My friend Rohan visited me on the weekend, and here is how our discussion went. Rohan’s comments are in red.
“Hey Vishal, did you notice the crash last week? I am pained to see my portfolio again and again!”
“Crash? Where?”
“Stop fooling dude! You know I am talking about the stock market and the crash in the Sensex!”
“Oh that! No, I was busy somewhere else, so didn’t notice that!”
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“How could you miss a 1,200 points crash in the last 8 days? And you seem to be writing an investment blog, huh!”
“Rohan, I avoid looking at these daily and weekly rises and crashes in the stock market. I have better, more exciting things to do in life!”
“But doesn’t this hurt your investments as well? I’m sure your stocks must be down as well!”
“Oh, even I’m sure!”
“Wow! So how could you be so careless to just ignore these crashes?”
“Okay Rohan, let me ask you a question. You love those fatty burgers at McDonald’s right?”
“Oh yeah, I just had them for dinner last night! But why are you asking this?”
“Well, if you plan to eat those burgers throughout your life and are not a potato farmer, should you wish for higher or lower prices for potatoes?”
“Of course, lower!”
“In the same way, if you are going to buy a car from time to time but are not a car manufacturer, should you prefer higher or lower car prices?”
“Hey, of course I will wish for lower car prices! But what’s the point of asking these questions? Don’t they answer themselves?”
“Indeed Rohan! Anyways, now for your final question – If you expect to be a net saver during the next 15-20 years, should you hope for a higher or lower stock prices during that period?”
“I always want higher stock prices!”
“Great! So like many investors, even you have got this one wrong. Just think again. Even though you are going to be a net buyer of stocks – you will be buying more stocks than you will be selling – for many years to come, why will you be elated when stock prices rise and depressed when they fall? In effect, you are saying that you will be happy when prices will rise for the burgers or cars you will be buying!”
“Aha!”
“You see Rohan, this reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. But if you are a prospective purchaser, you should much prefer sinking prices.”
“Yeah, that makes sense. How in the world I never thought about that?”
“It happens dear.”
“So, Vishal, is this the right time to be buying stocks given that the Sensex has already crashed by 1,200 points in 8 days?”
“Sensex is nonsense, Rohan! Its rise and fall doesn’t tell you whether you should be buying or selling stocks.”
“Now, why do you say that?”
“Because most great businesses of the future have a high probability of lying outside the Sensex, which is built up of companies that are already bloated in terms of sales, profits, employees, market capitalization. Plus, the very fact these are in the Sensex suggests that they are among the most expensive stocks out there.”
“Okay, so are stocks looking cheap outside the Sensex?”
“Look at this chart, Rohan. It shows the price-to-earnings or P/E of BSE-100 companies. P/E suggests how cheap or expensive stocks are compared to corporate earnings. So you can note that the BSE-100 P/E – which is the average P/E of all the 100 stocks listed in this index – has fallen to around 16x as of now, from around 20x same time last year.”
Data Source: BSE’s Website
“Which means stocks have become cheaper, right? And thus a great time to buy them, right?”
“Yes and no! Yes, they have gotten cheaper compared to last year, but this doesn’t suggest in isolation that you must go and blindly buy any stock.”
“So Vishal, you think stocks can fall further from here on?”
“I don’t know!”
“What do you mean you don’t know? You are an analyst and you must know where the stock market is headed!”
“Being an analyst does not give me any power to predict, especially the future! All I know is that, as an investor, you must be prepared for big volatility in your returns over the next few years.”
“Hey, why do you say so? I’m already frightened seeing the current volatility!”
“My simple reasoning is that the stock market, as I see it now, is simply behaving like a drunkard who is high on an overdose of alcohol (easy and cheap money).
“So while it continues to move up and down the stairs in this heavily drunken state, I am fearful that it will take a deep dive. As for the exact timing of this dive, I won’t pretend to be sure of that. My simple premise for caution is – that which cannot be sustained will not be sustained.
“As an investor, it is important for you to understand that we live in a world that is based on economic structures that are now unsustainable. We are passing through the biggest bubble (call it a grand Ponzi scheme) in the history of the world – a bubble in government debt, asset prices, and promises.
“These bubbles are all going to going to collapse, in one way or another.
“The negative side of this is that you may be so terrified of all this that you may quit investing in stocks. The positive side is that you will get a lot of chances to buy stocks at cheap valuations.”
“Great! But what should I do now? Now as in NOW!”
“Keep playing the game. Keep investing in sustainable, growing, profitable businesses that you can get at reasonable valuations. If you don’t get them now, wait!”
“But how do I take care of so many ups and downs in stock prices? It’s so frightening!”
“You see Rohan, we’re all so encouraged by the 24/7 news cycle to focus on the short term, it’s too easy to panic when what we thought was attractive gets 20% cheaper.
