July 29, 2009

What did the bear market teach you ?

Lets go over what the typical investor was thinking over the last 18 months, from the peak to the current recovery phase.

Jan 2008 – Whopee, I am getting rich. Just need to keep buying and selling and trading and I can retire! I am a genius!!!

March 2008 – I knew the market was overvalued, but then I am long term investor. So I am going hold onto my stocks during the this drop, maybe even buy more

Aug 2008 – The market is climbing again!! the bear market is over.

Nov 2008 – What happened ?!! oh boy, why did not sell in august. I have lost too much money. No point in selling

Feb 2008 – This is getting bad. Let me salvage whatever I can and move to fixed deposits. Even the CNBC guys are saying that

April 2008 – The market has risen a bit, but I am not worried. The market will drop once the election results are announced

May 2008 – The results were a surprise and missed the rally. I should have bought in Feb when the market was cheap. Let me wait

Jun 2008 – let me wait for the market to drop

July 2008 – Let me wait for the market to drop

….and the mental circus continues

I know I am exaggerating, but I know there are a lot of investors who went through the above mental roller coaster and will learn all the wrong things like

- The market is a casino and one has to be able to predict the market in advance to make money
- I should take more risk and should trade more frantically to make money
- One needs to be glued to the TV to make money
- All the losses are not my fault, though the gains were due to my brilliance

I have myself gone through some of the above emotions in the past. There is nothing wrong in experiencing all kinds of conflicting emotions during such volatile times. It will however not do an investor any good, if he or she does not learn the right lessons. Let me state a few things I learnt from bear markets in the past

- There is only one person to blame for your losses – you
- There is never a good or a bad time to buy stocks. If you can find a good company, which is undervalued, buying is a smarter decision than guessing what the market will do.
- Prepare in advance – I have been guilty of being timid in the previous bear market. During 2001-2003 bear market, I lacked the self confidence of investing a meaningful amount of money even though I realized that the market and stocks were cheap. The reaction is understandable if you are new to the market and have suffered losses. After the bear market ended, I realized my mistake and make a mental plan of how much capital I would commit when the inevitable downturn came. During the current downturn, I was prepared psychologically to go ‘all in’ when the valuations became cheap.
- Stop listening to markets forecast and
silly predictions. They will cost you money in the long run
- Learn continuously. You may make money by luck in the stock market, but will not keep it.
- Stop looking backwards – I should have or would have done this, is not relevant. The question is – knowing what I know now, what do I plan to do?


Lucky said...

Very very true...

I was with the herd till August. But in October, I realized that people had gone crazy and I invested some amount. And then some more.

Returns: 40%-300% excluding Airtel and Satyam. Overall: 80%.

Not sure if it was just beginner's luck.

Vic said...

Thanks Rohit for summarizing wonderful lessons.

Though such have been stated b4 but doesn't hurt to emphasize again..we need to be aware of these always.

I have stuck to my AA and been DCAing in the US and buying in india. I could have bought more...:-) but no regrets. There will be opportunities in future too.


Rohit Chauhan said...

Hi lucky
i think the courage to invest in october and hold on to it is commendable. the sudden turnaround in the markets is luck which has benefited those who had the courage in the first place.

Rohit Chauhan said...

Hi vic
you guys are fast ..within 30 min of my posting i see a comment

btw ..what is AA ?

Aseem Kapoor said...

Agree with you. If we can just learn one lesson that timing the market is waste of human potential - use your brain for analysis and buy at right price.

In defense of an investor who waited we can say that -These roller-coaster moves within such a short time are a recent phenomenon.

Vic said...

AA- Asset allocation.. which u know well already.:-)

Anonymous said...

I differ!

I believe the worst is yet to come and waiting for it patiently is the way to go. Let's see...

I think in the next year or so we will see a rabid fear and sentiment plunging to an all time low. Somewhere around that would be the right price/time to buy. Everyone times! Even Buffet ;)


Vignesh said...

This is my first bear market experience One good thing I did is I bought good company share's between october thru feb. I learnt lesson from your older post's that you missed the bear market rally in the 2001-2003 cycle Which I didn't do. I think it's very good to learn from not only our mistakes but also learn from others mistake as well.

Daniel M. Ryan said...

One lesson I learned:

Assume that you're too early if your valuation rules of thumb tell you that the bear market is over. It's best to leg in because there could be one or two more paw-swipes from the bear.

I've also found out that the fundamentalist usually buys too soon. The above lesson is based on this finding.

Manish Chauhan said...

I liked this part most .

"Learn continuously. You may make money by luck in the stock market, but will not keep it."

The reverse is what people beleive in , When they make money (by luck) , they attibute it to there skills (which they dont have) and when they losse money because of there mistakes and idiotic decision, they blame it on "luck" ..

