquid funds etc) . In this case, either staggered buying on dips or buying once the trend of lower tops and lower bottom breaks would make sense to me.

According to me, once the market even has a whiff that humanity has figured a way out of this situation, it will go up with the same speed it has dropped. Which is why sitting on cash and waiting for some clarity to emerge could mean that you sold at exactly the wrong time. Feel we need to make sure that whatever approach we use, our cash is at play whenever markets reverse. And we all know everyone is trying to think the same way and time their last rupee, right to the bottom of this downturn. So either we remain completely invested throughout the madness, knowing very well that no matter when we buy, the prices will go down further or then we try and get in really early once there is some form of clarity (tough but maybe possible)

zygo23554 · March 23, 2020, 3:05pm

c) is more or less a 100% certainty right now. We know that central banks have already acted on interest rates & QE and that fiscal spending is coming soon. The US Fed has already hinted at unlimited QE for as long is needed and the fiscal stimulus bill will get passed one way or the other. All across the world, liquidity and QE taps are on in a manner never seen before.

As for (a) and (b) - I don’t think the answers to these matter a lot. What is the assurance that the thing won’t surface again in 3 months time?

I question I ask myself is - What can remove the fear and uncertainty surrounding the health situation? What is the probability of that happening?

If the medical authorities across the world were to come out next week and say - “we have a drug that can make the situation far better for those who contract the virus, take XYZ course for 10 days and there is a good probability that the virus will not affect you too adversely…”

Do either of (a) or (b) really matter to investors in this situation? At the risk of sounding very insensitive, investors will treat the 3.8 lakh people affected as of today as a decimal error and get on with their lives very quickly.

In my view the probability of some workable drug combination coming out over the next few months is high, till they figure out a vaccine that can put the issue to rest 12-18 months down the line.

If you buy this hypothesis, you just hunker down, keep doing what you have been doing over the years after ensuring survival and eliminating potentially big mistakes

If you don’t buy this hypothesis, the best thing to do is to exit totally and come back if/when the uncertainty is addressed

Why are we having so many discussions now? It is because history and probability tell us that it pays to be an optimist. All the accumulated wisdom from investment gurus tells us that we should not sell out and go away for the reasons of uncertainty we are faced with right now. That is the discomfort that each one of us needs to reconcile with - in one’s own way. In such times borrowed conviction does not work.

Humanity has survived natural calamities, asteroid strikes, world wars, depressions, other pandemics and what not. Our forefathers just 100 years ago dealt with 10X the health uncertainty that we are dealing with today on a daily basis.

Going back to what John Templeton said - “The most dangerous words in investing - this time it is different”. Will that continue to hold or will he be finally proven wrong by this new virus?

It is his reputation and wisdom at risk and not mine

Donald · March 23, 2020, 4:58pm

Thanks Kedar.
Perfect emphasis. Therefore the Title ending with Actionables

Actionables, in order of priority

Ensure Survival (personal circumstances may point to different answers here)
Avoid potentially big mistakes (related to scrutinising individual/Portfolio from different vulnerability angles)
NOT Jumping in too early (even without ensuring 1 & 2 above) by making the call that this is already near the bottom simply because one might be treating this as another 30-40-50% correction only.

For all we know, it could well be the case that India escapes without much transmission, along with the case that western world and rest of the world curve too flattens out in another 3-4 weeks. That would be great. But there is an equal probability or lesser that that is not the case. And how would a rational mature response to such probabilities, account for that?

Even if we take it as a given that a cure is certainly on the horizon soon, the speed of the curve if exponential in India (God forbid)and other new places of infection like NYC or elsewhere - would certainly cause much more mayhem (unimaginable, even) on the health front first, and then in financial markets (even as we discount lowering social behavioural patten changes already evident in India), than seen till now. There is certainly a dire need of a structured debate and discussion around these issues, even if brief, including survivability itself.

Actionable 1 & 2 when taken in conjunction with Actionable 3 - might reach very different conclusions than when only Actionable 1 & 2 ONLY are in ones consideration radar! Let’s all think about that too. Survivability factor degree may be drastically different? There is a possibility? Can anyone be totally sanguine about RULING out such a possibility! Wouldn’t that be plain hubris?

No one can/should make that call Now. As @hitesh2710 mentioned we wait for clear signs to be visible.

Also let’s not forget this thread is NOT addressing VP TopContributor decision-making - not to say there is any UNANIMITY there - there are at least 5 different reactions to current situation handling solutions - including waking up to ensuring survivability very late - because of the same hubris? That this is only a Virus scare. Its a medical problem - which will have medical solutions forthcoming in 6-12-18 months?

