This is Barath and what follows is my first blog post. I am an investor based out of Bangalore and have been investing in Indian stock markets since 2010.
In the below post, I am gonna share how I have been thinking about investing during this whole Corona Virus situation, this little devil, that has brought the entire planet, down on it’s knees, at least temporarily.
The all-important question, that practically nobody has an answer to – Now that the Indian markets have fallen by 30%+ the question on my clients’ minds is whether to –
- Wait for things to settle down and buy at the bottom (Neither sell nor buy stocks)
- Subset of option 1 – Sell everything today and buy again at the bottom
- Buy on the way down (Average down)
I’ll now list the thoughts that have been coming to my mind over the last month or so based on all the things I’ve read about this small thing that has choked the world.
Arguments in favor of Option 1 – Waiting for things to settle down and buying at the bottom
- The market hates uncertainty. Nobody knows what’s gonna happen over the next few months. Chances are the market is going to stay down until somebody finds a sustainable solution to this terrible disease. How can the market price in an unknown unknown like this one? Maybe Mr. Market still hasn’t fully priced in the impact corona is gonna have on various economies / companies / people’s psychology.
- The ripple effects of closing down entire countries and restricting movement of people and goods might be a lot worse than the market has already priced. Nobody knows the consequences of consequences of consequences and so on. Take for example, the price of gold – in a typical market crash, the price of gold tends to go up as investors look at gold as a form of protection but a couple of days back even gold prices went down along with the market. That’s crazy and the thing is almost NOBODY has an answer to why it should have gone down, yet.
- This is the time to protect your capital and prepare your family for Financial Armageddon. If Corona doesn’t end the world (as some investors seem to be pricing certain companies), then you might lose gains to the extent of perhaps 20-30-40% from current levels and you should be leaving those 20-40% returns profit on the table for the next guy. Let somebody else take the risk on those remaining small profits(and get back in later).
- On the other hand, if the market goes down further, your capital is protected. Between protecting capital and making a return shouldn’t your priority always be to protect your capital? In investing, it’s not how much you make that counts, it’s how much of it you can take home (Basant Maheshwari). Anything multiplied by zero is zero (Warren Buffett).
- It is not a good idea to compare Corona with pandemics from the past (Like the Flu epidemic in 1918, which killed between 2 & 5 Crore beings or the Cocoliztli in 1576 which killed 2-2.5 Crore men & women and many such diseases) because the world wasn’t as connected back then, as it is today. On the flip side, the world hasn’t seen such a scale of quarantining ever. So the good thing about quarantining is, the Corona might not turn out to be as bad as an epidemic from the past, wherein people would not even have known what really hit them or their loved ones. From reading Taleb I learnt “Things that haven’t happened before happen occassionally” and Corona might as well be one of those “never happened before but happened this time” situations. The proverbial Wolf from the Wolf and the Shepherd story might have arrived after all.
Arguments in favor Option 2 – Buy on the way down (Average down)
- Even the experts don’t know how drastic this is gonna be – During the Ebola scare in January 2015, some experts predicted Liberia and Sierra Leone will have approximately 550,000 or 1.4 million total cases, including reported and unreported Ebola cases. (1.4 million assuming there were 2.5 unreported cases for each reported case) The actual number – 21000. That’s way way off. These experts did not think about the second order effects of potential new patients changing their response in response to the Ebola outbreak becoming better known.
- Best time to buy is when the macro (economy) is looking bad (Hiren Ved). Clarity is one of the most expensive things to buy in the market (Basant Maheshwari / Ken Fisher).
- I love this quote from Amazon’s Jeff Bezos – Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.
- Seth Klarman – You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition among buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy.
