To say we have had an interesting month would be an understatement. Stocks fell like nine pins, and they fell irrespective of TAGS attached to em, blue chip, value company, growth stock, dividend yield blah blah and they fell irrespective how good a narrative was behind them.
There is something beautiful about Market fall. I am not a sadist trust me, its just that the market is such a great leveler, A sudden market fall puts everything in perspective, cuts your ego in half and makes a philosopher out of you 😉
More than anything else, The IMPORTANT Lessons get reinstated.
One of the biggest lessons for example is HUMAN URGE TO FIND WHY?
Spend 15 minutes on Business channels and you will know a well articulated 15 sentence reason of Why India had its fall. Crude oil, ILFS, currency etc etc. BUT remember these are post facto blabbers. They mean nothing to a speculator or to an Investor for that matter.
Lesson is Watch them for what they are worth, ENTERTAINMENT. In fact NOT EVEN that, because Information overload can actually paralyze you from pulling the Trigger.
Second Biggest lesson is wat @upticker tweeted
But no matter the approach, all emphasised the importance of building a framework that suits your temperament. Perhaps “Process Bhagvan Che” is the appropriate middle ground? #IC2018 @Traderscarnival https://t.co/jQyaHdLbJ2
— Uptickr (@uptickr) October 6, 2018
There are primarily 02 ways to milk the Market Cow. Momentum and Value. The question is NOT which one is BETTER?, instead it is WHICH ONE SUITS YOU!!
Its about knowing yourself, who you are and what are your core values. Are you a contrarian who thinks He is right and market is wrong. Are you confident about what you know about the company. Are you the kind of person who can easily sleep well at night seeing your portfolio down 50–70%.
or Are you
Not cocky about your abilities and convictions and believe in the wisdom of the market. Believe in Strong risk management to ensure you never reach a draw down which can trigger your Uncle point.
Now Trust me, neither path is EASY or BETTER than other. A momentum guy needs to have guts to square off his positions now and be willing to look stupid if this was actually a BOTTOM.
A value guy needs to have guts to Buy more of his position or other positions as the market keeps falling. You can only pull off such acts when you exactly know who you are, the strategy has to align with your belief system.
And once you have figured that out, it all boils down to DISCIPLINE to adhere to the defined process.
Third Lesson, Concept of ABSOLIUTE RETURNS Vs Relative returns.
MWM currently is at 20% return in 18 months. That is almost twice as good as NIFTY. But that may be a consolation prize for a mutual fund which compares itself with its benchmarks. For someone who is chasing Alpha, it is Pathetic that we had to give away so much back to the market. (We were up 54% in January)
The way to address this problem is Position sizing as a strategy over and above your current stock selection strategy. I discussed that in detail in our webinar below. Timing the timing model. (02 ways to do that ,Deploy more capital when going is good and less when trend of equity curve is down. Second, deploy more money on pre set drawdown levels)
Another way to ensure we keep what we have earned is to deploy Option hedges when trend changes.
Lesson #4. Difference between Practioner and Academicians.
Wassap and social media are full of WB and Howard marks quotes and what one should do ideally in these situations. How you should add to your positions and how “this too shall pass” .
The first thing a Practioner did, was liquidate all his liquid funds. That is the way how FAT TONY would think. The LAST thing you want is to lose your money on an account which was not even meant to generate ALPHA. Only an academician tries to beat benchmarks in Liquid funds.
Ofcourse these are extreme views, but get the drift. The point is this
Let us say you have a position in a STOCK and a bad news HIT it. What would you do.
A) evaluate the situation (if market is irrational, buy more)
B) Do nothing.
C) Sell first Think later.
Now look at the OUTCOMES.
Option C is the correct answer in almost all situations where you have incomplete information. You can always buy your stock 20% higher after your detailed analyses.
In both option A and B, you are presuming that you know more than the market and B) you have complete information. and remember in these situations you never have complete information, you don’t know the Fraud angle, or counter party risks etc. etc.
Nestle Maggie example: I would hold and buy more because reason of fall is known and there is no fraud angle
PC Jeweller : I would sell as I don’t know what the jhol is!!
Comments are welcome