Hi Friends,
As promised, here I am with the next discussion on investing.
If you are following the stock market regularly, you would have noticed a meltdown recently amid concerns on growing bond yields in the US and Foreign investors jumping off the ship, leaving the stock market deeply affected.
But do we need to worry? aren’t we in a raging bull market where everything is going to go up? what has changed so suddenly that everyone is talking about selloff?
Welcome to this series of investing during the bull market, where I am going to tell you ways to traverse through this journey peacefully.
First thing first, since most of the investors have joined the stock market in recent bull run ( i.e, after March 2020), it is easy that they miss the obvious, investing is a game of patience, so things may or may not go your way depending upon your temperament ( yes you're read it right, temperament plays a major role in investing).
Before we proceed, let me run you through a checklist that should help you maintain the temperament in all market conditions. So if you have,
Invested borrowed money in stocks?
Invested in companies that have high debt/pledging?
Invested in penny stocks? ( not necessarily low priced but low quality )
Don’t have an emergency fund?
Need money in the foreseeable future? (within a year or so)
Then your temperament is going to affect you negatively, and you might be forced to sell your stocks in times when everyone is selling them (PANIC selling) if the answer to any of the questions above is yes, then it’s best to correct it before continuing in the stock market.
Once you have passed the checklist, let me introduce you to a few characteristics of any bull market.
Most of the high-quality stocks are already discovered in the market, so their prices are very high compared to their earnings. EVERYONE KNOWS IT.
Many low-quality stocks have made big gains, so even their prices are very high. EVEN GARBAGE RISES DURING FLOODS.
Many new investors enter the market, tweaking the equilibrium of experience and inexperience, increasing the chance of wrong bets. 3,00,000,00 NEW INVESTORS IN 2 YEARS.
Most of the investor expectations are very high, due to recent memory bias of good returns, resulting in clouded judgment. FOG CHAL RAHA HAI!
Now with this information, it’s easy to say that the chances of wrong bets are very high in a bull market, it is not just difficult to find good companies at correct prices but the market tweaked sentiments forces you to rethink your strategy and most of the time we are carried away to pay higher prices.
But is there a way to avoid this mania? well doing the hard work of research and sticking to basics are a few of the things you can do, but the simplest way is to change some of your expectations, Great EXPECTATIONS…
Take nothing on its looks;
take everything on evidence.
There is no better rule.
So based on evidence, here are some of the expectations that you need to have sorted in your mind.
The stock market may not give Great returns like in the previous two years.
Some of my Great stocks can perform poorly, may even fall by 40-50%. ( see the past of stocks like Tata Elxsi, Vinati Organics, etc)
Some of my Great stocks can destroy money permanently. ( see the past of stocks like Unitech, Yes bank, etc.)
I am no Great Warren Buffet, I can take a wrong decision at the worst possible time, but will correct it as soon I realize.
I know it’s not easy to incorporate these expectations, they are simple yet some of the most difficult ones to apply. But if you cannot see your favorite high-quality stocks at half the current price, it can get difficult. Because that can be a possibility in the near term and potentially destroy your temperament. Yes, EVEN THE BEST FALLS!
Falling in quality stocks is not unusual, it’s been happening all the time. I remember a line from market veteran Ramdeo Agarwal, where he says,
“ek ka dus, dus ka teen, teen ka tees”
This means a good stock can grow from 1 to 10, then fall back from 10 to 3 before rising back from 3 to 30 again.
The only thing you need to have is a conviction on them.
So if you have to see your stock rising from 1 to 30x, you must have the stomach to digest its fall from 10 to 3. This is one gem of thought, which helped me hold some of my biggest investments during the last bull to bear cycle. I hope this helps you reassess your position in the market.
Realign your expectations accordingly.
We are at the last leg of this discussion. Now, I am going to present you with concrete action points that you can take to make your life peaceful while investing during the bull market.
There are two main points which you need to worry about, first your current portfolio and second putting your next bet. Let’s go…
Upkeep Current portfolio
I suggest everyone have a re-look at their portfolio. Take expert advice on it, if you can afford otherwise use your best judgment to sort it out based on quality. The most important thing to consider is to, FLUSH GARBAGE STOCKS OUT!
What about quality stocks? I always suggest you stick with quality, since we don’t know when this bull market is going to end, it’s just our wild guess but then sticking with high quality always pays off, if not this year, then next year or so on.
As and when the market crisis hits, and the prices drop, take it as a discount on your favorite stocks. KEEP QUALITY, INCREASE QUANTITY.
Book profits? Of course, if you are not comfortable holding a quality stock because of its valuation, you must take off your money, that’s the best thing to do in any situation.
If you are in doubt, you can always sell partially and take some gain out then wait for a better opportunity to enter again, perfectly fine. SELL SOME, HAVE SOME.
As usual, keep track of your invested companies, any sign of fraud, crime, or illegal activities, should alert you. Remember, if you are not comfortable holding some company because of its management issues, SELL THEM TODAY INSTEAD OF TOMORROW.
Putting Next bet
Once you have your current portfolio sorted, chances are high that, it will leave you with some cash on hand. You can always enjoy the cash in things you like and care for, clear your obligations or keep it as an emergency fund. But if you have to deploy them in the market at this moment, you can slightly change your approach.
Instead of buying in bulk, as we did in investing during crash, where we deployed 25% of the money in each tranche, we have to buy in steps now. SIP - Step Investing Please.
Steps can be anything like 2-5% of your portfolio, based on your need and market judgment, you can tweak them and deploy cash periodically in the market instead of onetime, the period can be fortnightly, monthly or quarterly as well. CHIP IN REGULARLY.
Also if you are unable to get a conviction of putting new money in the stock market right now, use the mutual fund route, you can increase your allocation in mutual funds and decrease in stocks (the reverse of what we did in 2020).
Everyone is in the stock market to make money, and I am sure together we shall be successful in the long term, but for that to happen, we have to survive in short term.
The market tends to get volatile in short term due to various reasons, even in bull markets, it’s normal for indexes to drop 5-10% and suddenly comes back slinging all the way up, it’s tough to predict, so it’s better not play the game we are not good at.
If you incorporate the points discussed above, there is no guarantee that your portfolio will not fall, but it certainly has more chance to recover quicker than others and with peace of mind on your side.
Having seen a couple of bull and bear markets personally, I can tell you that the right temperament plays a huge role in getting success in the market. It’s easy to get stocks names but tough to have holding conviction on them during times of crisis.
In the next chapter of this series, I will try to write about ways to find stocks during the bull market. Hope you sort your investments and apply sanity before any panic creeps in.
Please spread the idea, if you like it.