Stop the Naysayers
Twitter is filled with all kinds of folks, but once who get the highest attention are those who make wild projections on either side. No one will bat an eyelid if you claim that you can generate 15% returns in the long term but push that bar up to 24 – 30% and you shall definitely hog the limelight.
Markets / Sectors / Industries all move in cycles – some are long, some are short, but at the end of the day much of the market is cyclic in nature. The same applies to strategies that are followed – some bask in Value, others prefer Quality and few prefer Momentum. No strategy works all the time.
Today, much of Twitter is agog with how Quality Stocks are a bubble on the verge of Collapse. I have no clue on whether they shall continue to rise or get pricked and crash, I am no soothsayer with abilities to know how the future will unfold.
In 2017, owing to changes in the environmental policy in China which is now the leading producer of literally everything, Electrode prices started shooting up. What was sold at 5000 shot up to 50,000. All because China arbitrarily decided to shut companies that manufactured Steel.
HEG is a leading producer of Electrodes and the stock shot up from sub 200 levels to a peak of 5000 in nearly 1.5 years. Anyone who had studied the sector even a bit would know that this wasn’t going to last but the frenzy in the markets and the assumptions (mostly wild) on how long it would take to get supply back in the market made investors chase it higher and higher.
If you were a fund manager managing hundreds or thousands of crores in capital, I can understand why you would like to ignore such short term trends. Getting in and out for large funds is messy and you wouldn’t want to partake in stocks that are in the limelight for a short duration with pretty low volumes.
But if you are reading this post, I assume you are managing at best what is a few crores of capital. A 3% position in such stocks is less than 1% of the value traded in the stock on any of those days. Why should you ignore such opportunities?
Its risky and I don’t want to take short term bets may be the answer you have for me, but the fact is that every bet you make is short term, just that companies which continue to deliver and are held while removing companies that fail to deliver. In other words, most bets are a series of short term bets held over the long term.
In the current market scenario, Quality stocks which are trading at relatively high valuations are seen as the next bubble in the offing. There is no denying that companies are trading at extremely rich valuations, but rich valuations alone isn’t good enough for a crash to happen. Stocks can remain richly valued for long well before it starts delivering the goods.
But even if the fact is true that Quality is over-valued, should that stop you from participating in the rally. Bajaj Finance was said to be overvalued when it was 2000. Today at 4000 its still considered as over-valued.
For a very long time, Amazon was considered an expensive stock. 10 years ago, the stock was trading at sub 100 levels and a PE ratio closer to that of today. Today, at $1800 and similar valuations, it’s seen as a value buy. The change came not because the stock crashed as is evident from the price change. The change came because the company has continued to deliver stellar earnings making it look like a bargain today on the assumption that this trend continues in the future as well.
Anyone who bought years back as an Expensive Quality stock is today holding a not so cheap Value stock. Talk about Narratives.
The problem as I see is that there is overly focus on being right when entering a stock versus focusing on being right when exiting. True Risk Management is all about getting the exit right, it’s never about getting the entry right.
From its peak, HEG declined by 83% at its most recent low. But this did not happen over-night or even in the course of a week or a month. The decline has taken an entire year and even today we aren’t where we started off from.
As a fund manager, it’s tough to accumulate or distribute vast quantities of stock in a short span of time. The bigger the AUM, the tougher it becomes to invest in most stocks outside of the larger indices. Its hence understandable if they wish not to invest in companies like HEG.
But this ain’t true for you as an Individual Investor. You capital allows you to be more nimble that most fund managers are, so why follow thesis that seem like threats to them but can actually be opportunities to you.
On that note, I tweeted this a few days ago
As a Momentum Investor, I love bubbles for they offer the greatest opportunity to profit from. Yes, exits can be tough when it implodes, but time and again, what I have observed is that the fall is slow at first and fast much later. Unless there is evidence of fraud, stocks don’t crash in a day or two.
The only way we as market participants can make money is because the markets are unreasonable all the time. There is no such thing as too high or too low (until its zero). Whether you are a value investor or a momentum trader, it’s important that you have a set of hard rules that shall take you out of a position. If you get that right, how you enter will not make much of a difference in the long run.
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