August 1, 2013

Facing despair

I was planning to continue on the previous post – ‘Failure to sell’ , but decided to write on a different topic as I have been receiving quite a few emails – full of despair and frustration.

A lot of young investors, who came of age in the early 2000s, entered the workforce when the economy was booming. If you passed out from a half decent college, you could get a decent job with a good starting salary.

As the economy was growing at 8%+, it was common for employees to be given 15% salary hikes (people quit in disgust if the raise was less than that) and the high performers got promoted every other year.  In addition, flush with cash, some of the same people invested in the stock market or real estate and saw their net worth double in a few years.

You did not have to work too hard to do well

We are not entitled to be rich

I am going to ruffle a few feathers, but let me still say it – We had a dream run from 2003-2008 and now it is over. The days of 20% salary hikes and 30% stock returns are gone (at least for now) for the masses.

If you are really good at your job or in investing, you may get above average raises or returns, but that is not going to be the norm for everyone

If you entered the workforce in 80s or 90s, you may have seen tough times yourself (or maybe your family did). The reason why the current slowdown feels horrible is because our expectations are high now. Don’t get me wrong – I am equally angry with the government for running the economy to the ground.

Keep grinding
I  faced a similar market from 2000-2003, when the market dropped by around 50% over a three year period. At the market bottom in April 2003, capital goods companies like BHEL, Blue star were selling at 5 times earnings. The current market darlings like Asian paints (15 times PE), Marico (around 5-7 times PE) and other consumption stocks were selling a very low PEs too.

At the risk of getting philosophical, I can think of the following things to do this time around

- Assess your risk tolerance:  If you have trouble sleeping in the night after seeing your portfolio drop by 10-15% ,  you should reduce your level of equity holdings.  My thumb rule – will I be able to sleep well if my portfolio dropped by 40%+ ? 

- Clean out the trash: Now is a good time to clear up junk from the portfolio. A bear market and 40% loss on weaker ideas concentrates your mind. One should evaluate each position closely, sell the weaker ones and redeploy the cash in the better ideas.

- Have faith:  There is no data or logical argument which can make you hold on to your stocks or add money to it. You need to trust that the markets will recover in time and so will your portfolio.

It is easy for people to say that they want to think independently and stand apart from the crowd. Now that that we have a blood on the streets and no end in sight, you will know whether you can truly do that.

At the risk of looking foolish, I plan to keep adding to my positions.

Edit : I have a day job to support my family. I will not starve even if my portfolio goes to 0. I would not do the same thing if I was living off my savings.


Anonymous said...

Very timely post Rohit. I agree this is looking like the early 2000-2003 period(probably like 2008 in the midcap/smallcap space). Hopefully one can keep up the courage in the way down.

Thanks for reminding me to be patient.

---- Nir

Ashish said...

Great post as usual... i think having "faith" to hold or to add(!!) is the most difficult thing to do and one's level of conviction comes to fore.

Also in times like these, one can hope to get bargains in form of under priced securities..

Any chance you are looking at fall in MCX...available at 2600 crs today.
ur thoughts?


Praveen Veliyam said...

Thanks for your timely post ..:)

Shankarnarayan.K. said...

Great Rohit ! Your posts are always simple,lucid and plain. No high funda stuff :). I hope we are somewhere near the bottom of the midcap/smallcap carnage cycle.


Lucky said...

Timely for sure and wisely put indeed.

- Will I be able to sleep well if my portfolio dropped by 40%+?
> Not if it dropped further 40% from here. I am already at 10% loss and another 40% drop means a cumulative loss of 45%.
But then that would also mean, probabilistically, Sensex PE = 10. Time to sell your house and put the money in equities.

- Clean out the trash: Now is a good time to clear up junk from the portfolio.
> Exactly what I did (was forced to do). Came down from holding 28 stocks to 23. Booked another 10% of losses doing that. But not feeling too bad about it.

- Have faith: You need to trust that the markets will recover in time and so will your portfolio.
> My whole financial well-being depends on that :-) Amen...

Talking of BHEL, it was a good value buy @220 and now @120, what does one say about it? Value investors of 220/= are losers by 45%.