A swing of 1% up or down is a decent move in the stock market during normal times. In the US and European markets a 3%+ swing is now becoming the norm. If you have been looking at these markets, you will realize that the volatility of these markets has gone up.
The European debt crisis and other issues are causing a surge in the volatility . The Indian market, though not yet impacted to the same extent, is beginning to feel the effects. It is easy to feel dizzy and disoriented by such large daily swings.
The most common reaction to such swings is to look for explanations and the common source for it is usually the news channels. We have the talking heads trying to make sense of it on a daily basis and giving us one silly reason after another after each up or down in the market.
What if there is no explanation
It is quite likely that we do not have any specific reason to explain these wild swings on a daily basis. Almost everyone in the market is equally confused and just reacting to the news flow on a day by day basis.
One option for all of us have is to ignore the daily chatter and get on with our daily lives. I am trying to follow this option. It is not easy, but I am definitely trying hard to ignore the noise as it is easy to get overwhelmed by it and do something silly as a result
Head in the sand?
Does that mean one buries his or her head in the sand and just ignores what is happening around us. I donāt think thatās a smart option either. The line between keeping your eyes open and getting swamped by the noise is however very fine
There are a few scenarios which look more probable every day. It is now an accepted fact that Greece is close to bankruptcy (if not already so) and sooner or later will have to restructure its debt in some shape or form.
It is difficult to figure out the chain of events that will follow from this event.
Will this lead to defaults in other European countries and consequent failure of banks? Will this be a repeat of 2008 and more? There are many opinions, each supported by its own logic and each sounding as plausible as the other
My thought process
I will not add more noise to the mix. My thoughts are good as anyoneā elseās or maybe worse as I donāt have any special macroeconomic skills.Ā As I cannot forecast what is going to happen, the prudent approach is to position myself for the possible storm.
The usual recommendation is to go into cash, hunker down and avoid all equities Ā till it all sorts out. IfĀ you have been reading this blog for sometime, you know I will hardly recommend that and will not follow that course of action J
I actually have a very simple plan which I can break it down into a few points
–Ā Ā Ā Ā Ā Ā Ā Ā Ā Keep 25-30% or more cash as part of the portfolio to take advantage of a collapse in the market, if it happens. Ofcourse the market could rise and my returns could suffer.
–Ā Ā Ā Ā Ā Ā Ā Ā Ā Keep analyzing companies and identify some attractive ideas before hand. If the market drops, these companies could be available at cheap prices and I need to only pull the trigger. Ofcourse one needs ample amounts of courage at such times
–Ā Ā Ā Ā Ā Ā Ā Ā Ā Keep 6-9 months surplus cash in form of expenses at hand. If there is a contagion and a loss of job, the last thing one should do is to liquidate your investments to pay the bills.
–Ā Ā Ā Ā Ā Ā Ā Ā Ā Have some popcorn and coca cola ready for the entertainment on CNBC and other channels ā need to have a sense of humor during such dark times !
Isnāt it dĆ©jĆ vu ?
It is tempting to think that this is a repeat of 2008 again. The market could collapse and the brave would go riding in with their cash. They may have to wait for 6-9 months and then we would see a sudden turnaround as we saw in 2009. Ā It may turn out that way and then maybe not !
As the saying goes ā History does not repeat, but rhymes. We may have a similar crash, but it also quite likely the rebound may not be as quick. The last time around, the central banks and governments released a flood of liquidity which did the trick. This time around Ā the lenders of last resort ā the governments are themselves the problem. There is no superman around this time to save the day. As an equity investor one needs to be prepared for the long haul.
One thing which will not change is the reaction of people around us. A lot of people will be shell-shocked and scared. One advantage of writing for 6 odd years is that I can go back to my earlier posts and look at the comments and see the thought process of a lot of people.
You may find some of these posts interesting. Do read the comments (some may be yours too) to see how we looked at the crisis as it was unfolding
Time to get busy ā this was after the Lehman bros collapse and markets started dropping. I started getting excited way before the bottom (as always)
Buying in bear market āAs I spoke about buying into the bear market, a lot of people and their friends were advising otherwise. See ā nothing changes !