- Howard Marks – I’ve never considered it a legitimate goal to say you’re going to invest at the bottom. There is no price other than zero that can’t be exceeded on the downside, so you can’t really know where the bottom is, other than in retrospect. That means you have to invest at other times. If you wait until the bottom has passed, when the dust has settled and uncertainty has been resolved, demand starts to outstrip supply and you end up competing with too many other buyers. So if you can’t expect to buy at the bottom and it’s hard to buy on the way up after the bottom, that means you have to be willing to buy on the way down. It’s our job as value investors, whatever the asset class, to try to catch falling knives as skillfully as possible.
- You’ll drink a hell of a lot more Coke if it’s always available. So said Charlie Munger. Just because the price of stocks is “Available” to you daily, should you be selling stocks of your favorite companies that you expect will do well over the next 2-3-5 years or more? Would you do that to a property you own? Suppose, sellers were trading properties daily on a market exchange like the BSE/NSE would you sell and buy the RE property back, after prices started going up? If you’d done that between 2000 & 2010, for most real estate investments, you’d have regretted and perhaps been considered bonkers, unless you were an expert at timing RE investments. Point is just because prices are available, you should avoid getting sucked into consuming (selling at) whatever prices Mr.Market is offering you. You should alse be skeptical about all this noise around Corona.
- Remember the 2014 ebola scare? Many people were afraid of infection, but paradoxically, didn’t get a flu shot. Six times as many people died from the flu in the United States than died from ebola worldwide. This is the heart of the availability bias. When something is at the forefront of our thoughts, we assume it to be the correct answer. Sometimes this works. Sometimes it doesn’t, and usually that involves 2nd level consequences.
- History has shown Humans have survived several such epidemics. From the book – Guns, Germs & Steel – “Within a year of the first European settlers’ arrival at Sydney, in 1788, corpses of Aborigines who had died in epidemics became a common sight. The principal recorded killers were smallpox, influenza, measles, typhoid, typhus, chicken pox, whooping cough, tuberculosis, and syphilis.”
Bear markets are deceptive. Each bear comes with a different face and Corona could well be one of the many faces we’ll see in our lifetimes of investing.
- In 1929 the bear attacked after the roaring 20s bubble burst
- In 1987, the bubble was burst due to automated selling which didn’t consider effects of effects of effects.
- In 2009, it was the Lehman crisis
- In 2020, it is the Coronavirus pandemic
What is my bear market strategy?
- Buy in a staggered manner (In addition to stocks that I already own). Deploy cash that I have kept out of the market over the last few years.
- Get rid of some CAGR killers that haven’t performed for a while now.
- Avoid WhatsApp, Twitter, News channels and other social media. because I feel (& I might be reacting like an Ostrich) the news flow is way too negative than reality and this negative news impacts my ability to take potentially rational decisions.
- Undertaker in a plague(Peter Lynch) investment theme. Even in bad times, people will need roti, kapda, makaan, education, medicines, hospitals, etc. The stocks of such companies are likely to do well despite a prolonged impact of Corona.
Pre Mortem – What are the top 3 things that can kill the above idea?
- Consequences of consequences of consequences lead to the economy not recovering for a decade or more. Also, when there is trouble, everything corelates (Buffett)
- Medical science is unable to come up with a vaccination for 3 or more years.
- Leverage could totally ruin some weak balance sheet companies and fragile business models which depend on the kindness of strangers (Warren Buffett).
What do the various role models say?
Taleb says – “Be Paranoid”
Buffett – I don’t know what the stock market will do in the next year. What I do know is that, if you go back to the 20th century, 100 years, you had two great wars, you had other very large wars,you had the Great Depression, you had the FLU EPIDEMIC, you had a dozen recessions and panics, you had all kinds of things.At the end of that century the Amer– the average American was living seven times as well as- the start of the century. The DOW Jones average went from 66 to 11,497. With all those problems
Buffett – “You don’t buy or sell your business based on today’s headlines” — on coronavirus sparking a frantic market sell-off.
Buffett- Although this is scary, it shouldn’t affect what we do in stocks.