While contributing to taking these discussions further, lets also put on the lens that this thread is about addressing requirements of the larger investment community at VP here, who need much more hand-holding.

I agree Actionable 1 & 2 is what we should focus on first. And help the VP readership with first. And the Seniors amongst us have many solutions to share, I am sure. Please dont hold yourself back. The forum needs you to speak up!

And then we can move on to the exciting Actionables for Value Investors. If you had the Moolah, where is the best bang for the buck. But I would request everyone to hold your horses on that aspect till a few days later - till when we have done justice to above - not a small task in itself!

There is much to throw light on past follies, and how to ensure Survivability through different market conditions in the past 3 years of Market stages progression since 2017. Different folks have displayed different strengths(?) at different points of time/market stages, at some point or the other one segment that did well seemed to feel that theirs was the only game in town, rest didn’t matter, including the penultimate stage of Quants-fancy .

There could have been better processes/strategies (starting from proper Asset Allocations, Stock Picking, Capital Allocation, Portfolio Structure, Market Cycle awareness, Adherence to Process, and more) employed at every stage of the market progression in last 3 years - for each one of us! There is no debate about that. Let’s NOT brush all that under the Carpet. if we do that, next time round too, we wouldn’t be any better-prepared.

I have a take on that and reflecting how to structure that in here in this discussion briefly (perhaps a humorous take on our human follies?) to highlight the central importance of first-principles or back-to-basics, that gets ignored (leading up to the good times)?

Would like all of us, certainly the Seniors, to reflect more on this aspect and share practical insights that can help us all collectively become better at the Investing game - that humbles us all!

am648 · March 23, 2020, 5:40pm

I feel one potential risk needs to be debated here which I feel has not been brought up yet. What happens if this problem is not contained and stretches out longer than a month? What happens to the vast majority of companies that have leverage on their balance sheets? What happens to their employees? What happens to the banks who have loaned money to these employees to buy cars, houses, etc? You see where I am going with this. While there is a chance that recovery might be as violent as the fall but the longer this goes on for, we must also factor in a disproportionately increased (the longer it takes) risk of a pronounced slowdown caused by several companies failing. The lockdown in Wuhan started on 23rd Jan. it has taken a full month and a half for cases to drop down to zero. What happens if leveraged companies can’t produce for 45 days? How will they survive? No eventuality can be ruled out at this stage!

sharemarketgen_ · March 23, 2020, 6:44pm

We are in a bear market after a gap of 11-12 years.The earlier bull markets ran for a shorter duration(around 8 years) so does that mean this bear market can last longer than the usual 12-18 months? However,this time the price damage has been very swift.We have knocked off 35% in a month! Largecaps like M&M,Tata Motors are at 10-12 year lows already while Nifty returns for 5 years stand at 0 now.Similarly,well-respected names like IndusInd Bank have lost 50% of their marketcap in just a week.The broader markets have also been correcting.This is inspite of a pretty decent correction post Jan.,2018.From the management commentary(ies) it seems that the going was just getting better.For e.g.,TTK Prestige mentioned in it’s recent concall that they saw very good sales in Feb.,while uptil March 20th they are already up 2% yoy.The current situation has definitely upset the apple cart.IMHO it would be useful if we could get some handle on the 2nd-3rd order effects.

Debt-laden companies: Companies specifically catering to the travel segment have been hit the worst.I think it will be a good idea to look at companies that don’t have high debt or have strong parentage to bail them out if going gets even tougher.The high debt companies will most likely be wiped out leaving the market for a smaller no. of competitors.Similar reasoning applies to financials as well.NBFCs/Banks that have raised capital recently or are well funded stand at a great advantage now that prices have halved and raising money is twice as hard.
Lifestyle: After being cooped inside their homes for a few weeks purely for health reasons how will people’s behaviour change? Westside management says they have experienced a shift from street food to more hygienic,organised places once such shutdowns in countries(e.g.: Singapore during SARS outbreak) are removed.The other change could be more diagnostic tests.My point is will people change their lifestyles meaningfully once we are out of this predicament.And whether it could be a structural shift?
Global supply chains: There was some talk of companies de-risking their supplies by sourcing from both China & India.This is possible in a sector like chemicals and some specialty manufacturing.Even textiles.However,as we know China is one of the few large countries that is not in lockdown anymore and the situation is in control.Thus,they have the upper hand so this possibility seems to have the lowest probability as of now.

