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Prashanth Krish | Portfolio Yoga - Part 16

Author: Prashanth Krish

Twitter Polls and Markets

If you were wishing to conduct some large scale social experiments, there seems to be no better medium than Twitter. Given the wide diverse audience, this provides for a nice mix of what people are thinking. That said, since it takes just a click to answer, not every poll will provide you the right context or meaning.

Take this poll of mine for example that I conducted on March 9 (Nifty @ 10,450)

Just 8.9% were selling and in hindsight they seem to have hit the nail right. I of course was kind of mixing between Buying (a bit) and Chilling. Who knew that one can develop hypothermia so fast 😉

Anyway, not satisfied, I decided to another one (Nifty still at 10,450)

Given just 2 options, the audience was evenly split. And Yet I did not. To add, I actually wrote a couple of posts around the time Corona started to break out expressing the view that everything would get better and it wasn’t really going to go bad. Man, was I wrong.

My personal investments in Equity are basically whole and sole in Momentum. Other than ELSS funds, I own no other Mutual Funds that are equity oriented. But when I say Momentum, it’s interesting to observe most to think it as some sort of trading even when the logic is systematic and universal in approach versus just random stock picking based on charts. 

So, as usual I asked Twitter for an answer. 

As I write this, more than 50% say they would have felt sad to have lost 30% in a portfolio that picks stocks on short term (Momentum) versus just 16% who would feel the same in a portfolio that has long term picks.

The result is not a real surprise to me since I have seen even die hard momentum investors claim this to be some sort of high risk portfolio and hence more of being a satellite versus a long term portfolio that is seen as the core.

It’s similar to the behavioral study that has shown that people tend to spend more when using Cards versus using Cash. Advent of online ecommerce sites that allow for one click buying and home delivery allow for even more instant gratification (I write this looking at my own bookshelf with books I am yet to read but couldn’t stop myself from buying more).

Mutual Fund returns for the month. This from Valuepickr

I have sorted the same by Month Returns, Worst to Best. The fall has been of such a nature that it has not only destroyed the returns of the year for most funds but also pushed into negative territory most fund styles for 3 years and a few even in the 5 year time frame.

Investing needs to be for the long term, but long term investing is fraught with uncertainties and dangers that is barely discussed for long bull markets makes one forget that one also saw long period of bear markets in the past.

A disclaimer before you go further. All my recent views on the Virus and its impact have turned out to be totally wrong. The only ability that I have is for now sticking to my system even when the gut screams for me to break the rules this one time.

The 2008 bear market was one of the worst bear markets to hit the Indian Markets. But the one that was even worse? The one that started in 1992 and came to an end in 1999. If you were to believe Indian Astrology, you would have heard about Saade Sati.  

The 2008 was mostly a walk in the park for anyone not associated with Capital Markets. Life went on for the vast majority of folks and even though the Real Estate Index has never recovered (it’s even today down 90% from its peak), Real Estate enjoyed a few more years of boom till the stagnation came in.

The coming bear market is going to be nothing like that given how much of an impact the current crisis has been having on an ordinary citizen. At some point things will return back to normal, the question is how long it would take and what is the damage we shall see in the interim.

When markets fell in 2008, Infrastructure firms and Realty firms whose Balance Sheets were loaded with debts were those who found the bottom giving up. This time around, even firms with low leverage but falling into categories where shifting consumers trends can create havoc.

What is currently happening is unprecedented and hence the previous market behavior may or may not be of significance. We have no way to gauge the depth or the length of this bear market and its impact on our lives in ways we wouldn’t have thought about in the good days.

Targets of 6500, 3000 and 666 (on S&P 500) are being thrown about as if coming down there will have no impact on the real economy. While the last time around, throwing money was sufficient to lift the sentiments and the economy back on track, this time around, we have a Virus which has no use for Fiat money or Gold for that matter. 

