It had been quite a turn-off to look at the market from investment perspective throughout year 2018. Every now and then, it looked damn expensive to enter. Many of the valuation reports I carried or came across turned out to be like, the company is a great business but not at current valuations. I really like some of the quality stocks, but the insane P/E ratios in the range of 50-80 just spoil the enthusiasm. That is the nature of a market. Look at the monthly P/E chart of Nifty 50. It is just red hot lately and most of the 2018. This is just Nifty 50 index, but if you look at specific stocks and if that is slightly good company, it looks insane.
In terms of Charlie Munger’s analogy of the market with pari-mutuel system, it is like that you know you are likely to loose at current valuations but it is the thrill that wants you to buy. That urge to “do” something is quite dangerous these days. You end-up buying at the peak of the mountain, and then always wish that the rally makes this point a foothill. But, as you go higher up, there are even heavier headwinds. Strong performance is needed just to sustain the current valuations and even stronger performance is needed to go to higher valuations. In such situations, the environment becomes so fragile that even a small bad news, or one bad quarter turns the market sentiment hostile. As a new investor, you don’t want to get in this situation.
Warren Buffet quotes, “be fearful when everyone is greedy, and greedy when everyone is fearful”. This is easier said than done, especially as a new investor who has not been around in the market for decades, who is hardly catching up with some of the pages of “Intelligent Investor” to lately find out, s/he does not have enough perspective to put this knowledge into practice. For example, the book suggests you should never pay higher than 22.5 P/E * P/B for a stock, but it does not say too much about which sectors follow these range. Will you ever find stocks like Hindustan Unilever or Asian Paints in that range? Does it mean you should never buy them? The theory of compounders proposes the other direction that you should not shy away from paying a premium price for a very high quality stuff. Sometimes, quality demands premium but how much that is the question which require research.
Now look at the other side of the equation. If it is so obvious that one should not enter at the higher levels, why so many people are still around and do enter at such times. One category of people who participate at all levels is trading community. It is their day job to just participate in the market and bring more people in. I just do not understand the TV shows in the morning which outrightly ask and give quotes on what to trade today. There is no investment element there, so let us keep them out of the discussion and stay away from there. Now the other large community is the new investors. Especially, who have seen the amazing performance of the market over last few years, but were not part of it. They want to get in now. As they say, nobody can time the market, and nobody knows if it is going to scale another height in the years to come or enter in a recession. Hence, some serious investors try to accumulate stuff every now and then even in the expensive market. But they are far from all-in situation. Historically, Berkshire Hathaway had $100 Billion worth cash on their books during 2018 and did not deploy it in the market, probably it was a hint that there were not many “screaming buy” bets for them.
In such times, one can “sit tight” to “buy right”. The Mr. Market (Benjamin Graham’s Intelligent Investor fame) many times gives opportunities to find misplaced bets. There are times when you find the pessimism taking over the stock prices and allow you to buy at right levels. For example, the uncertainty over NBFCs brought the Bajaj Finance stock down to INR 1950 one day. On that day, one had to decide if that is the right price and if it still has the same charm that it had before the NBFC reforms. In very few days, the Bajaj Finance recovered to the level of INR 2500. Disclaimer: this is just an example around the discussion not a recommendation. This kind of phenomenon clearly shows if one sits tight, there will be opportunities to find bargains even in the middle of a bull market. One just needs to be ready for that day!
Systematic Investment Plan (SIP) route strikes a good balance between these difficult choices. It is also quite similar to dollar cost averaging where one fights the uncertainty with long time period and consistency. Other than mutual funds, SIP can also be done for your own pure equity portfolio.
Finally, I encourage you to read more, do some homework, stay safe and do not burn your hands in these expensive times! Please do share some of your strategies to fight such times. Also, feel free to ask questions if you have any. We can grow together. Subscribe to receive an email on new posts: