Bearing the Pain – February 2022 Newsletter
Till date one place I have been highly unsuccessful is in the arena of entrepreneurship. Reasons are many but one of the foundational reasons as I understood very late is my inability to bear the pain of losses while continuing to be optimistic about the future prospects.
Very few enterprises start off making money right from the word go. Even not accounting for the founders own salary, many take years to break even. If one added the opportunity cost of the founder foregoing an income he would have been able to earn elsewhere for the skills he has, the breakeven period could be even longer.
Writing in his book, The Narrow Road, Felix Dennis chimes thus
Anyone in good health and reasonable intelligence, provided they utterly commit themselves to the journey, can succeed on the narrow road. Tunnel vision helps. Being a bit of a shit helps. A thick skin helps. Stamina is crucial, as is the capacity to work so hard that your best friends mock you, your lovers despair, and your rivals and acquaintances watch furtively, half in awe and half in contempt. Self Confidence helps, Tenacity is an absolute requirement, Luck helps.
When it comes to the market, the success rate is no different though experience tells me that it’s actually worse since what happens in years in a business can happen over a period of days in the market. The worst business can survive for a year blowing out his capital. The worst investor or trader would last a few weeks at best.
Behavior and Strategy are the two key ingredients for success. But good behavior alone cannot guarantee success since a bad strategy is guaranteed to blow up one’s capital though good behavior may ensure that one can hang around for a lot longer.
A good strategy in itself doesn’t guarantee success in the short term for there are always vagaries of nature but like compounding, in the long term, a good strategy can make a huge difference to the outcome.
The period from April 2020 to December 2021 was a rarity. In those 21 months, Nifty doubled in value. This is not something we haven’t seen earlier with the most recent of such instances being in November 2010 (21 month returns were to the tune of 112%, 10% better than this time around).
Correction in the markets was not a question of it but when. 2022 we seem to have started off as a year when some of the excess returns will be given back as markets self correct their earlier excesses.
Take a look at the chart below
Since 1980, Sensex has generated a long term return of 15.88%. But yearly returns on an average aren’t anywhere close to that. We have some very good years and some very bad years and some nothing years in between.
The chart plots out the differential between the return of the year and the long term return. Hence for 2021 when Sensex return was 22%, it shows up as 6% excess returns.
What is interesting to observe is the big bars we used to see pre-2009 on both sides have virtually disappeared. We don’t have extraordinary years (like 2003 when we went up 73%) nor are we seeing extraordinarily bad years (like the bunch we see in the mid 90’s – do note though that the market wasn’t that bad. It’s just looks had when you subtract 15% from the years already bad return)
In 1998, Sensex trailing PE ratio went below the 10 mark. Interest Rates were high, Inflation was high and Markets were cheap. The probability that we shall see a similar opportunity while can never be ruled out, the odds are pretty slim.
It never rains but pours is a proverb that is most suited for bear markets.
Right now, there is plenty of bad news going around.
The Russian Invasion, the sharp hike in Crude which may push up Inflation forcing RBI / Fed to hike will all be just excuses for what we have seen happen in the markets time and again.
Crude prices were high even before the US had enforced sanctions on Russia but are now on a tear. While every country will be impacted with the high price of Oil, the impact will be felt more in emerging countries like India.
Price of Nickel shot up so much that the London Metal Exchange had to shut down the market for the day to allow for those caught on the wrong side enough time to refill their margins. Poland has broken ranks and raised interest rates by 0.75% to 3.5%. Sri Lanka has had to devalue their currency by 15% to ensure that they can apply to the IMF for loans
But only when there is bad news enough to frighten the life out of someone will he be willing to sell things that once were seen as great opportunities at throw away prices. We aren’t at throw away prices currently but waiting for those isn’t a strategy.
Drawdowns are a pain, but once accustomed, it becomes easier to navigate through the bad times for the good times are generally right at the corner where the bad time ends. There has been enough written on it yet to be a successful investor, the ability to bear the pain when markets trends down is important.
Right now, the trend is weak. There is no denying that as is the case that there is no escaping such without trade off’s of one kind or the other. Momentum Portfolios as I have long argued are no better or worse than any other factor based strategy. While many got lucky during covid, it seems such luck is missing with respect to the Russia Ukraine Situation.
As the saying goes, being prepared is half the battle won and in investing, being prepared for the bad days is critical for success.
Between the idea
And the reality
Between the motion
And the act
Falls the shadow
- T. S Elliot
Book Review: Bulls Make Money, Bears Make Money, Pigs Get Slaughtered
The title of the book was what interested me to check it out. While the title can be said to be slightly misleading (though true), the contents were pretty good. I highlighted some interesting chapters on Twitter
The book, while written in 1999, isn’t as dated as one assumes a 20 year book on markets will be. Most of the lessons that can be learnt 20 years back are applicable even today. I particularly liked the Psychology chapters the most. While a newbie may not be able to grasp all the information and analysis, this book is good for someone who is exposed to markets and trying to smoothen the edges.
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