A recent post to our subscribers on the current market situation. Hope you find it useful
We have experienced 13 drops of more than 10% in the last 14 years of our advisory. A few have been more than 20% and the one in 2020 was 30%+
If you have been in the equity market for a long time, this is not a surprise. Even a cursory study of market history, shows the same. Yet, a lot of people get shocked by such drops.
The recent drop is being explained with a new set of reasons whereas just a few months back, India was being touted as a miracle economy. If you really need a reason, how about this? – The markets fell as it often has in the past and will do so from time to time in the future
A study of the past
I recently did a talk about past cycles of manias and booms & busts. You can watch the recording here. Some of the key lessons are
- Manias and crashes are driven by human nature. They will always be there as long as people are trading in the markets
- There is a plausible, kernel of truth which gets stretched to excess
- No one can predict when/where a bubble will start and when it will end
- Media always acts as a cheer leader of Bubbles (Story/Attention Bias)
As part of this study, we also reviewed the past 25 years of the Indian market. We have incorporated the learnings in a new process, where we review the market on a monthly basis to gauge its trend, breadth and sectors which are doing well and ones that are slowing down
As a result of this review and rising valuations, we started exiting some positions and are now at 25% cash levels
Did I foresee that the market would drop? No amount of market analysis can help you forecast the future. What we did realize was that some companies in our portfolio were stretched and so we started pulling back. We also exited positions where the performance was poor and the stock was weakening
In a nutshell, we raised our cash level as the risk reward ratio in our portfolio dropped
So what about the cash?
The next set of questions, we invariably get after every drop, is when we plan to invest the cash. For starters, we are not swing traders who are trying to catch the swing low to make a 20% gain on the next bounce
Our focus is to buy stocks with a 2-3 yr window and a 10% drop is not enough. Several stocks have dropped from a PE of 100 to 70. That is not cheap
We are constantly searching for new ideas and that process continues independent of the market condition. A bear market turns up more ideas for consideration, but we are not in a hurry. We have slept well and made reasonable returns inspite of holding high cash from time to time. We will continue in the same manner
