Imagine It’s September 2007

Imagine it’s September 2007. The world seems safer, for we have not seen much of Donald Trump or Kim Jong Un. We have an opportunity to trademark brands like Uber, WhatsApp, Quora and Instagram as they do not even exist. Twitter and iPhone are less than a year old. Steve Jobs, Robin Williams, and Michael Jackson still walk the planet.

Imagine it’s September 2007. Bear Stearns and Lehman Brothers are still in business. Ramalinga Raju, along with his accountants, is still creating fictitious cash at Satyam. The market caps of Eicher Motors and Page Industries are less than 2% of what they would be ten years later. And those of DLF and Suzlon are 6x and 24x respectively of what they will be when you are ten years older. The BSE-Sensex is just four months away from peaking before crashing by 50%, though it is still 50% of what it will be after ten years.

When I imagine it’s September 2007, I am ten years younger, and stupider. I am busy writing stock recommendation reports for my employer, whom I am going to leave in another three years. The idea of Safal Niveshak does not exist in my, or anyone else’s, mind. Nobody knows me or trolls me (wow!).

Cut your imagination now and come back to 2017. But wait just a minute! Imagine how difficult it is to imagine yourself and the world as it existed ten years earlier. Imagine how hard it is to imagine things that we now know with certainty – because they have already happened – because we think we always knew about them before they happened.

“I knew the stock market was about to crash in January 2008!” is a common refrain I have heard over the years, and the accompanying regret, “Why didn’t I sell out then?”

“I knew the stock market was at its bottom in March 2009!” is another phrase I have heard over the years, and the accompanying regret, “Why didn’t I sell my house and buy stocks then?”

You see, imagination is a powerful tool that nature has bestowed upon us.

In 1929, poet and journalist George Sylvester Viereck managed to get an interview with an initially reluctant superstar physicist. He asked him, “How do you account for your discoveries? Through intuition or inspiration?”

The physicist, Albert Einstein, replied, “Both. I sometimes feel I am right, but do not know it. When two expeditions of scientists went to test my theory, I was convinced they would confirm my theory. I wasn’t surprised when the results confirmed my intuition, but I would have been surprised had I been wrong. I’m enough of an artist to draw freely on my imagination, which I think is more important than knowledge. Knowledge is limited. Imagination encircles the world.”

Here’s one of the world’s most knowledgeable minds talking about the limits of knowledge and the expanse of imagination!

Anyways, for most of us adults, imagining is what we are not supposed to do. It’s hard, like you may have found out imagining September 2007 in the exercise above minus what happened after that time. That period looks more like reality than imagination. You already knew what was about to transpire.

So, imagination is difficult. It’s difficult to imagine that the stock market, as of now, looks like that of September 2007 (I am not saying it looks like September 2007, just suggesting how difficult it is to imagine this way).

But we easily fantasize. Like in 2007, it’s easy for us to fantasize in 2017 the outsized return that we will continue to make by buying anything and everything – businesses we understand and those we don’t, stocks that are cheap (for a reason) and those that aren’t, and managements that are clean and ones that aren’t.

With the benefit of hindsight, it’s easy for us to fantasize about the next Eicher or Page in our portfolios, but not imagine the next DLF and Suzlon that may also lie there. And with the same benefit of hindsight, I can tell you this is a dangerous way to invest or make any decisions in life – by fantasizing about a bright future without imagining what may go wrong.

Lest you fall into this trap again, I would suggest you do this exercise now.

An Exercise in Imagination

1. Imagine September 2017 is September 2007.
2. You know (like you knew in September 2007) the stock market is a few months away from its peak and the crash is imminent (just imagine).
3. You know all your stocks – good or bad – will also fall in the coming crash (hard, but please imagine). Though the good ones will again rise like Phoenix and the bad ones will continue to lose for the next ten years (yes, imagine the next ten years).
4. Imagining this future you already know about, what should you be doing now, in September 2017…I mean, September 2007?
5. Imagining that may lose a lot of money (some of it permanently) over the next few months, and also over the next ten years (again, some of it permanently), how would you position your portfolio so that you don’t lose much, and in fact gain a lot given that you also know the broader market is going to double over the next ten years?
6. Check your existing portfolio, sell all your stocks mentally, and then look at each stock and answer this question – “If this stock was not in my portfolio already, would I buy it today…especially when I know what’s coming in the next few months?” If the answer is no, question what that stock is doing in your portfolio?

One rule of the above exercise is that, even with the benefit of hindsight, you cannot time the market i.e., sell everything four months later and buy again in March 2019 (as if it was March 2009). You just don’t know when that peak and bottom would appear, only that it would all happen in the next eighteen months.

Is your head spinning already? When I was going through this exercise over the last few weeks, mine was. Not because this exercise was something difficult to do, but just for the amazing insights it left me with after I finished it off. And a few action points – I ended up reducing allocation in a couple of stocks and increasing allocation in a couple of others that were already in my portfolio. Fortunately, I had nothing to sell in terms of bad business quality.

Imagining the future left my reflective brain overheated for some time. Imagine a steam locomotive working at its full speed, to understand how my brain felt. But the entire process was satisfying, and that was what I was looking for.

“Imagination rules the world,” said Napoleon Bonaparte. Obi-Wan Kenobi warned Darth Vader in the first Star Wars movie nearly 40 years ago, “If you strike me down, I shall become more powerful than you can possibly imagine.”

As investors or decision makers, perhaps we need to expand our imagination a little as we contemplate where the businesses (and thus the stocks) we have invested in or are looking to invest in may be 10 or 20 years down the line (either way, up or down).

In fact, apart from observation and deduction, if there’s an important skill that an investor or analyst must bring to the table while making investment decisions, it is imagination. It is, after all, imagination that helps us make relevant connections that are not entirely obvious, between data or information about a business that may appear disparate at first.

And of course, we must imagine directed by reality and power of our knowledge. Else it would be a mere fantasy.

What do you say?

Share in the Comments section of this post what you were doing with your portfolio in September 2007, and what you plan to do now imagining we are in September 2007 again. Try it, for it will be an interesting thought experiment, and may leave you with some insights to act upon now.

P.S. Watch John Lennon’s Imagine, the best-selling single of his solo career. Its lyrics encourage the listener to imagine a world at peace without the barriers of borders or the divisions of religion and nationality, and to consider the possibility that the whole of humanity would live unattached to material possessions.