The Price of Uncertainty | Portfolio Yoga

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Post leaving my last job, I spent a few months basically meeting people – both who I thought I could associate with and those who I thought maybe interested in partnering with me for the new venture I was planning. The former did not work out for various reasons and the later did not work out for the single reason that starting a new venture is one bridled with uncertainty and it’s not easy for anyone to leave out a job he doesn’t like but one that guarantees food on the table. Investing is no different.

In March of this year, there was a great deal of uncertainty which also meant stocks were cheaper relatively than most were for a long time now. When a friend asked for my opinion on what to do with his equity exposure, this is what I had to say

“I don’t believe that we should exit equities at the current juncture. In fact, I am personally adding more to equity (reducing from Debt)”  

Uncertainties offer opportunities and while I would have been happy to have deployed big time, the fact was that even I got cold feet after speculating on the second and third-order effects. As much as I try to keep myself away from the Media and more importantly perma-bears who can really make you question your thesis at the worst possible time, this time I fell to their spell and wondered if this was only the start with much more to go.

History in a way provided a similar view for when markets went down 30% or more in the past, it usually went well below 50% and with limited money on the sideline I wasn’t willing to dive into the deep end.

Markets have recovered tremendously and what is interesting is the fact that it has done so in record time even as the Virus continues to have an impact on the day to day life and business is not as usual for most. It’s as if we have accepted that earnings this time will be bad but the future holds promise and hence lets bet on that future instead of betting on the current despair.

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Some time back, I was looking at the chart of Nifty in 2008. If one had entered the markets after it had fallen in August when the Index was seemingly bottoming out, he would have seen a draw-down of 50% in the next couple of months. 

It’s not impossible to catch the bottom or close to the bottom. Was lucky to have caught ITC at 145 which I would say is as close as it comes. But what is impossible is to allocate in full at the bottom. The ITC allocation was the single biggest stock for my brother’s PF, it was still a single digit allocation in the overall scheme of things.  

The only way to take advantage of falls like these is to be prepared well before the fall happens. In addition,  you also need to know what you are willing to pay – markets sometimes may provide you that opportunity for a small time frame, but the speed of this rally is astonishing even from historical to the extent that unless you were prepared to bet with no worry about how the stock may perform in the coming days and weeks, opportunity got lost pretty fast or did it?

The markets made a low on 24th March though it actually closed positive for the day. The lowest close was made on the previous day when Nifty fell an astonishing 13% – something we had not seen ever. The largest fall was the 12.2% fall Nifty had seen on 24th October 2008. Interestingly then too, the next day was the lowest ever reached and a level that is unlikely to be ever seen again other than by using eccentric patterns on charts. 

Nifty gave a clear signal to me using what is known as the Lowry Indicator on 7th April 2020 when the country was in a lock-down. It’s amazing in hindsight how the trend shifted right under our noses while most were still arguing how much damage the virus could have and how low the index could go. In fact, on 9th April, Nifty made its first higher high – a clear and simple signal to say that the trend has turned.

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The 200 day EMA is seen as the barrier between Bull and Bear Markets. Nifty crossed it a few days ago. While more and more signals are confirming a bullish trend, the narrative has shifted underneath to – what is going on in the markets which suggests that way too many have missed the boat. But the uncertainty about the markets haven’t changed

There are charts and data trying to showcase how lopsided this rally is and that may well be true – but the only way to make sense out of that data is to compare it to historical data and see if it was different then. I say it may well be true because breadth data which I use is suggesting otherwise – in fact, one of the indicators I have developed using breadth (and as any indicator has its bad calls) went long in the markets on 29th May 2020. In fact, if you were to track PMS returns, I found that June for most has been a better month than April when Nifty went up 14%.

Personally I regret missing out on buying some stocks at what really were mouth watering valuations, but what I will regret more is if I stay out of the entire rally due to anchor bias. Its okay in my opinion not to be able to catch the low, as long as the valuation is still worth and the company is available at prices not seen for a while, I think its okay to jump in though the risk today may be slightly higher than what it was in March. But that is the price we pay for more certainty.

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The risk though is that markets may come back down to their March lows or lower. This fear is what keeps most investors out for there is no honest answer. It’s a coin toss probability at any point of time. With people supposedly making millions left, right and center, you may question whether this time ain’t much different from the past and there will be a price to pay.

Once again, I don’t know the answers but sitting in cash post a crash and hoping for another crash is not a strategy either. Having a plan and sticking to it are two different things but that ultimately is the only way you can have a great career as an investor in the market. If that is too much, its no shame to just push your money into Index Funds for in the long term, the index generally goes one way – up (there are exclusions, but lets for now assume that India is not an exclusion).

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Prashanth Krish

Prashanth Krish

Prashanth is a Chartered Market Technician who believes in the Systematic Momentum Investing strategy. He runs his own portfolio advisory firm - Portfolio Yoga.
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