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Not a time to be a Hero, but not a time to run away either

On 18th July 1948, Havaldar Major Piru Singh laid down his life while attempting to eliminate the enemy during India’s first war with Pakistan in Kashmir. For his bravery and ultimate sacrifice, he was awarded the Param Vir Chakra, the 4th such awardee in Independent India.

If there was an award for bravery in stock markets, I am sure most of us will qualify. But unfortunately our rewards are based on the results. If the act of bravery works out, you have some bragging power among friends and if the act falls flat on your face, the reaction is based on how much have rubbed them the wrong way when the times were good.

Last week saw stocks across the board falling like nine pins. Of the stocks that are traded on the NSE, nearly 92% of them closed in negative territory. Regardless of fundamentals, stocks have taken a beating like no other.

The trigger for the whole correction came from the default by IL&FS. Though the default was more of technical nature and one that would have had no direct repercussions on the market, it was a excuse that was not to be wasted.

Since 2014, thanks to inflow of money through mutual funds like they have never seen in the past, stocks had propelled higher regardless of whether it made sense to buy at such valuation or not. Selling by Foreign Institutional Investors, Political uncertainties, Rise in price of Crude and the widening deficit among other news that earlier would have torpedoed any rally were thrown to the sidewalk.

The fear of missing out on the action meant that investors jumped into the pool regardless of knowledge of depth or whether they actually knew to swim in the calm waters let alone troubled waters in the first place.

Crash in stocks like Yes Bank and Dewan Housing Finance has meant that there suddenly investors are wondering, which stock has the possibility to be drawn into question tomorrow. And then is Infibeam which fell 71% on Friday and in September alone has wiped out all the gains it had seen since its listing in April 2016. This is not the elevator coming down but the elevator crashing after the ropes have been cut.

Amidst all this, the US markets seem to be well on the way to another all-time high showing no sign of any weakness as the economy is growing at its fastest pace in a long time. But with easy money on the way out, the question is, how long this can last.

The US Federal Reserve has been tapering its balance sheet since quite some time now though that pace would fasten since the schedule of security reductions should see the Fed reducing their balance sheet by 50 Billion a month from October onwards, it was 40 Billion a month for the last few months.

“In order to rise from its own ashes, a Phoenix first must burn.” ― Octavia Butler

Every bull market is marked by excesses that is seldom understood or recognized during the phase of the market itself but once the bubble is burst, it’s easy to point out the same. This bull market has been led by financials – private banks, NBFC, Housing finance companies as such.

Of course, unlike the Infotech boom of the 2000, all sector booms have been growth led and this has been no different this time around. Low Interest Rate, Public Sector Banks going into a shell when it came to lending and aggressive sales meant that financial companies grew at a rapid pace.

While much of the banking sector is in a mess, Private Sector Banks were able to grow their books without getting caught in the kind of problems faced by Public Sector Banks. This isn’t the first time we have seen rise in NBFC’s though as they would say, “Its different this time around”

Good friend Vijay Sambrani has been in the markets for longer than I have and importantly has the ability to connect time lines across decades. His view on the current market conditions;


1994 REDUX ???. I have been having a recurring nightmare since the beginning of this year seeing the aggressive buying in mid caps and small caps since Demonetization. Was unable to recollect anytime in the past bull runs where the mid caps /small caps Indices’s P/E ratios were higher than that of the Nifty/Sensex .

Then I went back to my charts/notes/memories and remembered distinctly that this kind of scenario prevailed between Mid 1993 and Mid 1995. Then as of now the mid and small caps had a runaway rally , there were a slew of IPOs and retail which had been burnt by the 1992 HM scam came back with a vengeance .

 I remember the NEPC Group, Tatia Group, Sterling Group and stand alone entities  such as Balaji Steel, Femnor Minerals , Caplin Point etc etc which were the darlings of speculators/investors. And then came a host of NBFCs like ZEN Global, CRB  etc and sprouting of Benefit Funds which funneled large parts of inflows into stocks which created a mini mania . And then one day , in September 1994 at the start of the month long NON-DELIVERY period the Sensex peaked after crossing the 1992 peak by a few points.

That market was led  by a huge dose of liquidity which came in through by the newly formed Pvt Sector mutual funds and FIIs like Morgan Stanley. September 1994 peak coincided with the Peak Liquidity. Then the liquidity tap began to dry and slowly and steadily the market lost steam without any “apparent bad news”.  In April 1995, the MS Shoes IPO failed and that led to a panic and no amount of assistance by MFs /FIIs could stem the downward spiral and slowly the NBFCs began to fail and the Sensex had dropped below 3000 in less than 8 months and bottomed out only in June 1996 .