As history tells us,large corrections are great buying opportunities and disproportionate returns are made from such times.The dilemma this time is that while the price correction has been quiet large,the time correction is yet to get underway.All we can do is keep looking for companies that will eventually come out stronger post this crisis.

hitesh2710 · March 23, 2020, 7:05pm

Thanks donald for starting the thread.

With the kind of drubbing we have received till date, it seems like we have corrected multiple legs of a correction in a single downswing. Even the 2008 correction now seems like a good one to have faced as compared to the current one. In the current downswing there doesn’t seem to be any respite from daily onslaughts. And this time the markets have left very few companies in proper shape. The market favorites have all taken a severe beating. Financials which were having very heavy weights in the index along with the likes of reliance and larsen are all under severe selling pressure.

And it looks like we are going to retrace part of the rally that began from 2008 and that amounts to a major correction. Correction post 10-12 years of rally is not going to be over in a hurry (Remember 2008 correction which retraced rally from 2003-08 took nearly 12-13 months to get over.) So the idea is to get ready for a major war with many small battles thrown in. But each leg of correction once over will lead to a sharpish rally that will induce the feeling of the correction getting over.

Regarding guessing which sector will be the market leader or market favorite going forward, I have found over the years that its better to be slightly late than too early. So idea is to let markets tell you where the action is shifting, rather than be trigger happy and shoot in the wrong direction.

For those with nimbleness, bounces will offer good trading opportunities and can be utilised off and on if one is wired to such take such action. But for someone who wants to get in for the long haul, my guess it will be prudent to see the dust settle and then only take a call.

While facing corrections, I have found that even if you panic halfway during the correction, the damage limitation can be effective. You will live to fight another day. But if one tries to justify companies in the portfolio based on valuations, or theorise that with the kind of cuts stocks have undergone further downside is limited going ahead, there will be a nasty surprise in store.

In the immediate near term, peaking of the virus onslaught in a particular geography, probably USA as the whole world watches it, will induce a sharp rally which is likely to take the form of a relief rally. I think later on the after effects will induce another gradual correction once people assess damage to business models and recalibrate their investment decisions.

India has some good things going for it. Primarily strong decisive leadership, weak crude (some sheen taken out of it by weak rupee) . Key monitorable remains how we fare in next couple of weeks in containment of the viral onslaught. Govt actions seems to be strong but how things play out needs to be seen as its difficult to predict things in advance with these things. My guess is relief rally will begin much before we peak out in terms of viral onslaught but this is only a theory and we need to see how things pan out. One needs to be flexible enough to re adjust according to new facts and outcomes.

prabhakarpandey · March 23, 2020, 8:03pm

Don’t underestimate any positive medical development and breakthrough, this will completely reverse this situation. The historical chart of Dow starting 1900 till date , including all world war and turmoils sums it all that this too shall pass! Just have the patience and positivity.

Although the draw down during great depression is scary, it took 20 long years to revert back to the top from where draw down started.

Interestingly during 1918 Spanish flu, which impacted 25% of world population, as a pandemic, the draw down was not so high. In USA where 500k to 675k died, the Dow corrected only close to 40%.

https://stockcharts.com/freecharts/historical/marketindexes.html

deepinsight · March 23, 2020, 8:23pm

My personal perspective on the present crisis is one of realistic and humble acknowledgment that “I don’t know” and the action to that recognition is to get very defensive; since the risks and rewards are not discernible. Being offensive would actually be highly speculative since we don’t have an handle to grasp the risks involved.

The crisis touches many variables; few of them being, human lives, medical response, societies, politics, countries, real world economics and finally the stock market. It means how society, politicians and countries respond to this crisis is not easy to grasp. Different countries are waking up to the challenge differently. It will get very complicated.

What we know so far is social distancing is an essential tool to manage the speed of the spread; managing the speed of the spread is essential as otherwise the medical infrastructure of the particular hotspot becomes overwhelmed leading to higher mortality rate. This is what folks have been calling flattening the curve.

Social distancing however has an enormous economical cost; bringing the economy to a complete stop. An experiment been taken worldwide almost for the first time in our lives; what this means for the economy is extremely difficult to comprehend. There will be direct impact and then second and third level impact to the economy, companies and people.

It means first we were only trying to grasp the risks of the virus and it’s impact. Now we need to grasp the risks of the economy being engined down to a complete stop. It feels like a risk raise to the power of 5. Risks not calculable have been introduced. Nobody knows what this means, how long it will take, what will be the costs, which companies will face severe consequences, which will emerge winners, which maybe severely impaired.

