Stop Playing the Blame Game

If Investing is a Journey, 90% of such journey’s are left mid-way. Every co-passenger you meet on the journey seems to know what his final destination is – unlimited riches. Financial freedom alone doesn’t cut it for what is freedom without recognition as being a great investor / trader.

Markets move in cycles and we all know what goes up most of the time comes down – may not back to square one but definitely deep into recess before the next up cycle begins. Yet, the euphoria of a bull makes one forget that all these can and shall end one day.

While fundamentals provide the true value for a stock, its sentiments that drive much of the demand and supply. In 2014, news of the incoming government’s intention to launch GST provided a strong fillip to logistic companies.

While logistic is a simple business with very little of a moat to speak about, stocks got re-rated crazily. Companies like GATI which were trading at 10 times their trailing earnings suddenly were traded well north of 50 times. Its as if GST would revolutionize the Industry and boost their earnings significantly.

Well, there is a reason for old proverbs such as “If wishes were horses, beggars would ride”. Markets had just overestimated the impact and when results didn’t showcase any such boom, stock started to climb back from the peaks to the base-camp from where it had all started. The stock is today down 80% from its peak and yet its actually more than double from where it started off.

Sector after Sector has followed a similar pattern with stocks being sold at valuations that defy gravity and logic. Yet, with markets showing no weakness, like Chuck Prince many an advisor and fund manager felt that this was the new normal. Afterall, why is it abnormal to pay Non Banking Finance Companies which depend upon Banks for their own funding a price to book and price to earnings that is multiples of banks that have cheaper cost of deposits.

This is not the first time nor the last. The only difference is the sector / stocks in play and the players themselves. Old wine in new bottle as they say.

The question is what next. There will be another bull run but that doesn’t mean that your stocks will participate. In 2000, anything that had a name that included Infotech shot up. When the dust settled, the only survivors were barely a dozen at best.

Similar was the play in 2008 when Infra companies toppled. 11 years hence there has been very few if any companies that are trading above their 2008 high. 

In 2008, one of the top performing mutual fund was DSP BlackRock Micro Cap Fund, a fund focussed on small cap stocks. When the trend turned, the fund dropped like a rock falling 75% from the peak. But come 2017 and the fund was once again in focus with inflows to the extent that the fund actually stopped taking in fresh monies.

From the 2008 high, the NAV at the beginning of 2017 was up by 200% – the high of 2008, not the low of 2009. This even as the Nifty Smallcap 100 had barely recovered to its high of 2008. 

This did not come through by sitting on their old portfolio but by removing weak companies which were replaced by better companies. This ongoing process cuts out the weeds and ensures that the future performance is better than the immediate past. 

From advisors to fund managers, 2014 to 2017 was a time when most of them got carried away by the relentless bull rally. Momentum investing, especially price based momentum investing isn’t bad as regular readers of this blog know by now.

My own Momentum Portfolio was 80% of small cap stocks in January 2018. Today though, the portfolio is more in the Large to Mid Cap universe. While that in itself hasn’t helped me in limiting the draw-down (currently around 20% mark), the thought process is that when the markets bottom and the next bull rally takes off, the portfolio will be in the forefront of gainers.

If I had held the same portfolio that I had in January 2008, the portfolio would have been down by more than 60%. Cutting the losers and holding onto the winners has helped restrain the overall draw-down though given the deep cuts we have seen.  

If in this market, you have been caught with stocks that are down, you have two choices – one – hold onto the existing portfolio with the hope being that when the trend turns, the stocks too will recover.

Or better, shift out from the weak to the strong for when the market climbs back up again, the strong stocks of today have a greater possibility of generating better returns than the weakest of today.

In a way, the current situation for many is similar to the Monty Hall problem. Rather than me explaining the same, this video should do the trick.

Every rise and fall in markets is accompanied by narratives as to why the markets have moved as such. Currently the narrative is to blame the fall on the government policies. While government policies do influence stock price movements to a great extent, the fact remains that overpaying for future earnings does take a toll in future growth prospects of the firms as well.

Infosys was growing faster in 2000 than anytime in the future, but overpaying for that future earnings meant that the high of 2000 was seen once again only in 2006. Then again, investors in Infosys were lucky, same couldn’t be said for the hundreds and thousands of investors in companies such as DSQ Software, Silverline, Pentafour Software among others. All they hold today is worthless paper.

You can blame anyone for the mess but the impact is felt only by you. Everyone of us makes mistakes, but the way out is to first accept the mistake and learn the lessons it offers. Blaming can only take one so far and you are far better not investing with people who blame things on everything but themselves.