March 17, 2008

Ouch !!

Jan 9th – Mar 17th – Returns = -27% and counting.

There is quite a bit of
panic and fear in the markets now. It is amazing what difference 3-4 months can make.

It is easy to get preachy, especially if you don’t have skin in the game. But I am not in that position. My own portfolio shot up like a rocket from september and has come down since then. I have seen worse bear markets in the past where the index just kept sliding down for 2-3 years. Will it happen again now? There are enough forecasters and gurus out there forecasting. I don’t want to add to that noise further.

This is what I am doing .

1. Don’t panic – seriously!!
2. Stop watching the market, your portfolio and CNBC – I am half serious about this. This will only induce more panic
3. Don’t anchor – If you were watching a stock for sometime and it has dropped by 20 - 30% from the peak price, it does not mean that it is cheap. There is no point anchoring on the past price. The stock is cheap only if the current price is at a discount to its intrinsic value. So I would not rush out and start buying blindly just because the market has dropped
4. If you have been analysing and watching stocks for some time, a few stocks maybe dropping below the buy targets. It may be time to start buying. Will the stocks go down further …that’s possible. But if you think the stock is undervalued, I would ignore these fluctuations.

The above suggestions are valid if you have followed a long term investing strategy (where long term is more 1 year) and have not been a trader/ momentum player. For traders/ momentum players I have no suggestion as that is a different game, which I have no clue about.

Beyond this I don’t think there is much to do. Ofcourse I am assuming there is no leverage involved and you can psychologically handle the losses.

As I have
said earlier and this becomes more and more evident as time goes by – It is close to impossible to predict the market. So I think no one can say whether the market will go up and start dropping again or resume its rise again. What we can do is to be rational about our investment approach and keep a margin of safety


TempleTree said...

Hello Dear Rohit,

Wonderful. I truly liked your statement.

>> 2. Stop watching the market, your portfolio and CNBC – I am half serious about this. This will only induce more panic

I never seen a bear market. So I am watching things develop each day (like masala Hindi movie). Starting looking at equity in 2002, bought Bharti and ICICI at throw away prices in 2002 and sold them in 2003 for no-profit-no-loss as I bought a home, but only re-started buying equity from 2005. It is a real learning for me in terms of need to have a longer term view and should manage liquidity to avoid selling stocks forcefully (I do not repent selling Bharti and ICICI since I bought a home at equally good price :). Way back in December 2007 I gave a hard-look at the stocks I was holding and cleaned-up and trimmed down some, but still have a decline for those retained. I followed Graham's 50:50 approach and left 50% equity. Within equity, 50% is in mutual funds and 50% is direct. I have moved some money to long term debt funds, I have bought some more equity in the recent declines, but I think I need to go little slow and check intrinsic values more deeply before I jump.

Please keep posting stock and valuations ideas. I started looking at your valuation templates, but I guess it will take a while for me learn and institutionalize these.

Thanks for your postings, they are really useful and eye openers.


VISHNU said...

Hi Rohit,

When I started investing , I used to stay in the market.
But after Bengraham , I started getting out of market when price go above intrinsic value.

I have been out of the market for the past 3-4 months with cash and rigourously looking for Risk Arbitrage opportunities.(Though I am novice here)

I think this is the best time to buy as there is a panic in the market (Offcourse price should be cheap enouh).


Rohit Chauhan said...

Hi templetree

It is a given that all of us will face multiple bear markets in a lifetime of investing. although i would like to believe that there is some magic formulae to time the market, i have stopped spending my energy on that.

that said, there is no fun watching your portfolio drop. however as you go through multiple markets, bear and bull ones you learn to work with it

Like you my investment approach has changed over time too - not the core, but the execution. I have a % in graham type ideas and buffett type ideas where my holding period is longer as the intrinsic value of the company is increasing.

Rohit Chauhan said...

Hi vishnu

I follow a similar approach of comparing the stock price with the intrinsic value. however i have now stopped focusing on the overall market levels.

If the companies i like, are gettin cheaper due price drop or because the company is doing better than expected, i start buying. I try to ignore how the market is doing at that time. Sometimes the price drop happens when the market is dropping , sometimes the drops have happened even the overall market is rising.

I tend to look at overall market levels only if i have invest in the index.

My own personal experience has been that tracking the market and moving in and out of the stocks based on overall levels has been a major distraction and has actually costed me money. If i had ignored and stayed put, i would have done better.

Anonymous said...

Hi rohit, like most i've watched my portfolio decline close to 30%. While it's not something you want to see too often, it is something i can live with. What i really look forward to is seeing your analysis on some of the value picks you see emerging.

I find a lot of people now talking about "mouth-watering" value levels but personals don't think levels have reached "mouth-watering" in fact far from.

We both keep portfolios that are quite markedly different, so its always nice to see the companies you throw up. Most are usually outside my circle of competance but your valuation technique is always great. So please keep investment ideas coming!

