The New Normal – Change is the only Constant

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Bitcoin keeps breaking new barriers, NFT’s are now being sold for Millions of Dollars and IPO’s are red hot. The most recent IPO, Roblox was sold at a Price to Sales ratio of 26 times – Sales, not Earnings.

If you follow me on Twitter, you know I am not a fan of Bitcoin and definitely not a fan of NFT’s though NFT’s still tend to have some logic. NFT’s are more like Kindle books – you are paying for the content even though there is no physical aspect to it. Whats better, unlike Kindle book which you cannot even share, let alone sell to anyone, you can always sell the NFT you acquired.

I like Physical Books and Physical Art. But if one is buying a book or an Art not just to enjoy but also use it as a store of value and one that could appreciate over time, why not invest in Digital Art. Only this can explain why some one paid $69 Million for “Everydays — The First 5000 Days,” by the artist known as Beeple.

It’s easy to dismiss these things as a consequence of either free money or a fad that runs out in time. Or maybe we are at one of those times when things are changing right under our noses and we are unable to get a hang of it.

Money for long existed as a physical medium of exchange once we ditched the barter system. From Conch Shells to Gold, there have been various currencies that have been in existence over time. While paper is assumed to be relatively new, Paper Currency was first introduced in the 11th Century by the Song dynasty in China.

For a while, Paper was backed by Gold for there was an enormous lack of trust in the Institution. But over time it came to the realization that there was just not enough gold to go around for all the requirements and secondly there was a greater amount of trust and hence yanking off the support of gold would not materially change anything.

If you think deeply about money, everything is literally based on trust and relativity. The price you pay for an asset is not based on what it means to own that asset but what others would pay for that. So, real estate prices are based purely based on what others are paying for similar property and art is based on what others think it would be worth paying for.

The stock market is supposed to behave better for unlike a Painting which you can only admire when you are the owner, a company has real earnings that can help pay you back the amount paid for the acquisition. Yet, stock markets are driven by humans and if humans are willing to pay millions for a JPG, why should not companies be priced based not on earnings but whatever the future one assumes will unfold. 

As part of my momentum portfolio, I bought a stock called Dixon in May of 2020. When I started investing in the Momentum Portfolio in 2017, I tried to read as much about the company as possible even though I was not buying based on the company’s fundamentals but purely based on its price performance.

By the time I bought Dixon, I had shed all such notions. I would just buy whatever the algorithm threw up and one that did not seem like a total fraud (I have a negative checklist of companies I wish not to buy even when they pop up on my Momentum screen). By August, it had shot up sharply and I was beginning to get worried, real worried. The PE touched 100 and I tried to read up on the company and the more I read, the more I wasn’t sure if I wanted to hold onto the company.

The thing with Momentum is that when stocks go up exceptionally fast, the ranks don’t deteriorate till it has given away a lot of the gains and I for one did not want that to happen. I decided that I knew better than the market and booked profits (so much for advising others on sticking to the system). But the stock seemed to care less about my beliefs and continued to head higher. Thankfully in late September, the stock had a small correction and by then I had the realization that I should stick with the system and took that as an opportunity to get back in.

I continue to hold Dixon as of today and the PE it quotes has risen to 155 times its trailing four quarter earnings. Does this mean looking at PE ratio is useless – absolutely not. PE has as huge signaling mechanism and that generally comes true in time. But you need to think about it differently.

When we buy a stock, we are buying a part of the company and yet we aren’t really buying the company itself and that is a huge difference. When I bought my Stock Broking Membership card, I bought it at a price of 1 year future earnings. Dixon in the last four quarters made about 82 Crores in Profit. For me to get a similar deal here, Dixon needs to make 23,500 Crores next year. I know, even impossible is meaningless here.

The thing about buying stock is that we wish to participate in the growth of the company and yet unlike the promoter, we need not be stuck with it. If tomorrow I sense I feel that I wish to get out, I can. the promoter on the other hand is unlikely to get a exit at even half the valuation of today if he wants a exit tomorrow (remember GMM where one of the promoters sold their stake at a discount of nearly 30% to market price recently)

Mixing fundamentals and momentum to me appears dangerous. The only reason I have list of negative stocks is because I sense that the exit door is too small and unlikely to allow me a clean exit in case of a fire. Else, I wonder why should I really bother about things that are above my paygrade.

 In the 20+ years I have been in markets, I have had great times and pretty miserable times though I would think that the current time is great not just because of the gains I have made but because I have been more organized and clear about what I am doing and more importantly why.

The first bull market I participated in and made some serious money was way back in the 2000 dot com bubble. What I remember most about it was that I did not stop to ask questions. My fault though was that I did not know when to dismount the tiger either.

The toughest thing about riding a tiger it’s said is getting off it without getting killed. The current state of the market to me is suggestive of riding the tiger and while the cost of getting off is not equivalent to getting killed, without a plan on what will lead to us once again getting back on the tiger, it makes no sense to try and get off.

This is the 4th consecutive quarter that markets are positive. This is not really a rarity. Post the crash of 2008, Indices saw quarterly positive close for a consecutive 8 quarters. Since 1979, Sensex has had a consecutive positive close of 4 quarters or more 13 times with the average gain being to the tune of 173% (we are as of now approximately 133% up from the March Quarter close)

I have some very intelligent perma bear friends but who pretend to be bulls. The thing about their reasoning is so comforting that you are sure that the only thing that can happen to market is a big fall and one that is right around the corner. The last time I met him, he was certain that markets will fall before Summer starts and what has Summer to do with markets fall. Well, it’s in Summer he said China will attack India and that will be the end of the bull market. 

Markets spend more time in bullish phase versus bearish phase. If you toss a coin, you should expect, in the long run, 50% of the time to have heads and 50% tails. In the shorter term though, this could vary dramatically and yet unless you seriously have questions about the coin itself, you understand that this randomness is to be expected.

Markets are no different. Since 1979, Sensex has seen 53% of its days being positive – slightly better than 50% of a coin toss and one which in finality accounts for all the difference. If you were to think about the stock markets as a Casino, the house has a negative edge. This means that the longer you play, the surer you are to come out as a winner (in a casino, the longer you play, the surer you are going to lose everything you have and more – that is the house edge).

A friend asked me if I had the yearly drawdowns on Nifty handy. I had not updated it for a while but I updated and posted it on Twitter. 

If you look at the chart, you can observe that every year we go through a drawdown of some kind. Exception years being 2014 and 2018 when we saw single digit drawdowns. Markets though have continued to rally through and through over time. One can be worried forever and make no money or worried but with a plan and make money. I for one choose the latter.





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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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