Our minds are looking for simple binary solutions. A quick vaccine, a quick cure, a large stimulus action from the central bankers etc. Simple binary solution to a multi variable problem does not exist.

Our trained temperament ( specially from the last 10 years) is also biased towards seeking opportunities from every correction (buy the dip) primarily driven from the fear of missing out. What if the market goes up? What if someone makes more returns? What if the cure is found and the market jumps 50% without me Etc. Etc. We have forgotten the fear of absolute permanent loss.

The way I try to practice investing is, to act when the odds are favourable; risks of failure is reasonably low and potential reward is reasonably high.

The present conditions are risks are unknown and not calculable. New risks are emerging on a daily and accelerated basis. Not at all easy to grasp the odds of how a company is going to come out from this challenge.

It means we need to recognise that this is a loser’s game. Most things are vulnerable and there is more than normal fragility in the system. The way to play this is to try and make the least amount of mistakes, come out of the crisis intact and ready to fight when things get better.

My recommendation: Forget trying to predict; let’s observe reality earnestly and learn, get personal clarity and then act. Till then there is nothing to do but wait ( preferably at home, practicing your newly found social distancing super ability)

vaedermacher · March 23, 2020, 8:37pm

Hi,

My two cents:

Price action in global markets: Sparked by the virus, but related to massive leverage across asset classes started in the last crisis. What we’re seeing is huge deleveraging across market participants into markets which are turning illiquid, causing large price movements. Hence the Fed actions to flood the system with liquidity, starting with treasuries, and today moving into corporate bonds. Next could be high yield / junk bond market. I’ll just say this has little to do with the real economy, and is basically a bailout of the shadow banking system and money market funds, and indirectly overleveraged corporates. Fiscal action is still expected, but its doubtful what this can do (besides help politicians seem active / paper over some household / business debt for a few months) in the face of inelastic supply / demand - can’t buy / produce if you’re going to fall ill / under lockdown.

Pandemic response: Almost all interviews of veteran epidemiologists and infectious disease experts concur: This is a long term battle over 12-18 months minimum, as countries battle to flatten the curve and push out cases over longer period of time till a vaccine or herd immunity is reached. This doesn’t mean constant lockdowns, but likely continual disruptions over the next year. Viral pandemics of the past have recurred in 2-3 waves as seasons change, no reason same shouldn’t happen here - historically 2nd waves have been in winter and been much worse. My take away is that this implies no V shaped recovery and continued volatility and supply / demand shocks, and volatility. Coupled with deleveraging in global markets, and likely now exodus of MF flows in the next few weeks in India and a scarred retail investor population, flows will be muted over the next year.

After entering post the first few weeks of correction, I felt I was too early as my research started making me v uncomfortable - this could be a market drawdown of 70%-80% over the next year due to the factors above. The risk of capital destruction did not seem worth it, hence I initiated index shorts and have been liquidating positions on every spike to preserve cash / limit drawdown. Concur with seniors above that now is the time to survive.

zygo23554 · March 24, 2020, 2:32am

Coming to the actionables part -

Most important step is to Determine what level of equity allocation allows you to keep your lifestyle, sanity and peace of mind.

This is what every risk profiling exercise starts with, unfortunately it is seen only as a compliance item by most investors. Consider two people A and B, A has 30% allocation to equity and the rest in fixed income while B has 50% allocation to equity and the rest in fixed income. Assume that B is a good stock picker while A has done a shoddy job of picking stocks.

In a massive correction, assume good high quality companies fall 50% while bad companies fall 80%. Once the correction is done A has 74% of his net worth intact while B has 75% of this net worth intact. Though B is way superior in stock picking skills and has beaten A’s portfolio by a wide margin, he is more or less where A is on pure outcomes.

Over the past many years I have seen portfolios of investors who call themselves conservative but have 50% of their net worth sitting in a stock like Infosys, HDFC Bank (primarily the eSop beneficiaries) which is a high quality business in their own words. This is a severe disconnect which investors do not appear to understand. Same for people who put 50% of their net worth into a mix high quality businesses and expect to stay immune from sharp falls. Relative out performance does not look very appealing when the portfolio falls 50% even if it falls much lower than the rest of the market.

The best way of containing volatility and to survive big crashes is to have enough put away in fixed income funds/FD/bonds.

