Bubble | Portfolio Yoga

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)

How is the josh?
— Prashanth (@Prashanth_Krish) March 9, 2020

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)

Is it too late to panic? #AskingForAFriend
— Prashanth (@Prashanth_Krish) March 11, 2020

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.

Assume you have 2 Portfolios. One Short Term Picks, another Long Term Picks. Now, both go down 30%. Which makes you feel more sad {Amounts invested being same for both}
— Prashanth (@Prashanth_Krish) April 2, 2020

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.

Are we at a Tipping Point

The big read of the week has to be the “Howard Marks” Memo which these days seems to be the second most read fund manager report after the Oracle of Omaha. In this Memo, Howard warns about the Risks that the market seems to be ignoring as the fear of missing out (FOMO) seems to drive money towards ideas that in general times wouldn’t have been given a second thought.

Last weeek, I ran a Twitter poll asking if it was possible to see 20,000 on Nifty 50 by year 2020.

What probability would you give for Nifty to cross 20,000 by 2020?

— Prashanth (@Prashanth_Krish) July 21, 2017

Quite a few replied saying that they felt the chance was ZERO while the majority of voters felt that the chance was less than 25%.

The results weren’t surprising to me given that in recent times, there has been quite a concern that markets may have over-extended and it was time for a pull back. Yet, given the fact that we don’t know the future, should we write off even the remotest of possibilities?

No one really likes Bear Markets. While Value Investors claim to love Bear Markets as they provide them the opportunity to pick Dollars for Nickels, when the push comes to shove, I do wonder how many will be left standing let alone participate by buying stocks as they become cheap.

Bear markets come in different shapes and forms.

The 2000 Boom and Bust

Who doesn’t know about the Dot Com Bubble these days. December of 1998 was the start of the rally that took Nifty 50, a Index that wasn’t having any heavy weight Infotech Stocks at that time from 817 to a final high of 1818 in the space of just 15 months.

The rally in the Infotech Sector Index took quite a different route with the rally starting two years earlier in December 1996 with the Index floating around the 78 mark. When the peak was finally achieved, the Index was quoting at 9,550.

Similar to the Nasdaq 100 which took more than a decade to break its all time high of 2000, Nifty IT too broke its 2000 high only in 2013.

One thought process of where one should start a new bull rally emphasizes that a new bull rally starts only on breaking the previous all time high. Using that definition, we are still in the Infant stage of the bull rally in Infotech (validity to remain as long as it trades above the 2000 high) and yet IT stocks are a pretty hated lot.

Nifty 50 on the other hand took around 34 months before it broke above the 2000 high and 48 months it was before we were well and truly above that high water mark. Dow Jones Index on the other hand had to wait for 72 months before the 2000 high was broken only for the financial crisis to crater the Index well below even its 2002 low (Nifty 50 on the other hand didn’t really come anywhere close to the lows we saw in 2002).

Its another matter that the stocks of the next rally bore little resemblance to the stocks that mattered in the earlier rally.

The 2004 and 2006 Mini Bear Markets

Markets fell greater than 30% from their peaks in 2004 and 2006, but given the speed of recovery, this mini bear market is less talked about. While the trigger to the 2004 fall was the surprising end to the NDA government in which markets had great hope, the 2006 fall was triggered by global factors.

While both 2000 and 2008 are talked about as the great bear markets, 2004 and 2006 aren’t since the amount of time spent underwater was fairly short. Markets rebounded strongly from the lows and in no time were we back at the earlier peaks.

The Great Crash of 2008

Who needs to be told about the crash of 2008? These days, every time market starts to feel a bit too hot, the fall of 2008 is what comes to top of the mind. Investors who look at valuation seem to worry that every time we close in to the valuation we saw in 2008 prior to the fall, its just a matte of time before we see a repeat of the same.

At its peak, the much derided and yet the quickest way to figure out where the market lies, Nifty 50 PE was testing the highs it saw in 2000. Sensex PE Ratio (both of them being at that time of 4 Quarter Trailing Earnings on Standalone Balance Sheets) was a bit away from its peak of 2000.

Despite the difference in stocks (Nifty 50 has 51 stocks while Sensex has 30) and the weights, both most of the time top out simultaneously most of the times. 2008 was one such instance.

The fall of 2008 has for many who experienced the same has created a phobia of every fall being similar to the one seen in 2008. Seeing your retirement kitty (if invested in the market) fall by 50% or more is nothing some one can forget in a hurry.