Unlike US which can go with a multi trillion dollar rescue package, options for India is very limited. In the longest bear market (1992 to 2001), Inflation was mostly in double digits and Interest Rates compared to today were mouthwatering.

The social and economic cost of this bear market is not something that may go away soon even though we all hope for a fast recovery. Of course, I maybe too skeptical and we may be back to new highs in this year itself, but the odds at the current juncture seem pretty remote.

A dislocation for the Ages

It was 1990 and as a citizen of Iraq, life was seemingly getting better. The long war with Iran was over and while GDP growth was nowhere close to what one would have loved to have and one they had seen before the war with Iran, at least the future it seemed was better. In August, Saddam Hussein decided to invade Kuwait and life has never been the same again.

Countries go through different kinds of dislocation – some temporary, some literally permanent and in between Millions live their lives. Since 1900, literally every country has gone through a period of short or long period of dislocation that has changed life as they knew it before.

When we look at such a large canvas, the current crisis concerning the Corona Virus and the month long lock down India will be enduring looks fairly small. Yet, the implications of shutting down much of the country for a month has a long lasting impact that we cannot fully visualize.

Replacing a one month of no activity can easily take a year or two and even that assuming that the firm is able to survive. The Financial Crisis of 2008 laid to rest the high flyers of the previous years – Infrastructure and Real Estate firms. This time, one wonders who will be the ones facing the firing squad.

But India will move on and that means at some point, Valuations become attractive enough to overlook the immediate risks. The recovery from the 2008 crisis was fairly fast, the recovery from the 2000 crisis took a few years, the recovery from the 1992 crisis took a decade and a bit more. 

It’s hence important to reassess our goals and our time frames before jumping into the boiling pit solely because valuations are cheap. What matters more is our ability to sustain for long without support from the markets. 

This time its’ No’ Different

Markets Falls are common though we had the uncommon pleasure of not falling big for nearly a decade. What differentiates this fall from others is the fear that the world may never be the same again.

Almost all falls of the past are those that were caused by financial stress or bubbles caused by easy money policies or scams. This is the first real crisis caused worldwide by something that couldn’t have been foreseen.

Personally, I got it Wrong. As the Corona Virus started to make news, I tried to update myself on as much as possible and try to decide the future course when it came to my portfolio. The only similarity I could see is the Spanish Flu.

The American Market was the only one with reliable data I could rely upon. This was the performance of the Dow between 1918 to 1920.

At the time of the start which could be categorized as late 1917, Dow Jones was on a decline. From its peak in November 1916, it had fallen by 26% by September 1917 and fell a bit more before it bottomed out in December 1917.

In fact, by the time it ended, Dow was actually in the positive zone. Maybe this was a wrong example to look out for or maybe the impact then was smaller than its today, whatever it is, markets today are looking worse for the wear.

Yesterday, I popped this question on Twitter

https://twitter.com/Prashanth_Krish/status/1241242995300564993

Thanks for all those who responded. 

One difference or this may be due to the nature of the media is that most people are not selling out in panic with most wishing to add more given the opportunity they feel this market reaction is providing them.

What the market does is not something in our hands, but our actions are entirely in our hands. Personally, I regret being unable to exit completely at the start or even post the first gap down. Then again, I was sticking to what my System was telling me and even today, the system has not gone fully into Cash.

Recently, I was reading Stocks for the Long Run by Jeremy Siegel. In it, he narrates a interesting episode which I quote,

In the summer of 1929, a journalist named Samuel Crowther interviewed John. J. Raskob a senior financial executive at General Motors on how the typical individual could build wealth by investing in stocks.

Raskob’s idea or plan for the retail investor was that by investing just $15 a month into common good stocks, an investor could expect to grow their wealth to $80,000. 

A 24% return then as is now seemed ridiculous, but then again in the decade of 1920 to 1929, Dow had risen from a low of 64 to a high (set a few weeks after the interview) of 383. That is a compounded return of 25% per annum over 9 years. 

