2018 has been a seemingly frustrating year for most investors so far. It is a year in which the markets started out being highly volatile with occasional but decent rises upwards, but more recently the markets have shown a lot more inclination to stagnate and go down and any semblance of a rise is quickly bought into and negated. From an Indian perspective the major risks seem to be the recent spike in crude oil prices which adversely affects our current account deficit and trade deficit and has led to sustained weakness in the rupee. And although crude oil prices have softened a bit in the past few days, it doesn’t seem to be enough to mitigate the negative sentiments that have gripped the markets. Also, the ruling party that forms India’s central government, recently lost a pivotal state election despite emerging as the single largest party, falling prey to a post poll alliance between its two biggest rivals in that state. What was seen as an inevitable win for the ruling party in next year’s central elections, now seems a little more in favour of the opposition parties, giving rise to political uncertainty, something India has not had to deal with in the past few years, and it has taken its toll on the markets, given that markets hate any kind of uncertainty whatsoever.
On a company specific front, a lot of scams have recently emerged from the closets of established Indian companies, especially in the public sector banking space, and big questions have been asked of India’s corporate governance standards. Though the negatives in this case are greatly mitigated by the fact that India’s corporate earnings are starting to come back in a big way aided ably by recent reforms like GST. So the current market context is one where the upside for the market is capped by weak macros (rising crude oil prices, a weak rupee and political uncertainty), and the downside is protected by ever improving micros (the comeback in corporate earnings). This effectively means that the markets may trade in a narrow range for the majority of the year, and that markets will not be going anywhere too far any time soon.
So the question on the mind of every investor in this sort of a market context where negative sentiments have gripped the markets and the markets themselves have stagnated is: How do I deal with this now?. The current situation, according to me, is the best possible situation for a committed, long term investor. I again emphasize on the words committed and long term. Last year, 2017, was a mindless rat race between investors everywhere. The areas that caught the markets’ fancy were the mid and small cap stocks and there was a recurring theme to investing in 2017. Hot mid cap or small cap stock emerges which catches everyone’s fancy, everyone rushes to buy the stock, and as far as prior research and ground work on the stock goes, well nobody wanted to waste time on that because they feared they may miss out. Well those investors who participated mindlessly in last year’s rat race conveniently forgot Newton’s third law of motion: Every action has an equal and opposite reaction.
The reaction to 2017’s action has now emerged in 2018. The best quality mid and small cap stocks have fallen 35-50%, and I don’t even want to talk about the fall in the rest as I’m afraid it may give you nightmares. At this point I would like to congratulate any investor who researched their mid and small cap stocks before buying them in 2017, and/or simply bought quality large cap stocks. I’m sure you have lost a lot less money because you would have only bought the best stocks with the strongest fundamentals regardless of the size of market cap, thanks to your prior research. And for those who didn’t, the time to redeem yourselves is at hand. The markets will not be going anywhere any time soon, so you will have sufficient time to research your stocks, and the frequent corrections in the markets will give you ample opportunity to buy at comfortable valuations.
The key to surviving and thriving in this market, for me, is discipline. Discipline both of emotions and finances. Calm your mind and train it to not get fearful when stock prices fall, because prices fall and values in most cases don’t. Basing your buy or sell decisions on stock prices is the worst possible thing to do. Instead carry out a thorough prior research of what the company is really worth, and if you find that the markets are offering you the company at less than its true worth, go out and buy, and if they give you an inflated offer which is unjustifiable, be the first to sell. Financial discipline is equally important. Just because you see that your favourite company is being offered for less than its worth, it doesn’t mean that you put all your available money into the stock at one go, unless you are okay with bearing up price pain in the short term, because the stock may continue to fall after you buy it, and you may not have any money to take advantage of the fall and buy again. For those who want a pain free experience, understand that when a stock, or markets as a whole fall, it usually follows a set pattern. It first slides quickly, hits a bottom and then bides its time before moving up again. Buy slowly on the way down, and go all out when it consolidates at the bottom. Remember this when buying stocks during a fall: Slow and steady when it slides, go big when it bides.
Remember that equity markets are auction based markets and there will always be swings in auction based markets in the short term. Swings to the peaks of euphoria and to the bottoms of fear and pessimism. This is something that every investor signs up for when he or she decides to enter the stock markets. So it is not fair to complain about it when it actually happens. The best investors research their stocks beforehand, practice emotional and financial discipline during tough times and take advantage of both kinds of short term swings in these auction based markets, sometimes even bear up a little short term price pain if need be, and the rest fall by the wayside.
As I close out this piece, I only have one question to ask you, and this is a question you should probably ask yourself. In your quest to beat the markets, now that you know what it takes, do you want to rise up and be the best, or fall with the rest?