“But please don’t get bogged down by such short-term volatility. Be worried only of permanent loss of capital. If you can do that, you need no bubble to retire wealthy with your stocks.
“This will help you keep your head when all about you are losing their…in bull or bear markets.”
“It’s easier said than done! How do I really get my eyes off those falling stock prices in my portfolio?”
“Simple, close your eyes…and breathe!”
By the way, do you want to test how you behave as an investor? Take Safal Niveshak’s Investor Psychology Survey. I will announce the results soon.
Thanks Vishal, wonderful as always, and a special thanks since you’ve helped clear my confusion to a good deal.
Here’s what I wrote today to make sure I don’t swing back again, and when again in confusion, I can refer back to my thoughts in writing 🙂
May this stock accumulation period remain here for a good deal of time, and we very very (yes, twice!) conservatively pick great (not just good) quality stocks at super cheap prices when Mr. market again goes mad and throws them in dump, and eventually, when we’re about to retire after 15-20 years, we get great chances to make wonderful profits from our hard earned, patient investments!
Great, introspective post Sunny! Way to go! 🙂
Sunny, just read your excellent blog article….answered many of my doubts. Thanks. 🙂
I saw your Analysis list:
If I am allowed to comment these are my comments:
Amara raja Batteries: A good Story. Another Exide in making. The demand for the stock is good. But all these Auto stocks are good when they are small, they become as cyclical as they can when they are big.
MCX: Management Integrity is in question. I don’t touch this.
Airtel: I remember Yogi Berra ‘No one is going there, Its too crowded.’
MOIL: Commodity stocks, says Peter Lynch should come with a statutory warning, ‘The stock cannot make money for itself sometimes.’
(bajaj Auto): Bajaj Auto is the best stock in the total list. The stock is consumption based. Market leader and mostly passenger segment so a thumbs up, But i will not buy even this because of its clipped growth. The downside is protected but I think is upside is not big.
TVS motors: Have you seen the margins? Bajaj Auto is a safe bet. TVS does not have a moat as they say and big enough to be avoided. They have to introduce a vehicle with very good pricing power and sales like bajaj pulsar to change its PE ratio.
TATA Motors: A grand daddy. And the daddy is old. Actually I prefer Eicher motors. Even for its high PE ratio. Their Royal Enfield has very good sales. And the volvo deal is good. The stock at 8000 cr MCap is just in the beginning of changing the scenario.
Infosys: A good old stock again. Can be bought in the current IT trend. But it is very tough to make 5 baggers and 10 baggers in 100000 cr companies. Being a software engineer by professsion I know cyclical the industry has become.
CARE-RATINGS: The moat is there with CRISIL and will always be with CRISIL. Every business dreams to get higher rating from CRISIL. Not from CARE or ICRA. The ratings business is a virtual monopoly with CRISIL. I like CRISIL.
BHEL: Please avoid Government Stocks, Don’t let the government hit you directly. It is already hitting us indirectly.
Crompton greaves: WHEN THE SECTOR IS IN TROUBLE, IT IS VERY TOUGH FOR THE STOCK TO STAY DIFFERENT.
Piramal: I did not understand what he is doing. What are they doing with their businesses. I don’t think the stock is a long-term investment.
IL and FS: In a Holding Stock, The Money Manager is the MOAT. You need a buffet there to get high PE ratio. Holding stocks are undervalued, and remain as such.
Others: Swaraj engines is good. I don’t think they will attract high PE ratio. Unlikely. Solar Industries: Someone said its a long-term story, need to look at it. Others I cannot comment.
I want to make one last comment: ‘Unless people know how to buy an expensive stock, I don’t think they will make multibaggers. Because it is buying at 20 PE ratio and selling (if growth becomes unsustainable)at 40 when EPS also went up 4 times in the same period. This is my model of multibagger.’
In the case of MOIL for example, You have to be right about Market timing, because otherwise you end up with a stock which is falling and falling.
Nice analysis Surya
Great stuff Vishal….also took part in the survey…..petrified that I am gonna do really badly 🙂
Thanks Raghav! It was just a survey so nothing’s good or bad there 🙂
Thank you so much Vishal for this outstanding article, for some time I considered myself as a Rohan, worried about loosing scripts, thanks, any ways how is your father now?
Regards,
Nilesh Mundale
Thanks for the feedback, Nilesh! Yeah, my father is fine now. Thanks for your concern! Regards.
