There is joy in sharing during Diwali. And while this year has been extraordinarily painful for people, economies and, for a time, equity markets – the forced time-out and work-from-home has enabled a lot of reading and contemplative conversations with market veterans. The most learning though, as is always the case, has come from just watching Mr. Market. The best teacher always.
Here’s what it taught me this year, about pandemics and crises, growth and risk. The joy of giving and the best asset one can own.
1. Prepare For Tail Risk
As Morgan Housel put it beautifully in an interview in September as well as on his blog, daily news headlines are about the average consequences of risk. But the tail-end consequences of risk – such as pandemics and economic depressions – are what make the pages of history books. They’re all that matter. They are all you should focus on. While stock market bulls may not fully agree, if you remember what ordinary investors were experiencing in April and May this year, you’d know there is probably no more important advice than this.
2. Inculcate Some Hypermetropia
“If you have to value markets, don’t look at 2021: look at 2022. Because if corporate India even returns to 2020 numbers, we are in a fairly priced market right now.”
- Kenneth Andrade, Alpha Moguls, September 2020.
This was one big learning.
Everyone who invested post the markets hitting the trough levels of 7,500 in March by looking at a probable washed out FY21 would have stayed bearish on the market all through. But the market itself started looking ahead—at FY22—prompting a roaring pullback from the March abyss.
Sometimes, one has to let go of normal investment approaches to succeed in an abnormal world.
Read: One Factor That Kenneth Andrade Sees Driving Profitability This Decade
3. Go Micro
“Macro factors are top-down, be it market timing or sector rotation or thematic bets, those are more chance-driven. The more macro you go, the more it becomes a coin flip. The more micro you are, the more it remains stock-picking.”
- Prashant Khemka, Alpha Moguls, September 2020
Coming from a fund manager whose returns have been in the top percentile for a large number of years, and while managing a very large corpus, it is a thought worth considering. That a micro or bottoms up approach may pay richer dividends.
Read: Prashant Khemka Says This Is Key To Generating Consistent Returns
4. 60/40 Lost Decades
“There is a long and sad history of numerous lost decades for 60% equity/40% bond portfolios. What they all had in common was that each began with stocks or bonds being expensive. Today, stocks and bonds are pricey. This frightens us and it should frighten you.”
- Peter Chiappinelli, Portfolio Strategist, GMO (paraphrased)
Learn from history, even if it does not repeat. GMO looked back multiple decades to figure whether to stay invested or roll back some investments. If, as an investor, you have a higher proportion of your wealth in stocks, it may serve you well to heed this. The point aligns well with Morgan Housel’s view of always preparing oneself for the tail-risk.
5. Growth Trumps Value (Not That Trump)
Markets pay for growth. A company showing above average growth is like the child who always comes first in class - he always gets what he wants.
- The Thoughtful Investor
I was reminded of the primacy of a growth-led investment strategy when reading this book this year. Especially, in light of how growth stocks have done in the last decade, never mind their valuations. The argument that growth trumps value has never been in a stronger winning position than in the decade gone by, and in the Samvat gone by.
(And it ain’t leaving the White House any time soon.)
Watch: Warren Buffett And Charlie Munger: Growth Stocks vs Value Stocks
6. The Alt Version Of ‘When Life Gives You Lemons...’
“I’ve always said and I always keep telling the younger members on our team is that it is better to give up a part of the gains, especially when you have substantial gains. A dollar or rupee gained does not give as much pleasure as a dollar or rupee lost gives pain. Don't squeeze a lemon till it turns bitter.”
- Shankar Sharma, BQ Edge, September 2020
The veteran investor puts it well.
You’ve got one eye on the Nifty 50 chart these past few months wondering whether this applies. Maybe not immediately, but it’s best to remember not to ride the gains so hard so as to forget potential downsides.
7. When To Sell
“Most conversations and investment theories talk about what to buy and when to buy, but sizing—which is how much to allocate to a particular stock—and when to sell are equally important. The day investors spend a lot of time on sizing and selling, a lot of mistakes in investing will go away.”
- S Naren, Talking Point, June 2020
That conversation with Naren is a master class. But this one point stands out the most – more important than knowing what to buy is knowing how much to buy.
Read: Investing Isn’t Just About Buying, Says ICICI Prudential MF’s S Naren
8. The GMM Pfaudler Lesson
The GMM Pfaudler stock price movement – from just over Rs 5,300 to just below Rs 3,500 in six trading sessions – was a reminder, yet again, of the vagaries of buying at an abnormally-high price and getting lucky that the price rose further. If you thought it was a one-way ticket you have no one to blame but yourself.
Buying a stock so expensive comes with twice the responsibility – of determining all kinds of downside risks.
Revisit: The Curious Case Of GMM Pfaudler
9. The Jio Googly
Bharti Airtel went from being everyone’s favourite stock to the most confounding as its stock price corrected from over Rs 600 in May to below Rs 400 in October.
Two things that people ignored were that firstly usually promoter selling is not a good sign, and then that even if sell-side folks are unanimously bullish, the changing script of the business environment cannot be ignored. Especially in the face of of a muscular competitor.
Key lesson – Don’t buy the folklore of the analyst community at all times.
I told you so: Telecom’s Brief Sunny Season Over, Back To Price Wars?
10. The Most Valuable Asset Of All
Earlier in the year, someone I know was devoting time to food distribution to the poor, contracted Covid and died.
Our closest family friend, the richest man in his small town, contracted Covid, took it lightly and died for want of a ventilator.
Some others I know survived (thankfully), but the battle has left health scars for life.
While we spend our time devising asset allocation strategies to earn wealth, the most important asset, we were reminded this year, is health.
2020 drove home that point, again and again. Or as the Prime Minister put it – “jaan hai to jahan hai”.
Have a healthy Diwali, one and all.
Niraj Shah is Markets Editor at BloombergQuint.
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