Ending the Year on a High – The December Newsletter

What a year 2020 turned out to be. The year the Rat as per the Chinese Calendar, it seemed like it chewed more than it could bite. While the negative side is well known, the positive side is that thanks to the Medical Advances and the ability to arm ourselves with better knowledge than ever before, the death tally was relatively low when one compares with pandemics of the past. 

If some one had slept through the year, he may wonder what the hulla-bulla is all about. After all, the Index has moved higher as much as we had seen in the 2019. What is special about this year he may ask.

When markets fell in March, it was an opportunity of a lifetime as a Portfolio Manager put it. While I disagreed it was an opportunity of a lifetime having seen my share of bear markets, it was definitely an opportunity that we had seldom seen in the last 5 to 6 years. Yet, rather than hope, most of us were despaired. If only prices will come back to our earlier levels, we shall be happy to get out. Looking at the Mutual fund data, this is what seems to be happening too. 

We have seen this earlier – in 2008/09. Investors did not withdraw from the markets during the fall but later exited once the market got back to normalcy. Investors came back in droves only from 2014 as the new bull market started and have more or less stayed back in full. This is a very huge change from the past that we have seen.

One of my favorite books is Reminiscences of a Stock Operator by Edwin Lefèvre and one paragraph is quoted extensively on Twitter

It was always my sitting that highlighted the advantage of Buy and Hold versus jumping around. In 2018, as part of the Capitalmind Research Team, one of my picks was Majesco for the Multicap Portfolio. I had studied the stock and got what I thought was a broad understanding of the business. But what I had in reality was nothing more than a hunch that this stock was one of the very rare Indian companies to have a listed US subsidiary. A few months later, when we were looking for new ideas, I decided to drop the stock.

In March of this year, this seemed like an excellent decision given the way the stock had fallen post the decision to exit. Post the pandemic though, the company sold its US subsidiary for more than what the market thought it was worth and in December it announced a dividend of Rs. 974.00 for its shareholders.

The episode shows that it’s not enough to buy a stock because you find the business attractive but also have the conviction to hold to that idea when the market seems to have rejected the thesis. This is also a reason why Value Investing is tough – it asks you to hold an opinion that runs contrary to the market and one that may take a long time to be proven right. In this age of Social Media and everyday checking of portfolios, it’s doubly tough.

From the talking heads on Television to the Finance Twitter guys, 90% of the talk is about stocks and very less if anything about Asset Allocation. This is not surprising since Asset Allocation is a bland subject. How cool to say you bought a stock that doubled versus talking about why you think your exposure to equities is just 35%. 

My personal asset allocation is a mix of multiple logic chief among them being how I think the market will behave in the coming year. In 2019, I started to feel that 2020 will be the year when the markets will finally have bottomed out and we shall start a new bull market. My thesis was this would start somewhere in September. 

So, I decided to allocate to equities slowly till I reached a number I would be comfortable with. But as Robert Burns wrote, The best-laid plans of mice and men often go awry and Corona hit with an intensity that I did not expect. In fact, going into March, I continued to be bullish since my belief was that like SARS or MERS, this would not be too bad. I also checked out how markets had behaved in the years 1918 to 1920 when Spanish Flu hit much of the World. 

Dow Jones from the beginning of 1918 actually started moving higher and peaked out 71% higher from where it started in late 1919. While markets did fall in 1920, this was post the epidemic and not during the epidemic which wiped out 5% of India’s population at that time.

“History may not repeat itself. But it rhymes.”

– Unknown

Optically the market looks extremely expensive. But unlike in case of previous high’s, this is not something very few have noticed. It’s the talk of the town and the reason cited for a bear run if not a full on bear market. 

A bear market requires a trigger and while Corona has had a tremendous amount of impact on life, this doesn’t suffice especially in the light of the kind of liquidity that has been delivered by Central Banks and the promise of low interest rates for the foreseeable future. Indian Real Interest Rates have for the first time in a long time dropped into negative territory.

While financial repression is bad for those dependent on Interest for running their daily life, it has a favorable impact for new capacity addition by companies which hopefully will set the ball rolling for a stronger growth. Negative real interest rates also push savers to take more risk and risk is taken by investing in assets such as Real Estate or Stocks which again pushes up the prices of these assets.

While I don’t believe in Prediction, especially of the future, I have been interested in cycles since it gives me a better understanding of how and where to invest into. Based on some studies I have done, here are 3 predictions for the coming year. 

Two are moderately bull cases and one is an extreme bull case. The thing about cycles is that sometimes they could be inverted. I do hope that is not the case with these charts but hey, who said Prediction is Easy 🙂 

Here is to hoping at least one of them comes out right. Wish you and your family a very happy, prosperous year ahead.