Actions in the Fog of War

From my recent note to subscribers,

To all subscribers,

I have been writing to all of you for the last few weeks as I became concerned about the Corona virus Epidemic by the mid to late Feb when our small caps positions started behaving differently.

As I thought through the situation, I could not see a scenario where this epidemic could be stopped without causing a huge disruption to economic activity. That was my reason for saying that Tail risks were not priced into the market.

That scenario is now playing out across the globe. We are seeing shutdown of entire regions now. This is what I meant by economic sudden stop.

If you notice, I arranged all my posts in a neat narrative as if all of this could be predicted with perfect foresight. The reality is that things are moving very fast and continue to be murky. We have yet to see the second and higher order effects of this crisis as it depends on how long the shutdown will continue.

For now, there are all kinds of opinions on how long this will last and when the economy will come back. I think the most important variable is how quickly the spread of this virus is contained across the globe. That is something, no one knows for sure (and everyone hopes is short).

We are making decisions in the fog of war. We will get some of them wrong, but the focus is to get a good percentage right. As you can see in the last few weeks, I have changed my thinking and cash levels in response to the data which was coming in (at a rapid rate). That is likely to continue and as a result, my thinking and decision will change as the situation changes.

The cash level is at 42% of the model portfolio, partly from selling down some of our positions and balance due to the drop in the portfolio. We had closed the year at around 23% cash level and have raised it by 40% in the last few weeks.

I want to share the following actions from a financial standpoint

• Please ensure that you have at least 6-9 months of cash or FDs so that you can take care of your expenses if there is a loss of income. This will help you remain rational and avoid panic selling to meet expenses.
• It is going to emotionally tough and gut wrenching to remain invested. Your mind and emotions will scream at you to get out. It will be a torture to put money into the market and lose 20-30% in a matter of days
• I maintain a list of 200+ companies which I track from time to time. I have been working on this list for the last few weeks and updating them. The buy candidates will be from this list. I am in no hurry to rush in.
• My focus is not to time the market or pick the bottom for specific companies. I am focused on ensuring that we pick companies which can make it through. If a company survives the next 6-12 months, the stock will do well.
• I am not too concerned about valuations. At the current rate, valuations are dropping rapidly and if we pick robust companies, then returns will take care of themselves
• It is a given that I will get the timing wrong. I will either buy too early or too late. I hope you have already realized that and are fine with it.