For long, Foreign Institutional Investor have been the critical driver behind the rise and fall of markets. Other than for the one instance of 2016 where markets closed positive even as FII’s sold (Calendar year basis), every time, FII’s have sold, markets have dropped and vice versa.

Much has been said about how Mutual Funds are becoming the key driver in markets. But a cursory look at the Quarterly net flow of Equity Mutual Funds doesn’t really show it likewise. We have had similar inflow’s in 2007 for instance as we are having now.

The only difference is in terms of Gross Inflow / Outflows. While the first 6 months of 2007 saw a Gross inflow of 42,903 Crores , in 2017 its 1,24,517 Crores. This would suggest that while there has been a strong move towards Mutual Funds, the churn is pretty high as well.

Breadth Indicators

One way to determine where we are relative to earlier times is to look at a few breadth indicators.

Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

John Templeton

A euphoric market is one when literally everything is flying. At this point of time, you don’t need to do any Analysis but just invest in anything that seems to be moving higher.

While Mid and Small Caps seems to have been in a Euphoric in recent times, the evidence doesn’t easily lend to that buzz. For instance, here is a chart which plots the percentage of stocks that are trading above their 200 day Moving Average.

The above chart contains 2 data points. The top pane plots Nifty along with the 10 day Moving Average of Number of Stocks trading above the 200 day Indicator. The idea of using a 10 day Average is to smooth out the volatility.

The lower pane provides the raw data – % of stocks trading in NSE that are above their 200 day averages.

At 60%, we aren’t really into territory that seems to be risky at the moment. In fact, post 2014 Election Rally, we haven’t seen the Indicator cross 70.

This in my opinion is indicative of the fact that markets aren’t totally over-bought. While one cannot rule out any reactions from current levels, any major bear market of the kind seen in 2000 or 2008 seems to be not on the cards unless there is a Global Meldown in Equity in which case, all bets will be off.

Valuation

The big elephant in the room would be Valuation. Markets are expensive based on PE Ratio regardless of what Index you apply the same upon. The only cheap Indices would be the Infotech and Pharma, but hey, who wants to invest there in the first place.

Above is the Nifty Price Earnings Chart over time with Average and Standard Deviations. A casual observation would be that while markets are expensive, they haven’t reached a point where the odds really aren’t in favor of exposure to equities.

Current market valuation is more expensive than in 2004 prior to the crash, but is the Index the same as what was in 2004? Currently Financial Services account for 35% of the total Index weight. This wasn’t the case in 2004 for instance when the composition of the Index was vastly different.

Only 25 stocks continue to be part of the Index when one compares the Index of 2004 to that of today. In other words, as much as its essential to look at historical data points to get a sense of valuation, ignoring the huge churn and differential weights can change the basic structure of the analysis.

HDFC Bank for example is trading at 30 times its earnings and is closing onto representing nearly 10% of the Index weight. A High PE + High Weight in turn would pull up the overall weight of the Index. Is HDFC Bank cheap or expensive is another story altogether.

The path forward

Wouldn’t it be lovely to have a Almanac which can give us precise turning points of the future (Experts of GANN, a style of Technical Analysis would love to claim they know such dates) so that we can be fully invested when markets are trending higher and be totally in cash when the trend turns to bearish.

While we cannot project the future, one thing that is bound to showcase the future as it happens is the chart. Right now, the market is strongly bullish regardless of what method you apply. At some point markets would start to roll over breaking major supports and trend-lines on the way. That would be a better time to become bearish than try to predict the top based on tools that fit our narratives.

Above chart is as on date. Compare this with similar chart of the previous bull run. See something similar?

Is the chart of 2017 similar to one of 2008 or are we placed similar to 2006 or 2004? Once in a while markets can go up sharply at a 45 Degree Angle. While they mostly end up correcting, not all corrections end up like 2008.

I for one continue to believe that the best way to play would be to follow a Asset Allocation mix that is suitable under current circumstances and one while allows us to reach our goals even if the best laid out plans falls flat.

Random thoughts on a volatile market day

We are all familiar with Notional Loss and Permanent Loss but what about Opportunity Loss (Cost). Compared to the other two, this is not painful since Ignorance is Bliss. But then again, while the other two losses are something that has occurred due to action, opportunity cost is one which takes place due to inaction.

For Investors, the cost of opportunity is not being able to en-cash the gains in their portfolio. Warren Buffet says that he loves to hold stocks to infinity (speaking in a literal sense). But how plausible it is for a ordinary investor who has invested his money not to make wealth for the next generation but to achieve certain targets in his own lifetime.

