Investing in an uptrend is usually very different from investing in a slowdown. An uptrend usually does not give you the opportunity to wait and buy stocks. There is strong competition to buy stocks. You end up trying to grab market opportunity. In markets which are subdued, the stock prices tend to fall and waiting to buy actually help you buy more shares. Downtrends or slowdowns are painfully slow and boring phases. Investors don’t know how to pace their investing. This is exactly what you need to figure out now. Quite clearly, economic recovery is happening at a slow pace and we are unlikely to see anything dramatic happen in the near term. That makes investing a challenge even as we are faced with two scenarios. Hotly pursued stocks are not valued attractively. Other stocks which are under-valued have a baggage of problems to be addressed. We need to figure out how to play the current phase of markets. This is what market participants are not getting clear clues about. Defensives only offer safety and have very modest near-term return prospects. On the other hand, the growth oriented stocks are a small basket and are at very high valuations. Buying them at these valuations may not really deliver great returns over the near term. The solutions to this dilemma are easier if the investor chooses a simple strategy. Ignore the near term prospects and bet on the longer term outcome of economic recovery. Invest gradually to ensure that you don’t tire out of the slow-paced nature of the recovery. Be extremely cautious in buying the growth pack of mid-caps. Overpaying for stocks tends to delay gratification. The current valuations will extraordinarily delay gratification in these stocks while also exposing you to the risk of near-term underperformance by these companies too. One needs to think hard if the risk-reward tradeoff is worth taking in over-valued parts of the market. Remember, rarely do we see an inverted valuation structure between large-caps and mid-caps that we see now. The ample opportunity for value-driven investing in the larger companies is too good to be missed. Demonstrating patience now and showing capacity to suffer will take your investing to the next level. Slowdowns bring out the best in value-driven investors.
“Once you adopt a value-investment strategy, any other investment behaviour starts to seem like gambling.”
– Seth Klarman