But like the Magazine Effect, the Interview came close to the top, a top that was not breached for 25 Years. Yet, for some one who started investing systematically based on his interview was better off than a Bond Investor in just under 4 years. What did not happen though was reaching the 60K target, it ended at 9K. 

The key to reaching our goals depends on two key factors. The amount of savings we can mobilize and invest and the returns that the said investment can generate. Equities is a preferred route for those who understand the risks over the long term, they have generally and I use the term generally because it also showcases that equities don’t work all the time, they have provided a higher return.

But when we say long term, it doesn’t mean the taxman’s definition of 1 year or even teh 3 to 5 year period used by most fund houses to sell their funds. Instead, one needs to be invested for a minimum of 10 to 15 years to reap the benefits. 

Asset Allocation has to be the key decision for a mistake here has as much an impact as picking up a lousy fund or stock. The maximum pain point you can afford to bear is not something that is easy to locate in good times, it’s only in bad times you come to know what level of exposure was okay and what was not.

If we can agree that when this all ends, we will not end up in a dystopian society or become zombies, at some point the market will settle and then bounce back. No one knows which that level is which means that all predictions are just that, predictions without any greater chance than one you can come up with using a random approach.

As I wrote in my previous post, historically markets have bottomed even before the end of the bad news. Same would be the case here too. Stick to your method, there is no better alternative as long as the method has been tested and found to be something you can come to bear.

Mayhem in Markets. Will it End

Every Bull and Bear market is different yet when the dust is settled, it’s all the same. What is different is the way the market behaves and the speed at which it acts.

India has seen three major busts till date – 1992, 2000 and 2008. We hear those since they were related to either major scams or global market meltdowns. But those aren’t the only times markets have fallen. 

In 1991, with India on the verge of political instability (the then Chandrasekhar government could not pass the budget in February 1991) and a serious economic crisis. Foreign Exchange Reserves were declining to the extent that India in January 1991 borrowed $777 million from the IMF.

But markets had peaked in October 1990 and by the end January was down by 41%. But right when it should have crashed and burned, markets started to rise even though Foreign exchange reserves dropped to an all-time low of $1.1 billion in June 1991, barely sufficient for two weeks of imports. But the October 1990 high was taken out by July of 1991.

{Source of Fx Data: Montek Singh Ahluwalia. BACKSTAGE: The Story behind India’s High Growth Years}

Between 1986 to 1988, again a period of government instability, markets fell 40% before recovering all by October of 1988. 

Let’s look at some International Evidence

First, the London Market during World War II. The pics below is from the book Wealth, War and Wisdom by Barton Biggs.

Japanese Market during World War II and later the Korean War (Peak and Trough)

Biggs concludes with the following

Is Corona Virus the Black Swan that will result in a total breakdown of financial and social infrastructure as we know it? I don’t know but I think the odds are pretty low even though as country after country closes their gates to outsiders, it surely feels as such.

In the last leg of a bull market, the seller is staying away hoping for a better price tomorrow while the buyer is willing to pay whatever the market asks today. Today, we are seeing the opposite of it with the buyer staying away hoping for a cheaper price tomorrow while the seller is willing to sell it at whatever price it can get.

Which reminds of this famous pic from the Great Depression

Let’s look at the broader picture to understand where we stand today. First off the 10 year return.

If you had invested in Sensex 10 years ago, your compounded return today would stand at 5.02%. The previous time you had seen this kind of low return in this Century was if you had invested in 2007 just before the financial crisis brought the world’s banks to its knees. Most of the other instances are for investors who invested in the period between 1991 to 1994 (ending period being 2001 to 2004).

The Sensex is currently 26.50% below the 200 day MA.

Red Horizontal Line is where we are today

While it has come here couple of times in 1992 and 2002, the only other time it was comprehensively down was in 2008.