A portfolio of IT stocks would have skyrocketed in value when the 2000 IT boom happened. Once it burst, the portfolio could have never recovered even though its been 14 long years. Even a Index (which has the advantage of being able to jettison weak stocks and add new stocks instead) like the Nasdaq Composite has not been able to conquer its 2000 peak. If you consider the impact of Inflation, the break-even cost will be even higher.

A portfolio which was heavy on Infrastructure / Energy would have seen it soaring in value in the years between 2005 – 2007 (in India). But how long before they come back to their highs (and will many of them even survive in the interim).

Some stocks though have never bothered to look back too much. But the question that you need to ask yourself is, how likely do you think that your portfolio consists of such stocks and hopefully everything bought at prices which are not tested when the larger trend reverses?

Some Small caps move onto Mid Caps and later on become Large Caps. The question though is, what is the % of stocks that advance such. On the other hand, what is the % of stock that move the other way round.

Index stocks are seen as the bluest of the blue-chips. But 20 yeas later, how many companies have survived and thrived. If you had bought (for equal amounts / stock) all Sensex stocks in 1994 and looked at your portfolio today, the CAGR gains you would have seen is somewhere around 12% (Of the 30 stocks, 29 are in existence with Philips India being the only company that got de-listed).

If you were to think that maybe investing in Mutual Funds would have given you a better return, think again. While you would have gained handsomely if you had invested in Kothari Templeton Prima Plus, your investment (adjusted for Inflation) would have wiped out if you had instead invested in CRB Mutual Fund (and both were launched in the same year, 1994).

Ask any stock broker / Analyst and he shall be happy to share the huge gains that could have been made by investing right and sitting tight. Heck, as the list below compiled by friend Girish showcases, your returns would beat the hell out of any other asset classes

Of the list, I have been into a couple of stocks. But then again, like any other investor, I have not held to-date and missed a pretty nice opportunity. But then again, I do hold a couple of stocks which have given me 100x returns (UTI Bank / Indocount), but since my quantity of purchase is small, even though the percentage returns seems awesome, the amount is pretty meager. A lakh of Rupees 10 years back is not the same 10 Lakhs now.

In fact, its not about identifying a 100x opportunity but ability to buy it big is the key to making wealth in markets. But how many have the confidence to buy a stock and invest say 10 / 20 or even 30% of their networth into it?

Recently I was reading a tweet by a Mutual Fund manager where he professed as to how investors would have made handsome returns by investing in markets and as an example showcased how Sensex has grown to 27,000 from 100 in 1979. What he forgets is that 100 was the base price and secondly, there was no way to invest into Sensex / Nifty till 2002 when Benchmark Nifty Bees came into the picture. So, when people talk about the long term returns of market, do take with a few kilo of Salt.

Over the last few days, Russian Markets have literally imploded. Things have come to such a pass that one is hearing that people are buying iPhones to hedge their currency risk. What is the probability that we may get hit with something similar and what is the plan of action if that does indeed happen. How hedged is one’s portfolio to international moves that we may have no control.

Without a plan, most of us move with the herd making it easy for the hunters to cull us. But how many have financial plans in the first place. Today youngsters take loans which they repay for most of their lives to buy asset such as Land / Appartments. While that has worked well in last 15 / 20 / 30 years, what is the probability of it working in the next 30 years?

We are happy to see advent of Flipkart / Uber / Zerodha among other disruptive companies. But what if the next disruption makes us jobless with our domain expertise not worth the price we deem its worth. What is the plan of action?

Writing this blog is a way for me to express my inner thoughts and if its boring, I apologize. But think deep, do we have a plan to achieve our goals if the Plan A bombs. How many have a Plan B or even a Plan C to take care of us when shit hits the fan?

A couple of interesting recent reads that may have influenced some of the thoughts above;

On the Shortness of Life

How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness

Hand to Mouth: Living in Bootstrap America

Do check out the books above. Deeply inspiring to say the least. Made me think of what Warren Buffet calls the Ovarian Lottery and how lucky we are (regardless of the challenges we face).

This has been one hell of random writing. Thanks for reading. Hope its worth your time

sayonara 🙂

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The 2000 Boom and Bust

The 2004 and 2006 Mini Bear Markets

The Great Crash of 2008

Breadth Indicators

Valuation

The path forward

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