So when @Donald says he has purged his portfolio of non-core bets, his mental point of origin is to reduce the allocation to equity first, he does not start with the objective of reducing allocation to non-core bets. He is effectively saying - “In serious corrections nothing is immune, let me live to fight another day”. Once the decision to preserve cash and ammunition is made, then the decision of what to sell/exit props up; not the other way around. This is a very simple point but often misunderstood since we are a stock picking forum, we rarely have discussions on asset allocation here.

Getting the asset allocation mix right for the current situation should always be the first and most important step. Any mistake here can hurt much more than what we can envisage. The same works in a bull market as well, out performance contributes only if it is done on a decent enough base of capital. A 20% out performance over the market when you have hardly 10% of your net worth in equities hardly makes a difference to wealth creation. This works both ways.

Hence the approach of a core-satellite portfolio has many takers. Core portfolio is what one holds onto even during big corrections since those businesses will more often than not survive and be well placed to benefit during better times. There is no harm in selling the satellite bets at signs of trouble in the markets. Once again works well in theory but execution is never easy, as I myself am learning right now

The next logical questions would be - What can constitute a core holding? What are the characteristics of such businesses? At what valuation should one be picking these up? and so on…but these are questions we should always be asking, not just during corrections.

Calibrating to the current situation is much easier if we have already done the work on thinking about these questions - this is the preparation and cumulative learning aspect that Donald is harping on.

At the same time there are going to be a lot of unknowables in any serious situation, this situation is not very different from previous crises at a meta level. If the honest answer is “I don’t know” and no unique insights are ready at hand to size up probabilities, there is actually minimal payoff from thinking too much about these. Get your allocation right to ensure survival and wait for the market to give you some clear indications before increasing your allocation again. That is one sensible way of doing it.

phreakv6 · March 24, 2020, 3:14am

At times like these, I recommend everyone read Hans Rosling’s Factfulness for some stats and history-based optimism in an inherently pessimistic world. What we are facing now will pass but we don’t know if it will pass in 3 months, 6 months, a year or a couple of years and what damage it will leave in its tracks. When it passes, several businesses would have gone bust, business models would have undergone serious transformation, and market may not give lofty Rembrandt-like valuations in the near future as people will see black-swans everywhere.

Financials have undergone serious hit and even erstwhile unquestionables of HDFC Bank and Bajaj Finance are taking it on the chin. This is the time when demand for credit dries up, past book starts rotting and at the same time multiples undergo de-rating - triple whammy. So a business with a book-value of 500, trading at 10 times book at say 5000 and growing at 20-30%, will suddenly see growth drop down to single-digits or even de-grow, book value drop down 10-20% and the multiple dropping down to 2-3. This means a 70-80% drop in the market price - imagine that happening over a short period of time, as all market participants suddenly wake up to this.

Speaking of allocation, am no expert and to acknowledge that, my equity allocation at the max so far in the 3 years I have been in the market primarily as a speculator has never exceeded 30% of N/W. I have been a FD guy for too long but I realise that this is the time to change that. I may not change it overnight because its money I have put away out of sight, out of mind and it has grown OK post-tax on a risk-adjusted basis (It may have outperformed the indices even). I can’t be a trader anymore as I get better returns on my time in almost anything else I do and its time I build a long-term portfolio and I see this as a perfect time. But…

Even if we hit 4-5k on the Nifty next month at peak pessimism (anything is possible) and that ends up being the bottom in retrospect, there may be no way for us to know that we have made a bottom for the next 6 months or a year or even two years. So buying now may be the right decision in hindsight but will you be able to live through the uncertainty over the next 6 months or a year? Its better to have patience and commit capital slowly over the next few months. Speak to yourself and play out the scenarios to see if you can withstand a 20% or a 50% drawdown on the capital you are committing. If not, then invert and work backwards and see what is the amount you can commit that will let you stay in the market and continue being optimistic of a better future.

kums17 · March 24, 2020, 3:24am

Its a Great thread.
I read and listen to lot on CANSLIM of O’ Neil, which saved me a lot this time. Technofunda looks to me good method, at least in present scenario.
As advised by many Top Contributors, its better to wait for the situation to stabilize and let the market tell us what to do.
Thanks to all Top contributors

Harsh04 · March 24, 2020, 4:00am

Its great to hear from seniors on this forum about how to handle this crisis. i especially reckon with the optimism of @zygo23554
Novices like me will benefit a lot from such open discussions and will be akin to being guided in this tumultuous situation.