Nexg, a look at one of my favorite breadth indicators. Percentage of stocks that are trading above their 200 day EMA’s 

We have briefly went below in the past but other than in 2008, rarely stayed there for more than a few days at best.

Number of Stocks with Positive Momentum

Basically this is closing in onto the lows of 2008 (which came nearly 8 months after the crisis started versus being in the very first month this time around)

New 52 Week Lows

On Friday, 1000+ stocks registered a new 52 Week Low. With 2500 stocks being in the database, this means that 40% of the market was hitting new 52 week lows that day. A record with exception of 2 such days in October 2008.

Relative Strength Index {RSI}

Relative Strength Indicator is an indicator used to measure the strength or weakness of a stock or market based on the closing prices of a recent trading period. As of today’s close, 1400+ stocks are in oversold zone

30 Day Volatility

Enough Said.

A Interesting Twitter Thread

Compared to other falls where disruption was caused due to economic reasons, this time around the fall has very little to do in terms of direct economic or bank / credit related reasons. Banks are very much in business, there is no credit freeze or houses and jobs being lost, at least not yet.

Weak businesses need very little reason to fail and Cornavirus may be instrumental in taking them out of the works. Non Performing Assets may rise but given what we have already seen, the rise may not be as catastrophic as we assume.

The darkest hour is just before dawn. I don’t know if we can go darker for there is plenty of space to go lower, but the odds are already in favor of investing if one can hold onto it for a few years. 

In recent years, company growth has been ispid but still very much in positive territory. While future earnings will definitely be impacted by the current situation, the question is how much and how much of it has already been discounted.

Drawdown from Peak

On the NSE, just around 27 stocks have a draw-down from peak lower than 20%.

There is no magic strategy that can avoid draw-downs. Be it Passive or Active, Be it Value or Growth or Momentum or Quality, you shall be hit with draw-downs some time or the other. Going to cash seems an optimal way but this generally comes at the cost of returns. One cannot regularly keep going into Cash and still out-perform the market. 

Dow as I write this is down another 2000 points and now close to breaking the 19,000 levels, a level from which it broke out in 2017. On the other hand, our Small Cap Index is pretty close to where it opened in 2010 (and was where it was in late 2007 as well) while the Nifty Mid Cap and Nifty 50  Index are where they were last found in 2015.

Stick to your strategy. That is the best hope for now and forever.

Panicking is okay. Jumping out is not

We humans are prone to panic. Why else do you think we have so many horror movies that try to scare the shit out the viewers. In panic, we also do things that many a time can be regretful. We have seen more than once of people panicking and jumping out of buildings on fire. He survived the fire but died from the fall is rarely a good headline.

Today markets are on fire with Nifty down big time, something that was not seen post 2008. For any investor who entered the market in the last decade, this is akin to a building on fire where he feels trapped inside.

Everytime market falls, it’s generally because the world seems to be coming to an end and everytime one is disappointed that it isn’t so. Maybe, this time it’s different?

For the last few days, the US markets have been falling like a pack of cards. India not surprisingly is following suit for what the US does, we copy. Need more proof, check out this chart in a tweet I did a few days back

https://twitter.com/Prashanth_Krish/status/1234941743318982656

But the difference is that as recently as February, 80% of the stocks in US were trading above their 200 day EMA’s. Comparatively in India, we have been below 30 for a very long time (we briefly went above it recently just to get back to square one today).

This is my 3rd Bear market. The first bear market I experienced was the Dot Com bust of 2000 and while every fall is unique, the final outcome is similar – stocks get cheaper by the day till its so cheap that it starts to bounce back.

When we are suffering from a severe headache, the inclination is to remove the head to stop the pain. Thankfully, we cannot do that without killing oneself and the headache passes away in some time. It’s normal to feel similarly when it comes to our stocks and investments. The brain is screaming to cut out the source of pain, but cutting off other than letting you feel happy of having done something generally achieves the very opposite of what you aimed for when you started this journey.