In my short time in this website, which Vishal runs brilliantly, I have noticed he tries to keep off from politics and strives to be strictly apolitical. But it is my humble opinion that nothing matters more to the business environment of a country more than the political forces or the the political philosophies which are in power. The current political dispensation, which is strictly socialist and anti-free market capitalism, if it continues to remain in power for much longer, will make India into a gigantic Zimbabwe. They have done more than enough damage already, but over the next 5-6 years, if this political force continues to rule India, all your investment philosophies, and all wisdom garnered from Buffetts and Grahams will go for a toss. The only “safety moat” under such circumstances will be either a profitable inside relationship with this political party or a marketable skill that allows you to immigrate to safer environs abroad. There will be no investment opportunity in a begging bowl country that India will soon turn into. Just my honest opinion. Nobody seems to be seeing this “elephant in the room” – so I said it.
Thanks for your point of view Raghav! I have nothing to add 🙂
As a matter of fact, even Warren Buffett has quit on India…
Thanks for sharing this Raghav! Buffett has options, but we have to make do with India only. 🙂
Very well written article which is very apt for the current times.
It is common sense that the market will crash once the party of free money is over. I also see that many stocks have become attractive with enough margin of safety in sectors which are not in favor now (for e.g. Capital Goods). So I am confused on whether to invest on these stocks on a monthly basis (from my monthly savings) or wait for the market to crash. The question is whether to invest in stocks as long as there is enough margin of safety or wait (low probability of an endless wait) for the crash. Will it be wise to time the market for a crash?
I am not much concerned anyway as my investing horizon is more than 10 years and I am sitting on some loss already.. 🙂
Thanks Shamil! As I mentioned in the post – Keep playing the game. Keep investing in sustainable, growing, profitable businesses that you can get at reasonable valuations. If you don’t get them now, wait! Don’t get bogged down by short-term volatility. Be worried only of permanent loss of capital.
Hope this helps.
hi Vishal,
I understand that we should not track the daily movements of the stocks on daily/weekly basis but the stocks which are in our radar needs to be tracked on weekly basis atleast otherwise how we know them they are in our buy zone and also there is a possibility that they donot remain in our buy zone for long..
Saurabh
Yes Saurabh, it’s always a good idea to keep track of stocks in your watchlist.
Hi Vishal,
Excellent article as usual. To be very frank with you, I am bleeding like anything as of now (if u factor the lost opportunities in terms of buying & selling). If there is anything that I have learnt over this period it will be this (correct me if I am wrong): Look beyond OBVIOUS numbers.
Paradigms of market valuation are changing. I bought seemingly undervalued costs in inflated times to understand that they were grossly overvalued. e.g. Sintex, Ashok Leyland. A simple P/B prompted me to buy Sintex. But then I grossly ignored business dynamics (heavy debt, dependency on government policies and exposure to currency, hight working capital requirements).
I worry to see stocks tanking. Not because I am chickenhearted. But because it reminds me of the blunders committed. However let me clarify: It is almost reassuring phenomenon that I am learning something, albeit at a high price.
From my experience, I can definitely say that this is an excellent opportunity for people like me to rethink of (& revalidate) their past assumptions. I did the most sensible thing I could do – cut back losses by exiting the positions.
Let me share my experience with you: When market was at ~16000, my portfolio was up 2%-3% (even after factoring crappy buys). Now when market is at ~19000, my portfolio is down by 35%. I strongly second your opinion (through experience): Just because market (SENSEX, NIFTY & other indices) is up, does not mean our investments will do well. Just because market is down does not mean our investments will do bad. Afterall, the only meaningful yardstick to judge the investment success is the durability of businesses that we buy and the price at which we buy it.
Thanks for sharing your thoughts and experience, Gaurav!.
Here’re a couple of Munger quotes on your comment –
1. Being a humble and admitting, where you are deficient in is the birth of perception. Committing mistakes is human factor and admitting your mistakes is undoubtedly humbleness.
2. For errors and mistakes reduction, investigate thoroughly. Accepting mistakes are good but nothing is as good as avoiding mistakes. Before making any investment, you must try your best to reduce inaccuracies and mistake by investigating thoroughly.
superb article sir!!
the day to day looking at stocks has stopped but still not willing to sell the opto’s & mcx’s..:)
they have alrdy lost more than 80 % of there value..
at these times do we take the 20 % that we are getting or hold on to these losses & wait for it to recover or mayb average.
Jugal, here are Warren Buffett’s two rules of investing –
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
Hope this answers your question. 🙂
hi Vishal, nice article. i would like to qoute mr warren buffett (1990 annual report).” the most common cause of low prices is pessimism-sometimes pervasive, sometimes specific to a company or industry. we want to do business in such an environment, not because we like pessimism but because we like the prices it produces. it’s optimism that is the enemy of the ratinal buyer. none of this means, however,that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. what’s required is thinking rather than polling.’ thanks.