Here are my few observations :

Many have been advocating that we must wait for some clarity - on cure, on vaccine, on flattening the daily reported cases curve etc etc
My point is, wouldnt all the bargains vanish once there is clarity ?
with so much of liquidity around, wouldnt all that gush-up into equities ?
As Howard Marks says, bargains exist because of uncertainties. If uncertainties vanish, so do the bargains.
Should i really liquidate my equities and run away ? The immediate next question is, what am i going to do with that cash ? If i have enough cash set aside for surviving this crisis, this liquidated cash has no purpose other than waiting for more lower levels to enter, right ?
So, using the basic human survival instincts to take the cash out is good if that cash is going bto be used for ‘survival’, else it has no real meaning.
Am i believing that a doomsday has come ?
Am i believing that things can get only worse from this point ?
Certainly No !
What do i think will be the situation 3yrs hence ?
It will be much better and corona will be gone.
I feel it is human bias to extrapolate the recent past into distant future.

Now coming to weather stocks will gain their lost glory, valuations are subjective. May be alot of things will change, may be a lot of buisnesses will stay or go bust…or may be it wont, bcoz that will be dictated by the cost of such a change and the human inertia to continue in their comfort zone…

jamit05 · March 24, 2020, 4:02am

@phreakv6

I resonate with the conservative approach you’ve had in the recent past, and that you wish to make a change going forward.

Energy sector too are seeing a double whammy. Reduced demand and falling crude prices are making their oil wells less profitable and future exploration that much less interesting. Yet, Gail, Petronet LNG are top-notch stocks as they are into trading like setups, now available at decent price.

FMCG has not been sold into yet. I guess, FII will unload them last. IT stocks too are falling mildly in comparison, but they weren’t too “hot” either. Unlike, Banking and Finance stock, where the real show is.

I was thinking to myself. This clearly is time to start the staggered buying. But, I must be prepared for another 6 months and 50% of correction. For that, the stocks I buy must have that sort of a reputation.

For example I cannot by Mirza International as 5% of my portfolio and watch it lose 70%. That’s just not my temperament. It is a shortcoming that I have and I must understand it.

But I can buy HDFC Bank at 700 and would not bat an eyelid if it became 500.

Good luck.

deevee · March 24, 2020, 4:37am

Hi @Donald and VPers

Thanks for this thread.

I wanted to share my experience over the last few years 2016 onwards & what I have personally learnt in this journey. I will share what actions I have taken.

First and foremost I think there is a luck component which none of us can control. I read this in the books of Max Gunther. So we have to live with it.
Having some framework for equity debt allocation. I realized this at the time of beginning my endevaour in this field. I personally have used a very novice like mean reversion levels of Nifty valuations. No rocket science whatsoever. Most of my posts in the Nifty PE thread sums it up. At very high relative valuations I wanted to be atleast 50% cash. At times I was in 70% cash. And when the pendulum swings like it is happening now it doesnt stop midway. It is a pendulum from fear to greed.
Being a contrarian, sticking to your rules and having patience: In Jan 2018 I sold all my big positions, one happened to be Yes bank. Then on advice of a senior investor I sold RBL in 2019 with gains. This was luck. Holding cash going into 2018 was a real painful experience. But I had data which let me conclude that during bullish times I should be preparing my buy list and raising money. And during bearish time I should be deploying that money.
Picking stocks: I am a novice stock picker and am learning that. But I am a tad confident on my skills to stay out when I dont know. I never hesitate in saying I dont understand. Also I like to stay afraid of Mr Market. Jokingly my group of friends call ourselves members of Darpok Capital
Gambling: Yes we must take punts but it should be something which should let you sleep without the slightest hesitation

So what am I doing now. It is not an advice.

Sticking to my equity debt allocation. I am deploying very incremental amounts in core businesses I like. My objective is to not run out of cash for over a 12 month time frame roughly.
I buy when stocks in my list go to their lowest low. I have a very very clear rule in place. I also encourage all of you to write it down. Dont just think. Write it down and share with people whom you think can give you constructive feedback. Many years ago when I used to trade only futures I read a book called Money Management strategies for futures by Nauzer Balsara, This book had a lasting impression on me. Money management (in our case allocation amongst equities and equity debt allocation) in my books is perhaps even higher than stock picking.
Also I trade FnO to a limited extent. I started my journey in capital markets with this. But this is not the forum for this I guess.
I am keeping my smallcap list ready but I have not deployed even 1% capital into this.

My primary rule currently is survival. My cash position needs to outlive the fear of the virus. Once the fear is convincingly gone markets will be the first to rejoice.

And offcourse me and my family should last this virus pandemic. That is above all wealth.

Stay safe. Stay rational!

Regards
Deepak