Based on the below snippet from famed Statistician Late, Hans Rosling‘s book, Factfulness, there is a good possibility that the Coronavirus epidemic might die down like the ones that preceded it.
Epidemics tend to follow an S-Curve. They start slowly, grow exponentially and then slow down. In some cases die down.
Prof. Bakshi – The human mind also has another tendency. It tends to put an arrow at the end of a trend line. Basically the human mind is not wired such as to think in terms of mean reversion. It’s a natural tendency to believe that trends are destiny, but all trends are not destiny and it takes a bit of deprogramming to internalize the mean reversion concept and to use that to come to the conclusion that things will change. It looks bad now or this is too good to be true. This is not normal and the normal is going to come. Of course, there are exceptions, sometimes the trend line is destiny, and sometimes what you see as light at the end of the tunnel is actually an oncoming train.
Let me end this post with a seemingly unsolvable problem that New Yorkers faced way back in the late 1800s. When New York city was getting increasingly modern, one of the primary modes of transporting people and products was the Horse Cart. Eventually, it led to a problem. From the Book – Freakonomics – “The average horse produced about 24 pounds of manure a day. With 200,000 horses, that’s nearly 5 million pounds of horse manure. A day. Where did it go? Decades earlier, when horses were less plentiful in cities, there was a smooth-functioning market for manure, with farmers buying it to truck off (via horse, of course) to their fields. But as the urban equine population exploded, there was a massive glut. In vacant lots, horse manure was piled as high as sixty feet. It lined city streets like banks of snow.
Today, when you admire old New York brownstones and their elegant stoops (Staircases), rising from street level to the second-story parlor, keep in mind that this was a design necessity, allowing a homeowner to rise above the sea of horse manure.
All of this dung was terrifically unhealthy. It was a breeding ground for billions of flies that spread a host of deadly diseases. Rats and other vermin swarmed the mountains of manure to pick out undigested oats and other horse feed—crops that were becoming more costly for human consumption thanks to higher horse demand.
In 1898, New York hosted the first international urban planning conference. The agenda was dominated by horse manure, because cities around the world were experiencing the same crisis. But no solution could be found. “Stumped by the crisis,” writes Eric Morris, “the urban planning conference declared its work fruitless and broke up in three days instead of the scheduled ten.” The world had seemingly reached the point where its largest cities could not survive without the horse but couldn’t survive with it, either. And then the problem vanished. It was neither government fiat nor divine intervention that did the trick. City dwellers did not rise up in some mass movement of altruism or self-restraint, surrendering all the benefits of horse power. The problem was solved by technological innovation. No, not the invention of a dungless animal. The horse was kicked to the curb by the electric streetcar and the automobile, both of which were extravagantly cleaner and far more efficient. The automobile, cheaper to own and operate than a horse-drawn vehicle, was proclaimed “an environmental savior.” Cities around the world were able to take a deep breath—without holding their noses at last—and resume their march of progress.
This is perhaps not very surprising. When the solution to a given problem doesn’t lay right before our eyes (Think Corona as it stands today), it is easy to assume that no solution exists. But history has shown again and again that such assumptions are wrong. This is not to say the world is perfect. Nor that all progress is always good. Even widespread societal gains inevitably produce losses for some people. That’s why the economist Joseph Schumpeter referred to capitalism as “creative destruction.”
But humankind has a great capacity for finding technological solutions to seemingly intractable problems, and this will likely be the case for global warming (Again think Corona). It isn’t that the problem isn’t potentially large. It’s just that human ingenuity—when given proper incentives—is bound to be larger. Even more encouraging, technological fixes are often far simpler, and therefore cheaper, than the doomsayers could have imagined.
I presume, somebody is gonna figure out a solution to a terrible problem that impacts the world we live in, sooner rather than later.
Buy now or wait till a lower bottom – I bet nobody knows and so do I. What I do know, is some of these businesses will thrive, a couple of years from now and today is the time to think and act long term, not short term.
18th March 2020