Excellent write up, yet again! The world is firmly moving to a more balanced and just system. This is such a tectonic shift, that all formulas and patterns of the past decade or so cannot necessarily predict the immediate future. However, what choice does one have, except to invest. The alternative is to stay with cash and let inflation eat it. And besides, inflation is not likely to be tamed easily, only long term productive capacity (where the supply of goods keeps up with demand) can tame inflation. However, if one believes in human enterprise, then one must believe in stocks. Also, like water flows from a higher level to a lower level when the barriers to the flow are removed, capital will flow from where it is produced in excess to where there is short supply of capital, provided the barriers are removed. India has to remove the barriers, or it will face a human tragedy. 1.3 billion people need to be fed, clothed, educated, cared for, so that they participate in the system productively. Without capital (capital is not just money, but includes expertize, technology, management systems, networks, built up trust etc), India cannot create a just, peaceful and balanced society.
That’s why I believe the long term is good, once current imbalances sort themselves out (hopefully, in a peaceful manner). But for about 5 to 10 years, one must be patient and keep buying when the price is right. That is what I believe. And keep oneself busy in participating in the growth and well being of society, so that one does not resort to short term betting for entertainment. 🙂
Regards,
Rajaram
To my mind part of the market like FMCG, Pharma etc at a index level of over 25000 while capital goods etc at around 12000.
These are highly volatile times and you need to keep a very steady and focussed approach to be able to make sense of it.
I would generally agree that keep buying some on dips and keep cash aside for a scoop as and when the market tanks, which it should given that easy money will be gradually sucked out in some time.
Let me sum up the rational for ignoring the falling prices and why it may be not be prudent to do so..
1.People should be happy if their favorite merchandise sells for less price.
This attitude is good for merchandise but stupid for stocks. Why? because value(utility in this case) of merchandise remains same over time..but value of stocks are as volatile as their prices. So if the price of stock goes down 50% because value goes down 75% it would be stupid to ignore the price fall or buy more.It will be the right time to sell for a loss and one will be missing a great opportunity to sell for less loss.
2.If you are a net buyer over many years you should be happy to see lower prices.This is true for people like Warren Buffet who have free cash coming in regularly but not for ordinary individual investors.Many individual investors sacrifice their short term consumption for long term returns and they cannot keep on investing when their returns are eroded.Warren Buffet will be happy to see stock prices go down for 15 years and can still keeping on buying,but are there any other individual or institutional value investors having that comfort?
So I think people should stay cautious and should not never find comfort in this kind of logic which sounds fantastic,but can lead you into many mental biases over the long term.
As for predictions, investors should not only avoid predicting stock markets but should also avoid predicting(or having mental bias) on current or future macro economic conditions.The later can be as harmful as the former.Waiting for a big economic collapse can be more devastating than losing 60% of your portfolio.
Its appears Vishal is having some macro economic predictions on the structural ponzi schemes that can collapsing in the future 🙂
To each one his own.
As Peter Lynch said “invest only that money in the stock market which you can afford to lose.”
The thought in this post is to do with the fact that volatility is an investors friend provided we can maintain our composure.
If we invest funds which we cannot afford to lose, then we are committing a mistake.
The issue is greed and fear are two devils which are very hard to reign !
VERY VERY VERY VERY GOOD POINTS Rakesh. This is one of the reasons why I don’t follow buffett completely, though I don’t ignore him.The trick is to understand losses very quickly.
I will put some points here based on my understanding:
1. The biggest losses come when management integrity is in question.
2. Big losses invite investors when they buy Large-caps at high PE ratios except in the case of Private banks where the scope is very big. A large cap like Infosys, Tata motors etc should be selling at around 10-15 PE ratio.
3. I look at volumes. If there is a big problem for example in the case of MCX, If the Volumes are high as it was I will sell it beacuse a trend always starts with higher volume. A big rain always starts with higher volume first. If Volumes are low as in the case of Indusind or HDFC bank what it means is the recent short-term buyers have sold it.
Very good points raised.Even if you re a value investor you need to keep a watch on the prices of your chosen 15-20 stocks as our markets are highly immature and sentiment driven. too rich or too low valuations provide “arbitrage” opportunities to turn a quick profit. some arbitrage examples:
1. Titan hammered due to recent govt. curbs.
2. BILT hammered from stable 16-17 price band to 10-11 due to triggering of sale of 3.4 % equity of a single shareholder.
3. Volatility in PSU bank stocks over the last 5 years.
4.Arbitrage situations due to PSU disinvestment.
5.Tata steel breaching 200 levels recently
These are low hanging fruits BTW. A focused investor can gain from market behaviour even among his narrow pick of stocks if he adds a little technical knowledge to his fundamental skills.
P.S. Even Buffett bought 40% of the worlds silver at one point of time as he was able to recognise a huge arbitrage opportunity 🙂
I am acting like a hungry mosquito in a nudist camp!
Very well written article, Vishal.
Everytime I visit your site, I learn something new man. Good job.
Keep enlightening us!