By Ambareesh Baliga
Ask any investor in the market the secret of making money and most will come with 2 tips – First of all Buy Low and Sell High and Buy when there is Fear & Panic and Sell when there is Greed & Euphoria in the market. Great textbook mantras to begin investing in the markets but the moot question is how do you assess what’s low and high? A 52-week Low can go lower and vice-versa. How do you control yourself from buying when there is euphoria all around and all your friends, relatives and peers are making money? How to garner the courage to buy when there is blood all around?
Conviction comes from our understanding of stock and that gives one the confidence in times of uncertainty. Most people panic since they don’t know whether they are holding value or junk – So instead of buying more, they may end up booking a loss. Similarly, in times of euphoria when the stock possibly gets overvalued, one is overwhelmed with greed, adding further positions. If one has some idea of the valuations, the possibility of such mistakes is minimized. Though knowledge is important, but one’s behavioural trait assumes significance during extreme market volatility. Though knowledge gives a certain amount of confidence, the behavioural trait decides the action you take – many a time over-riding the knowledge-backed decisions.
Having witnessed major bull and bear runs in the past 4 decades, I have trained myself to stay away from the crowd. This has also moulded my stock-picking strategy which is mostly contrarian – stocks ignored by most of the market participants. Thus, irrespective of the market conditions, the stocks I buy are possibly in the midst of a downward move or lying listless. On the contrary, my exit point would be when market participants are vying for a piece of that stock and fundamentally it starts to look expensive. The euphoria and momentum can take it higher but one needs to learn to be happy with returns which fall decently short of the High and Low. One of the glaring examples is ITC which about 15-18 months back was the butt of all jokes on the investments’ social media platforms with memes flying around. A company with sound fundamentals, and excellent cash flows, with a number of growth verticals like Hotels, Paper, FMCG, Agro as well as Cigarettes which continue to be prime cash generators, did not move despite a super post-covid rally. The stock tired out the investors for a long time but the move in the last 12 months caught the naysayers on the wrong foot with nearly 100% returns. It’s been the same story with PSU Banks as well as some of the PSU Defence stocks in the last 1 year.
The stock price is like a pendulum which oscillates between overvaluation and undervaluation based on the market sentiment and news flow. When the markets are going through a major correction, it provides numerous opportunities as most of them would be swinging towards undervaluation and it’s always psychologically easier to buy stocks on the way down than on the way up. However, one needs to be careful not to buy junk which may have probably fallen 80% compared to the large caps which may have fallen possibly 20%. We love to buy at huge discounts but again these discounts are like the ones we see on some of the popular e-commerce platforms where the price is inflated before offering a discount, here too these junks move to stratospheric levels before cracking. So, the price correction could be a good filter to start with but the investment decision has to be based on valuation metrics at those levels.
One thing which most investors regret during a bear phase is the lack of liquidity. They are fully invested and thus unable to deploy more. However, one should be prepared to book losses for the mistakes done and get into those stocks where one has higher conviction. Booking a loss is difficult but this is again another mind game at play and we need to overcome that. Cutting a loss is an art which too needs to be practiced and none of this happens overnight – it’s learning through experience. I keep liquidity in two tiers. Tier one liquidity is within the Equity Portfolio where I shift between cash and equity-based on my reading of the markets at that point. Last few months we were about 30% in cash but got fully invested by the end of March. Tier 2 is the additional liquidity I keep to invest in equities during a panic wave. I bring in these funds to take advantage of the severe panic, however, the funds are reverted back to Tier 2 liquidity when the market recovers. Since I am bullish on the markets for the time being, thus got fully invested, but markets have a mind of their own. In case my view goes wrong, and the market corrects sharply to say 16000 levels, I would still have liquidity and thus need not panic or regret not being able to take advantage of the situation.
Advisors are guide investors but every investor has to choose a methodology which fits them well. Investing is a very personal game and there is no universal size which fits all. But no denying the fact that investments made in a bear market provide superior returns and provide us with that extra legroom even if one were to go wrong.
(Ambareesh Baliga, smallcase Manager. Views expressed are the author’s own.)