Only if one learns to change the view to 180 degrees , miracles can happen :)


karthik said...

Hi Rohit,

Well said.. The mistake I made was not commiting any meaning ful money when the market hit the lows... i was not prepared..Hopefully i will be better prepared when the market hits new lows.

Aniruddha said...

Nice post,

I learned to exit on avg to good returns. no matter how good is the company & how prosperous is the future. For example, Balmer, Thermax, Tata Investment and many more.

I have decided to take profits regularly and bring those profits back in the market.

rk said...

Small typo error
After Nov 2008 It should be Feb 2009
you have typed Feb 2008 and so on.


Student Of Market said...

One thing that has personally helped me is asset allocation. I had put quite a bit of money in MF over a period between July 2005 and June 2006. The year 2007 - particularly the last part of the year - I kept watching as the Equity portion of my asset allocation kept shooting beyond the percentage target I had set. And I moved money to liquid funds to rebalance. That saved me quite a bit from the meltdown in 2008. and then in late 2009 the opposite happened - my percentage in cash was way to high and I moved some to equity.

So an asset allocation strategy works and takes care of timing the market somewhat automatically.

By the way, I like your analysis on companies. It is my regret that I missed adding CRISIL. What is ur opinion on CONCOR?

Rohit Chauhan said...

Hi aseem
agree that the roller coaster is a recent phenomenon, but it also due to the greater intergration of india into the world economy.

may you are right and then maybe not. i personally dont have that knowledge ..if i knew , i would buy puts and get rich. in absence of such insight, i prefer to focus on what i do know - namely some companies are doing well and are cheap. if i buy such companies at low prices, i will do well in the long run

Rohit Chauhan said...

hi vignesh
it is smarter to learn from others mistake..so its good you learnt from mine

hi daniel
i personally cannot predict if i am early or not. if i can buy something cheap, i prefer to do that. if along the way the market crashes and then comes back ..so be it. frankly i would not focus on something which i cannot forsee or control


Rohit Chauhan said...

Hi manish
it is very easy to fool oneself ..not easy to accept your own mistake and look dumb in your own eyes.

karthik - a lot of us do this the first time. the key is to avoid it going forward

Rohit Chauhan said...

Hi anirudha

did you sell because you thought the companies are over priced ?

what do you mean by booking profits and bringing back to markets ?

rk - you are right ..there is a typo in the post. thanks for pointing it

Rohit Chauhan said...

Hi student of market
i agree with you 100% on the asset allocation / rebalancing. although not a perfect science, it helps one from getting carried away at time of greed and scared due to fear during bear markets.

i personally have not done it properly and regret not doing it

CONCOR is a good company and have written about it often on my blog. however i dont think it is cheap now

Anonymous said...

Hello Rohit, again it's a nice post from practical experiences. I was just going through an article written by Prof Bakshi and there he has mentioned that from historical data it is evident that whenever the PE of Nifty reaches 22, for next 3 years the returns are always negative. So do you think now is the time to start thinking about the exit strategy? This query is not relevant here. But would be happy to know to your opinion regarding this.

Warm Regards

Rohit Chauhan said...

Hi GCpradhan1
At PE > 20, the market is definitely valued from a historical perspective. but we have to look at the current context too where we are coming from poor earnings growth or even from degrowth
that said, i would have a blanket view ..a decision to start selling should be made stock specific.
in my own case, i am still undecided ..though i am start reducing some holdings if the rise continues


Anonymous said...

Yes, I was expecting similar reply from. You always says as long as the stock you hold is below its intrinsic value, no need to worry whatever the mkt situation may be. In fact I am in a dilemma now. By the way I am planning to exit some portion of my portfolio at >22 Nifty PE. Let's see !
Thanks for your reply.

Warm Regards

Rohit Chauhan said...

Hi GCpradhan1
think of it this way - if the stock you hold is cheap, will you want to sell it just because the market is possibly expensive.
is it a given that market will drop or even if it drops ..you stock will too ?

on the other hand if you feel the stock is fully valued, then future appreciation may be limited to increase in intrinsic value. if it was deep value stock to begin with where do not expect the intrinsic value to increase, i will look at selling even if the market was cheap

so my point is - sell or buy decisions should be first based on the situation with specific stocks and only then should you think about how it relates to over all market level

sumi said...

Missed reading your last few posts catching up on them now. Having courage to buy a company when it is undervalued is something which is difficult to practice. I have a few companies in mind which are really undervalued as of now. But after investing in them watching the rallies daily and seeing other stocks gaining huge percentages a newcomer like me keeps getting doubts. I have to keep restudying my analysis to gain the confidence. Posts like these give me an idea of experiences that people have so inspired to continue value investing.