The recent melt down on the Indian stock markets has delivered high voltage shocks to investors / brokers / fund managers ...............anybody who is connected in any way with the market. It has delivered body blows to Mutual Fund NAV's and individual folios. Erstwhile large caps such as R Com, J P Associates, Videocon, Suzlon etc have become mid caps or even small caps with genuine fear of some of them becoming zero caps. Vast swathes of mid and small caps have been decimated. Panic has reached levels where I even heard someone saying that Mutual Fund SIP stands for MF Suicide Invitation Program.
In this environment of confusion and fear what does a common investor do? Does he become a Brave-heart and go all in with his entire available funds picking up a motley of large caps, mid caps & small caps following that great advice from that great investor: Warren Buffett :-"Be greedy when others are fearful". Does he sell out and wait on the side lines, in line with that great advice from that great investor: Warren Buffett :- "Rule No1: Never lose money. Rule No 2 Never forget Rule No 1." Or does he simply freeze up and do nothing once again following that great advice of that great investor Warren Buffett:- "Doing nothing is often the right thing to do." Far from being sarcy or trying to belittle the Oracle of Omaha...... as Buffet is often called, I believe he is one of the best teachers for common investors to learn from.
Then why does it appear that his above quotes are contradictory? I believe that is not the case. It is just that they should be interpreted in the context of the situation. So being greedy when others are fearful is a great axiom to follow when at least some visibility is there on the horizon For example.........had the market collapsed this way when elections were over, Rupee & oil some-what stable at whatever level they wanted to & Trump done with whatever inanities he could conceive and the fall triggered essentially out of say a market un-anticipated election out-come leading to mouth watering valuations......... I would say go all in. But that is certainly not the situation today with multiple uncertainties hovering over the market. Be it oil or Rupee or CAD or the fear of an unhinged POTUS coming up with more lunacies on the trade front. Therefore in this situation ideally I would like to follow the advice "Rule No. 1: never lose money............." I would interpret it in the form of booking profits in small, mid & volatile large caps as well as equity MF's and seek safe harbor in a combination of mainly debt & and some hybrid funds as also a few select large caps............ In fact I had been advocating precisely this strategy from January 2018 onwards which my clients would vouchsafe. Unfortunately the damage especially in the last 2 weeks has been such that rare is the portfolio of small & mid caps and in many cases even large caps constructed in the last couple of years which is in profit. Most folios in significant profit are those of 5 years or greater vintage. So does an investor " Doing nothing..........." interpreting it as a hold on investment activities? I think not.
In fact I would like to interpret one of WB's other quotes in a manner appropriate for today's situation:-
"The market can price things wrong. Price is what you pay...value is what you get". Especially relevant in this environment where there have been many bouts of indiscriminate selling triggered by margin calls or international developments or "market news" or whatever. You sometimes get top notch names at decent valuations. For example today JSW Steel was available below 360 or Kotak around 1090 or Sun Pharma sub 590. The list of quality names where serious price retraction has happened is fairly extensive and the above are a few names from my recco list.
In fact the time is also perhaps ripe to cherry pick in small and mid caps...... for example First Source and Banco India traded around 59 and 175 respectively at one point today. Again part of my current recco list.
Does it mean that these are the lowest rates for these shares and from here they can only go up? Of course not.......the market knows no bottom just as it knows no top. But if you are a stock investor then at some point you have to start getting into buy mode just as at some point you should also get into sell and book profit mode. While no one can time the market perfectly, one certainly must have some sense of whether broad market/sectoral valuations and the general investing environment are appropriate for buying or selling stances. Just don't believe all the pundits who come on TV and say you can never time the market and so you should keep investing your money via SIP....... that's a Stupid Investment Plan which can cause serious grief. By the way.......why do all these geniuses NEVER recommend a SWP (Systematic Withdrawal Plan) on TV despite knowing full well that just as there are bull phases when broad market prices go up for a significant period of time; there also are bear phases when broad market prices go down for an extended time and investors are better off selling rather than buying. Is it that they are too dumb to spot market down turns or does it not suit THEIR financial health if they recommend SWP and investors start withdrawing money? Your guess is as good as mine. In fact, it is time that the regulatory body SEBI also encourages long/short mutual funds which take a more balanced view of the markets. Such investments avenues are easily available in developed markets and should be easily available in India too. They tone down the rabid bullish views which most MF managers in India have today and provide an alternative to investors to profitably stay invested even during phases of market downturns.
By my reckoning now the time has come to start buying in small lots with full preparedness to face wild price gyrations.......... perhaps up to next year's general elections.
Wish you happy investing times ahead.
Disclaimer: This article is the author's perspective on the subject matter and is not meant to be an investment advice. The author shall not be responsible for the outcome of any action purportedly initiated on the basis of this article by any reader.