Well, I thought I would pen some of my thoughts since we have hit rough patch before we see a lot of greenery. Again, this is from my personal experience and the post is intended for newbies.
I have gone through my posts above and I stick to what I have written despite some commenting on how expensive the valuations are etc. This is because, the proof of what I wrote is in my portfolio performance. Despite such excruciating corrections from 2018 Feb, the so called expensive stocks quote either around those prices or above. None have destroyed value.
However, few value stocks have caused immense pain by correcting more than 50% from the prices they quoted at the beginning of this bear market (Feb, 2018 as per me).
The best financial metric while analysing a company is not “Return on Capital Employed by the company” but “Return of Capital employed by you”.
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Yes, we will see Euphoria again, Our collective efforts to tackle a problem get better as we progress as a race. Covid-19 is no different, could be a larger problem than what we have faced for some time.
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But for us to enjoy the fruits of that, we need to survive in the markets and to survive, we need to think different.
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Mark your portfolio down by 30% from today’s close and if you think you cannot live through that, it perhaps may be the time to sell your PF to your comfortable levels and hold cash and re-deploy once you re-gain confidence, but at that time the prices may not be attractive because, the one who held through the rough patch has obviously taken more risk and so he should be rewarded with higher stock prices, right?
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Buy businesses that are efficiently managed and grow with time productively, ethically. Such businesses will NOT be available at a TTM PE of 20. The faster and sustainable the growth is, the higher the PE.
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Buy businesses where you can trust the promoter, manager and such person who portrays the correct picture of the business and does not show a rosy picture always.
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Sell your junk, penny, bought on others advise, hope stocks, if any, indiscriminately and either move to cash or to quality stocks.
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Please do an honest assessment of how good you are at this direct stock investing and if found lacking, invest in mutual funds of a reputed fund house (no self interest).
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Do NOT believe and invest in someone who analyses using complex excel calculations, talks a lot of value investing jargons, declares top notch quality stocks as expensive by 100% but instead buys stocks of worthless junk quoting his excel sheet proficiency and stating his academic excellency. I’m not painting every erudite person as same, but be aware. Look at the performance of the stocks such persons hold and decide for yourself.
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Quality stocks may take your time but gives back money but Junk stocks take your time and money and gives back pain.
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Of course, there are quality stocks in small and micro caps and will definitely give multibagger returns, but the probability of finding one is very low and even lower is holding onto it during the next correction. May be you can limit your PF allocation to some extent in your high conviction small caps to take advantage of this bear market prices.
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Give time to your quality stocks to compound.
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Do not repeat the mistakes again and again. This time it won’t be different otherwise, everyone would be rich through stocks.
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Differentiating the stocks which are really expensive and the ones which are optically expensive is an art! There are many factors involved in this and if you are not in markets for at least 5-7 years, it may prove to be difficult. It took me so long to realise this. Of course, you may be smarter, but be sure of your smartness and an MBA / Engineering from a top college is unfortunately not a good indicator of smartness in stock market.
I will keep adding here for the next few days, if I have missed any.
Edit 1:
- Some Ace investor or institution buying/selling a stock should absolutely NOT mean anything to you. It should not either be negative or positive.
You should take action ONLY
a) if there is a change in your thesis in business fundamentals, corporate governance, growth projections or
b) you got a better opportunity which should outperform the current stock by a mile
c) Align the portfolio allocation
d) Of course, you need money
- NO matter how bullish you are on a sector/stock, you must NOT go overboard on the allocation. Portfolio allocation precedes return expectations. Things outside our or management hands do happen and you may lose money heavily, sometimes with no exit. Have a process in place and stick to it, no matter what. In short term, you may underperform but in long term that would be a wise decision to take.
EDIT 2:
I will write about “Valuations during extremes vs. Sentiment vs growth expectations”.
People often have views that are north and south pole, so if you do not agree with me, that’s fine, there are more pressing things to bother about than bicker.