Don’t be a Hero is being said of those who want to venture out to buy equities. Yet, these are the very people who in good days quote Buffett and the importance of buy and hold. Buying equity today is not about being a Hero. 

Markets overreact all the time. In recent months, quality stocks were bid to the moon as markets wanted comfort in known names regardless of the price that was being paid. Today, some stocks are being sold at throw away prices because the same investor wants comfort and hold cash.

I have for nearly 5 years now been providing a simple asset allocation mix. On the whole, even the Aggressive model seems Conservative. But today when markets are falling like ninepins, this is what has given me comfort for I have enough dry powder that I can deploy more into equities and still be able to sleep well at night.

Diseases first kills people with pre-existing diseases and we are seeing the same when it comes to CoronaVirus as well. Bear markets such as the one we are currently in the middle of kills investors who are over-leveraged.

I bought a small bit of equity today and intend to add more in the coming week or so. But this is not a blind strategy speculating on a possible bounce in the near future. I have no clue of the coming weeks or months but if you were to talk about years, I am pretty certain that unless 90% of the world’s population dies, we shall have long past moved from this uncertainty.

If you have a cash flow and are comfortable with Risks, continuing to add is the right strategy. The very reason equities deliver a return higher than fixed in the long term is for taking such risks. If you are not comfortable with adding more risks, that is okay too. But do note, no opportunity comes with a blue sky scenario. Anytime you invest in equities, it’s a leap of faith. 

Do note that any investments may not generate the returns you desire for the next one or even two years. Once you are comfortable with that, you can make your peace with whatever markets can throw at you including days like today.

Is Yes Bank Failure the Lehman Moment for India

When the Federal Reserve decided not to provide a rescue for Lehman in 2008, it created utter chaos and confusion resulting in credit markets basically freezing with banks unwilling to lend to each other let alone to others.

India has seen many Bank Failures including the failure of a Scheduled Bank, Global Trust Bank way back in 2004. Recently we saw the failure of PMC Bank which was a cooperative bank but was still large enough to send shockwaves through the system.

Unlike Global Trust Bank of 2004, two things have changed. One, Yes Bank is or was the 4th largest private sector bank in India. Second, unlike in 2004, the availability of 24*7 news channels and social media means that the risk blows up big time for others for fear can drive people to act irrationally.

RBI’s action on Yes Bank has come too late and by penalizing the depositors is setting a bad example that shall not be forgotten for a long time. 

I don’t want to add fuel to the raging fire. Markets will take a while to recover from his hit. Invest with care.

The (in)ability to Act

There is a famous saying by Mike Tyson

Everybody has a plan until they get hit. Then, like a rat, they stop in fear and freeze.

As Investors, it’s easy to quote 

Buy when there’s blood in the streets, even if the blood is your own.

Baron Rothschild

but as another famous quote goes

In theory there is no difference between theory and practice, while in practice there is

When we talk about markets, we generally refer to the large cap Index – Nifty 50 or Sensex as the indicator of how good or bad the markets are. While the Corona Virus has brought down markets around the world by a notch or two, the fact remains that this fall is nowhere if compared to earlier falls that have been seen by the Index.

Take a look at this historical draw-down from the peak chart. At just around 10%, this fall is nowhere in comparison with even the falls of 2012 or 2014 let alone historical falls. In a way, if history is any guide, this is the start and not the end of a correction.

Nifty Drawdown from Peak

But, Nifty 50 for a while has not been the correct way to measure market sentiments. While Nifty 50 was hitting new All time Highs, more than 70% of the stocks that are traded on the exchange were trading below their 200 day averages

To get a better sense of the market, I created an equal weighted index of all stocks. Do not that its equal weighted in price terms and not on the basis of market capitalization. The overall market seems to be down by around 14% with the bottom made in October 2019 being in a similar range of the draw-down that we saw in mid 2013.

