Time to be in the deep-end.

How would a public swimming pool look like in summer? It would be crowded with people jostling for space and trying to move forward only to hit into each other. The current market seems to be like such a pool. The experience would be ordinary and competitive factors would be intense. The current markets see intense competition among investors to find winning bets. There is little room for maneuver.

However, not all parts of the pool will be crowded. The deep end of the pool will usually have fewer people than the shallow end. People hesitate to go where there are fewer people. And, there are fewer people only where people hesitate to go. This applies as much to the stock markets. A few stocks, themes and sectors have hogged the limelight while much larger and stable businesses have been ignored by the market. In a world where growth is shrinking, investors have shown a tendency to aggressively price growth.  There is a competitive tendency to do so. This should be held as a warning.Investors must now invest where others are not willing to crowd and channel their monies into. Essentially, undervalued businesses look more lucrative than the outperforming ones. Valuations always have a tendency to mix things up. Staying invested where the crowds are absent is hardly easy. But, going there and finding their merits  should be happening right now.
The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” – Warren Buffett

Choose Wisely

When the going is good, investors tend to get overly excited. Like a carnival where there are elements to excite you just as you enter the venue, the stock markets have different elements that keep the buzz and excitement up. In the midst of all the noise, din and hype, it becomes challenging to stop yourself from joining the fun and soaking in it fully. To even think of pausing and leaving the happening place is extremely difficult. The Indian markets seem to be going through such a moment. Investors want to be in the thick of the market action. Money is finding its way into IPO’s. New issues are lining up to lap up public money. Listing is now a happy lottery. Whatsapp groups are buzzing with hundreds of stocks begging to be bought. Everybody sees only positivity coming out of corporate actions. One hardly sees sell recommendations from brokerages. Risk seems to be a bad word in the Indian markets right now. In times like this, a bit of counter intuition would be just right. While one isn’t yet at that sell and go away moment, it surely is a good time to take fresh stock of every investment decision and to clinically reason out their sustainable merits. Time to pause and think hard.

A reserve of cash and loads of patience are central to intelligent investing.

The missed bus may stop by

Opportunity keeps knocking at an investors’ door. Investors with a keen ear are always quick to latch onto opportunity. The majority however mostly remain oblivious of opportunity and only realise it has passed by long after the event. Should the majority believe that the market’s attractive opportunities are not for them? Should they just let their investing stay ordinary? Investors must make it a point to participate in every opportunity thrown at them by the market’s extreme volatility. It is hardly difficult to be in a state of preparation. All it needs is for cash to be kept in a state of readiness. This will ensure investments can be swiftly made when the market’s throw opportunity the next time. Given the global volatility, greed and fear are bound to alternate. While they rise and fall in cycles, an investor must ensure his decisions are always contrarian to the market’s greed and fear. When the market’s show a tendency to run ahead of the economy, corrections offer the investor another opportunity to catch up with the market bus. The missed bus should not be missed forever. Boarding it when it slows down is the smart thing to do now.

Things always become obvious after the fact.”- Nassim Nicholas Taleb

Strategy > Tactics

Expectations can change much faster than we think. Consider  this. In 2008, everybody who was a stock market participant genuinely believed their stocks could not go down. In 2009, nobody wanted to buy shares because there was consensus that stocks would go nowhere. In January 2016, nobody wanted to bet on stocks. The consensus actually believed that the eight year stock market cycle was over.  Few people believed  that the markets would end 2016 at a level higher than where it began the year. We could see a positive surprise there.Now, post Brexit, the consensus view seems to think that the only place to make money in the stock markets is in small cap stocks. The markets seem to be in the mood to swiftly put behind every kind of bad news. From experience, we know one thing for sure. Consensus is a bad thing in stock markets. It has a history of negative correlation to performance. So, investors must be conscious of where the herd is forming and gradually move away  to a safer place. Equity investing will always be about choices. While the markets could still give high returns in the coming 24 months, the pack of performers could change dramatically. An investor must be diligent in his quest for returns even as he maintains his strong belief in equity as an asset class. That is hardly going to be easy.

“Success is 20% skills and 80% strategy.”- Jim Rohn.

Grow conviction.

There is no alternate to adhering to good economics. If sound economic practices are violated, the impact on societies will be profound. In such situations, societies will respond with alacrity. The message from Brexit is strong and loud for politicians and governments who underestimate the power of the people. The people are ready to face the economic costs of a tough decision. What is the message for India from Brexit? The message is to pursue responsible economic policies, maintain fiscal numbers within an acceptable range, improve competitiveness constantly and to pursue balanced growth between Urban and Rural India. India has been on track to achieve these objectives during the current regime. While outcomes could always be better, the directional focus is right and we should work constantly towards better outcomes. Indian investors must understand the merit of what we are doing now and believe in our economy. The benefits of following the right policies will be more pronounced in times like these when the world is punishing nations who don’t pursue them. India is definitely on a good wicket with respect to its economics and political will. What we need now is for our people to show greater conviction in the economy. The stock market would be a good place to show such conviction. The potential benefits will make deep conviction worthwhile.

How we invest during volatility decides how much we return during euphoria.