Almost all the NBFCs failed , and most mid caps/ small caps also got delisted. The high flyers of this era lost 70- 90 5 of their value ultimately.  I remember that one market maker on the Floor used to offer two way quoted for one of the most sought after scrip :  Balaji Steel at Rs. 350 . Within the next 20 months it went to zero.  Such was the carnage. And it all happened when there was no visible Major Bad News. 

I distinctly remember I held significant holdings on my own and my clients behalf in Femnor Minerals, NEPC , Zen Global, Balalji Steel etc which have now become “junk”. All the profits I had made in the previous year vanished as I kept averaging on the downside. Time has made me more cautious , maybe more than necessary . So when I see many similarities between this bull run and that of 1994 , I shudder to think , whether History will repeat itself. I sincerely hope my thinking is WRONG.


I don’t have his experience or insight but what I do understand, I do hope that he is wrong for the emotional impact that kind of fall will have on investors who are just stepping into equity will be unprecedented.

Markets trade in cycles – we cycle higher and then we fall lower and then we climb higher once again.

In the movie Inception, there is a dialogue by Mal who herself is a imagination by Cobb, she says

“But Pain, Pain is in the Mind”

 Right now, Investors are in a lot of pain. Just a few days back, I had a long conversation with my Chemist who has invested a significant sum of money for the first time in his life and is now seeing the value decrease day in and day out.

While the investment is significant, given his Networth from what I know of, this is a dip in the ocean. Yet, the pain haunts him making him wonder if he should just cut out the pain by redeeming the investment.

The recent bull run has meant that a lot of investors were herded into markets, some with basic idea of how the markets worked but most who had no clue other than that this will generate strong returns over time.

The panic we are seeing currently is from investors and traders who went overboard by building positions using margin. While leverage can help during bull markets and provide gains beyond what is accomplished by others, during bear phases it becomes a killer.

When markets fall as it has recently, the probability is very low of a V style recovery. The dust has to settle first before the next green sprouts seem to spring up. There is no reason to be aggressive in an attempt to maximize the opportunity for the opportunity maybe here for long.

What matters is where you are when it comes to your asset allocation and how confident are you about being able to hold out the pain in the event that his becomes an extended event. Bear markets are sharper and shallower than bull markets, but given that we had seen a multiyear bull market, any bear market will not be one that is over in a month or so.

If you are fearful, the best route out is to just stay put (assuming that your investments are in Mutual Funds where the churn from bad companies to good companies are taken care of by the fund manager). Add no more money for no amount of profits shall compensate for sleepless nights but withdrawing at a loss will be the worst possible way to deal with the situation.

If you are light on equities and are confident that going further markets will once again be better, this is the time to start adding again. We may very well fall further, but adding small amounts will provide you with a feeling of comfort that even in the unlikely case that markets recovery and take off from here on, you aren’t left behind.

On Twitter, everyone who doesn’t manage money seems to say, I told you so. They enjoy a luxury of being right despite being wrong for long enough to make the right inconsequential. The current fall is more of a correction of valuations than a fundamental change in the economy.

As long as you believe that the Indian economy will do good over time, it should not dissuade you from betting on the same. Betting on the Indian economy is best done by being a entrepreneur who takes advantage of the opportunities provided but since most of us aren’t good at that, the next best step is to piggy back on the entrepreneurs by buying their stock in the secondary markets.

Even though this is an opportunity, don’t over-invest for like leverage, your hand will be forced at the worst possible time. Stick to what is comfortable and allows you to sleep well at night. Reducing weight doesn’t really require selling off – you can reduce weight of your equity if you feel it’s too high by just not investing further.

Our family’s investment journey in markets started through a mutual fund we invested in 1996. By 1998, it had lost 50% of its value. Being new and fearful, I exited the fund in the heat of 2000. For some time, that looked like a fine decision. Today, that same fund has a NAV that is 12.5 times above where I sold.

The next couple of years should in hindsight provide for wonderful learning opportunities and opportunities. Being in constant fear will only make you miss out on those while not really doing anything to make the situation better.

Don’t be a Hero and try to buy stocks unless you really know what you are doing. That said, don’t be a coward and run away in fear for where opportunities lie, so does Risk. It’s two sides of the same coin.

Figure out your ideal asset allocation and stick to it. Sticking is the key, not identifying the ideal allocation for there is none.

Here at Portfolio Yoga, I have been publishing a simple asset allocation mix. Hope that gives you idea of where you should be.

The Gazette Notification awarding the Param Vir Chakra(Link)

 

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