Analysis: Lakshmi machine works ā this is one of my favorite posts. The company sold for close to cash during this period. This is the no.1 textile machinery manufacturer in India. I just could not see this company going bankrupt. Still, a lot of people had doubts. I still hold the stock and will add if the stock drops 15% from current levels ( stock tip J)
My portfolio details in 2008 ā Needless to say it got hammered during the drop as I kept buying.
Donāt catch a falling knife ā As prices dropped, everyone felt that it was dangerous to invest till the bottom was reached. There is no bell when the bottom is reached. One knows about the bottom only in hindsight. Another similar post here on NIIT.
Hoping for a quick rebound and Bear market to end soon āĀ These posts were meant to be jokes, when I predicted that the bear market will end by April 22nd 2009. Interestingly it did rebound in April ā though I was off by a few days. If I have such a flash of inspiration this time too, I will let all of you know when this bear market will end J
Are you feeling excited ā With perfect hindsight, March 2009 turned out to be the bottom.
It was quite a rollercoaster ride then and i expect it be a similar one, this time around too.
Hi,Definitely itās not a repeat of 2008. Bush administration acted immediately after Lehman Crisis. But in the current crisis, ECB / Germany could not come to any meaningful conclusion. Its becoming more of political issue than monetary issue.People should worry more about the cash in the bank or Debt instrument than Equity investment.Lots of value investors lost money during 2008 , but this time we could not see the pain anywhere. Market is priced for Greece Default, but I still donāt think its priced for secondary consequences of Greece default.RegardsVishnu
If this were Facebook, this post is worth clicking 'like' many times over! Seriously, this is a good one.
Great post Rohit.Keeping cash available seems to be the best option currently. How much is what I am still unclear about.I am currently around 20% in cash, and I was thinking may be this should be bumped to around 50%. But then I remembered this quote from Mr. Lynch:”More wealth has been destroyed in waiting for corrections than in corrections itself.”Regards,Rahul
Hi Rohit,What is your current portfolio like?
This is time to keep 40% or more in cash. Market is not going to breach 20K in a day or two. So either one will have hugh volitility (buy selective stocks) or, better still, we will have 2008-part 2 (throw darts).One should plan for ~90% in equities at 12000-13000 level. And if it does not get there? Well, nothing you can do about it…
Hi Rohit,Have you checked Jindal Poly films? Its looking very attractive.Any views?Regards,Arun
Hi vishnuperfectly put. 2008 was a surprise to everyone ..this look like a slowing moving train wreckrgdsrohit
Hi anonthanks for the great comment :)hi rahultiming is loser's game. that said, i am not waiting for specific index levels ..as the stock price of my stocks drop, i will keep addingrgdsrohit
Hi anonsome parts of the portfolio are same as 2008 such as balmer lawrie, crisil etc. rgdsrohit
Hi luckyat 12000 or below i will sell my dog, my car and put all the money in stocks :)just joking ..12K levels will be great to put more money. ofcourse i am not holding my breath on it. if it comes we take advantage , otherwise one takes sensible decision based on what we have in front of usrgdsrohit
Hey Rohit , what do you think about Cummins and Reliance Capital. Both stocks have been battered due to negative sentiments.Karthik
Hi karthikI like cummins though havent looked at it for some time.I am severly allergic to the anil ambani group and would not invest in itrgdsrohit
12,000 is not the market level at which you should sell your car. Much less your dog :-)Graham cautined against going more than 75% in either equity or debt. In the inflationary India, I guess one could go up to 90% into equities but no more.Let us not forget that not all bear markets correct like the 2008 one did. And we need to survive the irrationality in order to benefit from it.
Hi luckythat is not what i will prescribe for others ..but i will not mind it for my personal account. i work for a living and have constant cash inflow. so i can be 100% into equities for 5+ yrs and will not be concerned.one should never put the money one needs for the next 5 yrs into the stock market. again i will not tie to specific market levels ..but on specific stocks being available on the cheaprgdsrohit