The price of uncertainty

The Nifty is down 1% for the week and up 2% in the last 30 days. It is down 3.85% for the year.

If you were out on holiday from 1^st jan, did not check the news and looked at your portfolio today, you would not know about the daily chaos. The problem is investors check the news by the hour and that has caused a lot of volatility in the markets

This volatility is great if you are a day trader or high frequency quant. It’s a problem if your horizon is a few months to a year. As your horizon starts lengthening, this day-to-day volatility becomes less of an issue

The first step is to decide your investing horizon and act accordingly

The eventual outcome of this tariff war will have differing impact on each company, but that will be known in years. It’s futile for an investor to analyze the impact in real time when the main actors in the drama keep changing their stance by the hour

FOMO of a sharp recovery

In 2020, we took a slow and steady approach. We justified this approach as follows

How does one invest under such extreme uncertainty? One option is to assume that there will be a quick recovery and go all in. The other extreme is to wait till it is all clear and then deploy the capital. In the first approach one is making a bet on a specific scenario which may not occur, leading to sub-par results. In the second case, we may end up with sub-par returns too because prices will adjust once the uncertainty goes away.

If we assume that 50% of the investors bet on rapid recovery and the other 50% bet on the whole thing dragging on, the first group turned out to be right

You are now hearing from such investors who went all-in, in the month of March/April.

As the market recovered sharply from April 2020, we slowly deployed the cash with the following thinking

Under the circumstances, my approach is that of ‘regret minimization’. That’s a fancy way of saying that I will do something in middle, so that I can avoid FOMO (fear of missing out) if the first scenario occurs, but at the same time have enough dry powder available in case the economic recovery takes longer

We had a weaker 2020, but made up for it in the subsequent years. The reason for this hedged approach is because I think Survival is the ultimate prize

I don’t want to be a hero with our subscribers or on social media by calling the bottom and going all in. Our goal is to invest in a measured fashion and make decent returns over the long term

Pricing the imagined risks

I am not advocating burying head in the sand and waiting for all uncertainty to clear up. As investors, we think the future is clear sometimes and cloudy at others.

This is just a mirage. The future is always cloudy

When investors think the future is clear, they bid up the price of stocks. At that time, it makes sense to remind yourself that the future is unknown and reduce your risk by selling down the overpriced stocks

Conversely when investors get frightened and over discount uncertainty, we should become active in the market. The key word is over-discounting the risk

At such times, stock prices reflect real and imagined risks. This is the time to take your hard earned money and deploy it in the market. Your emotions will scream at you to get out as the market keeps proving you wrong in the near term

I am not waiting for the uncertainty to clear (it never does), but the market to ‘price’ in the uncertainty in specific stocks of interest