As usual you're doing a great job.


Anonymous said...

Hi Rohit

I am not exactly going to be very popular with my views but I will stick my neck out and say that I am happy with this panic and downturn. "I m loving it"

Its not that i shorted the market and made a lot of money, I m losing money like everybody else and seeing my portfolio shrinking.

Its just been bloody too simple to make money over the last few years and any dimwit could make money too easily ( and of course brag as to how intelligent he or she is) including the fund managers and all kinds of guys who are passed off as experts by CNBC and the ilk. The same applies to me and it is now that we will get to a environment where we will separate the men from the boys.

Where one will have to put effort to make money. Would require hard work and discipline. I think brilliant opportunity to build your mental models, refine one's thought process and bring rigour to the investing process. Something that will hold us in good stead through one's investing life.



Rohit Chauhan said...

Hi ninad

yes, you or anyone who says that is not going to be popular. put yourself in the other person shoes - maybe someone who started investing recently.

he or she has seen the market for 2-3 years which was a great time to make money. based on the limited experience if that person has bought a slighlty overvalued, but fundamentally a good company (and there quite a few such examples), he or she may be seeing the stock price cut in half. now that person may be feeling pained and not sure why after doing everything right is he losing money ?

if one one comes along and points that out, it is rubbing salt into the wounds.

i have been this person in the past having gone through 2 bear markets myself. when u face it for the first time you feel pretty dumb, not sure if you are the dummy or the market is wrong.

i hope most of us learn the right lessons and dont get scared out of the market forever.

unfortunately i have seen that happen in the past and can see it now too. A lot of people instead of reanalysing their process just leave the market permanently

Anonymous said...

Hi Rohit

Fair point. Like you I have seen two bear markets in the past and have known what it means to be in bear markets where one waits for years and stock prices just refuse to move and converge to fundamental values.

The intention is not to rub salt cause I m suffering the same wounds. We have experienced bear markets and focus on learning from our mistakes and trust me I have done plenty of them in my investing careers and I m sure i still continue doing more of them and hopefully will realise it at some point of time.

It is a continous learning process. My point was that money making should not be so easy. I want to quote from Ajit Dayal's ( Quantum Mutual)latest post - An entrepreuner in this country puts 12 hours a day of effort, fights the inefficient system, takes risk and out of his grit and effort builds a company. That entrepreuner pays 30% tax on his profit for all the effort that he puts in.

All the rest of us sit in front of a screen and click a few butttons and make money on which we pay 10% tax in the short run and nothing in the long run. Thats a unfair system.

My real point is that money making cant be and shouldnt be so easy. It is against the interest of scoiety at large. What incentivices a entrepreuner to put in so much effort when he can make more money easily on the stockmarkets.

And this has happened in the last 2-3 years. A huge chunk of the trading community, small businessman etc have defocussed on their business and focussed on the stockmarkets.

Kids in college borrow money and speculate. Housewives jump into the fray. Its pure greed at work. I as a kid in college speculated and lost money and learnt it the hard way that life is not so easy.

I m just saying life is tough and so is investing and there is no free lunch on this planet. Crashes like these are akin to a errant child getting disciplined by his/ her parents.

Continuing to work hard towards topping the unpopularity charts :-)



Rohit Chauhan said...

Hi ninad

i did not imply that you are rubbing salt ..just that no matter how one puts it is going to hurt ..

you cant put lipstick to this pig :)

agree more than 100% with you rcomment on the returns. and why just stock market alone, the real estate market is even worse.

the current assumption is that real estate is india can only go up. in the stock market the prices are visible daily and it is not easy to leverage. in the realestate market, there is leverage and on top the market is not transparent.

somehow the expectations are now 30-40% returns per annum. anyone looking for lower than that is considered dumb. so the end result is that everyone is now fixated on the returns and ignoring the risks.


Rohit Chauhan said...

a few of investment ideas on my blog have become cheaper than when i first discussed them. there is no change in fundamentals however some are looking attractive ..maybe not mouthwatering now ..but a bit more of a drop in the market and you may find me drooling :)

after a long time (last when i had this good problem was 2002-2003) i am now having to choose between cheap and very cheap. for the last 3 years it was expensive and less expensive

it would interesting to know which companies you find attractive


Anonymous said...

Hi Rohit,

My first experience of a bear phase.

Majority of my savings are in mutual funds and the bears have been doing a good job of hammering the NAVs. My other major investment is my house which was purchased recently.

The spare cash goes into equity market.

the bull phase was like anything one touched turned into gold... the downturn definitely pushed a few the hind sight, thankfully the circumstances meant not much spare money was put in my hands!!

but honestly tried to clean the junk...the money will go into buying good stocks...

what i've done is to list down the stocks which you've researched and placed in this wonderful blog..

waiting for the markets to correct a bit more...