These are interesting times. When it comes to investing, incentive for action seems to have got inverted these days. There is hardly any incentive for quick actions. Go getter attitude may take one places in the corporate world, but in investing, in the current market backdrop, aggressive action puts one in poor light. On the other hand, procrastination has become a virtue that pays handsomely. It may look confusing, but that is a reality now with the market punishing anyone who rushes to buy (go getters) and rewarding anyone who sits on it and waits, by proving them right with persistent fall in stock prices. But, getting proved right in the short-term could be worst trap they could be falling into as they would lose an opportunity to get proved right in the long-term.
There is this typical dilemma the investors go through now. Should one invest in the fall or wait for the prices to stabilize? There are no easy answers. To understand this more, let us take a scenario in which we have a stock that has the potential to give you 2X returns in one to two years, but could go down by 10 or 20% in the immediate short-term. But the catch in this scenario is, if one decides to wait to time the bottom (to catch the last 10 to 20% fall), one could miss the entire upside. This catch is real because of presence of following factors:
- Many false starts (bounces) before the final rally.
- Final turn could be sudden and swift that investors could misread that as a false bounce and wait eternally for the low prices.
- In the final turn, prices could quickly move up by 30 to 40% in just few trading sessions (as happened in the past cycles)
- Prices are best when pessimism is maximum.
From the above, it should be reasonably clear that, for value investing to work, there is no choice but to invest into the fall, however difficult emotionally it could be. But the pain could be made more palatable by pursuing stock-specific bottom-up investing, that too only in high conviction ideas where one would not hesitate to invest more if the prices were to fall sharply from the already low prices. If the down-turn turns deep and one runs out of cash, one could shift from relatively defensive to deep value and thereby continue investing all through the fall. This is time for turning aggressive on deployment, not defensive, though the high decibel media narrative manically mocks aggression. The reason why media does this is not anything obscure. It is fairly straight that they need to appear right in the short-term and hence toeing the line that is trendy than risking their reputation by swimming against the stream.
More importantly, investors need to be also aware of another trap, that is, to get lost in the innumerable problems that always surface in the down-cycles. To think about it, it is an interesting question to ask, why in an upcycle, one never gets to hear any problem? Is it a mere coincidence that India’s inherent structural issues like weak current account and high inflationary pressures (hence high interest rates) pop up only in a bear-cycle? Change in stock prices can do strange things.
Price action in stocks can magically change market’s view on problems. In frenzied times, market is more magnanimous to see the brighter side of the problems while in depressed times, it takes a myopic view to magnify any troubles. It is price action (cycles) that drives the narrative, not the other way. This understanding is key to take appropriate action during cycles without getting lost in the accompanying magnified narrative.
Moreover, current down-cycle has nothing to do with India specific, but has all to do with reversal of EM carry trade (money moving out of emerging markets). At some point (not too far), as in the earlier cycles, this trade will resume and lift all EM boats including India. During that time, now forgotten India’s long-term structural story will come back to dominate the narrative once again. If one waits for those robins, spring (attractive prices) will of course be over!! Investing is at its best when narrative goes negative. “Time to invest is when drums are beating, not when trumpets are blaring.” Follow the cycles (mis-pricing), not the narrative for the superior results in investing.
Happy Value Investing!!