Valuations during extremes:
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If a company produces growth north of 30% for 2 years, “market” generally extrapolates that growth till eternity and give PE accordingly. Specifically here, “market” refers to ‘amateur’ investors, technical traders both novice and experienced that belong to pattern followers, breakout traders, momentum traders. I believe a congregation of these “market” participants create tops.
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In the due process, the experienced and long term investors who know the growth characteristics of the company keep exiting. People refer to them as “smart money” and if conspiracy is needed, call them as “operators”. There may be manipulation in penny stocks but in widely followed index stocks, the scope is much lesser.
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During bottoms, almost similar things happen where market extrapolates no or de-growth well into the future and give bottom rock valuations.
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Since business cycles repeat often, it makes immense sense to go back in time and check the valuations accorded by the company during extremes and take action accordingly. Of course, if someone is holding for more than 10 years, these cycles smoothen out, but holding and sleeping is possible ONLY in a handful of companies and sectors. Typically, high quality consumers fall into this.
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So, while entering in a stock, it may makes sense to understand where you stand with respect to valuations vs. growth for that stock and be ready for PE derating or rerating and have return expectations accordingly.
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Tops are quickly formed compared to bottoms because “selling” does not need money commitment, while buying needs money commitment, so it takes time. Also, logically, growth falling down is quite quicker than company gathering itself, change strategy and then get ready for growth again! People also want to see proof before committing large amount of money.
I have never given any quick money making tips but as an exception here is THAT ONE TIP for those who are interested to enjoy the next bull run - SOCIAL DISTANCING. Everything else will fall into place with time.
Edit 3:
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It is outright preposterous to venture into small/micro caps when large caps are available at such valuations.
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There is no doubt that megabaggers would be born out of this correction, however, the chances of finding them and sticking through them is minuscule and in the process the capital would be at stake, so allocate only a certain portion of your portfolio to such companies and not fully allocate.
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One who has seen multiple such cycles obviously can do over allocate but for some one just starting out, the best bet is to pick stocks from NIFTY and NIFTY Junior set of stocks or even a low cost INDEX fund is the best option.
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When the length of closure of businesses is not visible right now, there would be multiple corrections, re-tests of index support levels. The stocks whose earnings are severely dented would slice through past support levels easily. If this is a one month event, the situation would be different, of course.
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STAY AWAY from stocks with high debt levels, Cyclicals unless you have deep insight, questionable corporate governance levels, negative cash flow companies who are buying revenue with credit, they will find it hard to sustain and concede market share. STICK with leaders ONLY.
Edit 4:
Disclosure: I have raised substantial cash by selling my existing holdings in the current rally of Nifty until 9000.
My Reasoning:
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The lockdown has changed my thinking dramatically. The extension of lockdown IF it comes about will cost the economy dearly. Even if it does not come about, I cannot fathom a quick recovery as the bruises of the virus may take time to heal and for consumer sentiment to come back.
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The fiscal space is very narrow compared to 2008 when the ground Indian economy was almost business as usual. If fiscal support is done through money printing, this is inflationary and to counter this the central bank cannot even increase rates given the state of economy and small businesses cannot take the cost of capital increase.
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Technically, we broke the 2009 trend line and as a believer of technicals, the reasons come later and price action typically shows the way first. The targets of the broken channel are dire!
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I do not want to depend on miracles but my thought process want to guide me. If I’m proved wrong, I will get back at higher prices because in such a case we may have a lot more upside!
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Even when I get back in, I will buy only leaders at a premium valuation and not laggards at attractive valuations. It helped me in the past cycle to retain most of the profits.
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If growth in earnings does not come, any number of auxiliary steps by government and RBI does not help much.
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It is very unfortunate that equity has not really given the RISK ADJUSTED returns for Indian investors, however, I still believe the current downturn will sow the seeds of a very prolonged bull market. The timing of which I cannot predict. Let the data decide that first, we will have a lot of time to accumulate.
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Valuations are a function of liquidity ALSO apart from fine fundamentals. If the western markets are in the throngs of virus, I personally cannot see money chasing stocks so quickly and bid the valuations.
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Thanks for @homemaker for the mention!