Draw-down from Peak of Equal Weighted Market Index

Don’t catch a falling knife is another quote that is used during market downturns. Then again, if the final destination of the falling knife is your foot, that risk may be well worth taking.

I am a strong believer in buying momentum when it comes to stocks but playing contrarian when it comes to asset allocation. This means that you should be wary of adding money into equities when markets are rising and wary of withdrawing money from equities when markets are falling. 

Having been in the markets since long, one observation I have been able to make is that while pre 2008, rarely did people refer to the crash of 2000 as something that could reoccur, despite the passage of 12 years from the time of 2008 crash, every fall is looked at as maybe the start of the next great melt down similar to what we saw in 2008.

Indian markets history is very small which makes it imperative to look at Dow Jones which has the longest running un-interrupted Index since 1896. Most of us have at max a 30 year period of Investing. 

If you had started your investment journey in the US in 1902, at the end of 30 years, you would have been negative at the end as markets buckled down destroying years of hardwon growth. The low of 1932 was the same level as was seen in Dow Jones was in 1896. 

An investor who invested in the depths of the great depression and let the investment grow for the next 30 years on the other hand gained a return that was not seen by investors until the investor of the 1970’s

End Result of a Buy & Hold of the Dow Jones . X Axis is the Investment Date, Y Axis represents the return for the same 30 years later

One of the toughest things when it comes to finance and investment is to be able to stand against crowd thinking. Right now the crowd is basically wondering if this is just the beginning of a bear market. 

Purely going by the 200 day Moving Average as the line in sand between a bull market and a bear, we are in a bear market with all major indices now trading below. Then again, if you were to observe historical data, the 200 day average has been violated once too many.

A much more stabler and better alternative seems to be the 200 Weekly Average (approximately average of 4 Years). Here is a chart that plots the difference (in percentage terms) between the 200 Week Average of Nifty 50 and Nifty 50 itself.

Whenever blue has turned to red has generally tended to be a good time to invest but not every fall resulted in index dropping into the red zone. In fact, during 2004 when markets tumbled post the election defeat of NDA, even the unseen lows did not test the 200 DMA.

What this means is that if you wish to invest more into equities, waiting for the bottom may prove to be a wait in vain if markets take off without providing one such an opportunity. On the other hand, it’s always advisable to have some dry powder if such a situation emerges.

So, how do we deal with such a situation?

This is where Tactical Asset Allocation comes into play. Unlike traditional asset allocation where the view is to stick to a single allocation and relook at the same once a year or once in 2 years (or as a AMC head recently tweeted, once in 4 Years), the advantage tactical offers is the ability to move higher or lower depending on the situation at hand.

In Bull Markets, we are comfortable with a higher allocation to equity (even musing if we should have risked even more) while in Bear markets, we wonder why we are so high on Equity. The ability to act against the trend is neither simple nor easy and yet acting in line with the crowd while it offers ability to share the happiness in good times also means sharing of sorrow in bad times.

While being too early is as wrong as being too late, we all need to act at some or the other point and if you cannot, your returns will match your expectations or even market returns. Our inability to act during opportunities is because of the fear that we may be too early. Based on whatever data we have, I believe that is not the case. Yet, markets could fall more and hence going all in at the current juncture is not a good idea either.

Stagger your investment to predetermined levels based on either your own portfolio draw-down or the market and act on it. The other day I tweeted out saying that the worst case, I am expecting a 20% dip from here for the large cap and 30 to 40% for the Mid and Small Cap. But that may or may not happen.

Based on the above thesis of mine, my strategy is to stagger so that I can invest / move a part of my capital from Debt to Equity at every X% fall in my portfolio. If markets fall to my worst case scenario, I expect to reach the maximum allocation to equity I am comfortable with, else, I shall still continue to hold Debt higher than the lowest allowable level.

There will always be regrets, the question though is which regret is better to live with and which is not. No one is going to tell when the bottom is hit but having a plan (preferably written down) can go a long way in helping you act when the opportunity arises.