Wednesday, May 5, 2010

God..the market is falling...what next??

I think this is the most-asked and discussed question these days. And it sure is a million dollar question. (Although 'million' seems small these has to talk in trillions to get noticed!)
Well I have been asked this question a lot in different forms lately. The same question comes disguised in forms like 'market kya lag raha hai?' or 'teji ya mandi' or better still 'where do u see the market 2 months from now?'
Arey! If i 'saw' the 'market' 2 months from now, i wouldn't bother with all the research and analysis, would I? ;-)
Anyways, just thought that this is a good time to post on this topic. And I thought it better to post in a question-answer form, to be concise and to-the-point.

Que: Where do you think the market will go from here?
Ans: Well, i think it will either go up or it will go down. Theoretically, it can remain unchanged!!!
Frustrating answer? Well, in my defense, it was a frustrating question! To frustrate you even more, let me answer the question with more questions..
How does it matter? 'Market' as everyone refers to, is the broader index, which is a sweat-inducer for many people. So the 'market' consists of only 30 (sensex) or 50 (nifty) stocks. Now, are these stocks our investment universe? Do we trade in Nifty derivatives? If the answer to both is 'no', then one really should not care about where the 'market' will go. We invest in individual companies, so why not try and focus our attention on that, instead of trying to second-guess the index movements? How does the index movement matter, if we are neither investing in the index nor solely in its constituents?
Have you ever been successful at predicting index movements? I don't think anyone can say 'yes' to that. Predicting index movement correctly and consistently is impossible, as per me. The index is a hotchpotch of many companies, whose individual prices move due to a variety of factors. All these movements together move the index. So, in my view, predicting these individual movements and the overall movement is not possible. (You might have guessed by now that technical analysis does not work for me and I don't even try to do it.) So, all-in-all, predicting index movements is an exercise in futility. So I have made my peace with the fact that I am incapable of predicting where the sensex/nifty will go and that I will never ever be able to 'time' the 'market' properly.

Que: O really? So you mean to say that the index movement has no impact on overall stock prices? Boss, when it rains, everything gets wet. The index is a representation of the macro scenario. You just cannot afford to ignore the index.
Ans: Well, although i do agree partly about it, I would ask one more question. Have you been able to predict the 'macro' picture properly and consistently? You foresaw in 2007 that the world economy would be going through a tough time? Or that it would plateau and rebound quite fast a short time later? Trying to predict the macro (one has to study the world-wide scenario these days!) picture is like trying to put handcuffs on an octopus! Just like an octopus has too many arms, here too, there are just too many variables/factors and one will surely miss some. (if not many). So, while studying/reading up on the broader economic picture does add to knowledge and has made me more alert recently, I have been unable to incorporate the same successfully, while investing in companies. I wonder if your experience has been different.

Que: Bummer! What the hell man? You are negating everything. So what do you think one should do?
Ans: Well, so sorry to be 'the irritating pest who opposes'. But what if we do the following:
1) The absolute golden rule: BUY CHEAP. Now one needs to remember two things here. When I say 'cheap' I am referring to the valuations, not to the price. Second, 'cheap' is a relative concept. What seems cheap to me may look ridiculously expensive to you and vice-versa. So, you should develop your own parameters while looking out for 'cheap' stocks, vis-a-vis their perceived intrinsic value.
2) There should be a decent margin of safety (MOS) too. This would give you the necessary buffer in case things don't go as you plan. One can build good MOS by being pessimistic! If you analyse a stock assuming worst case scenarios going forward, and it still looks cheap, you have a decent MOS. You should, of course, think straight and control your emotions while doing this. Remember, you are doing this to determine whether you can buy, not to justify your decision of buying!
I have been thinking a lot lately on building MOS in volumes! I intend to express my thoughts on this topic in a separate post later.

Que: Well, what if I don't find any cheap stocks?
Ans: The most likely reason for this would be that you are not looking hard enough! Value exists at all times, one just needs to look deeply and dig it out. But still, if you are really not finding any cheap stocks, sit on cash amigo! Unlike mutual funds, we individual investors have the luxury of taking cash calls. There is absolutely no compulsion to be invested all the time in equity. If cash gives you comfort, so be it!

Que: Well what if your so-called cheap stocks also fall?
Ans: Well that would be good news, right? Something cheap has become cheaper! The stock is on sale! If your analysis is strong and you have the conviction, you should buy more. This is where the concept of 'MOS in volumes' can be useful.

Que: Hmm.. Well what should an individual investor do, if he wants to start investing now?
Ans: Well, first, he should introspect as to why he wants to start investing now?!! Is it because he has seen people around him earn a bundle in the market and he has become greedy? If that is the case, its the worst reason to start investing and such an investor needs to think a lot more before entering the equity market.
My humble advice to a new investor would be to be extremely picky and choosy while buying stocks, leave cash on the table and start off by building small positions. You may earn small on the upside but at least you won't lose big on the downside! Build your own conviction as time passes and then graduate to bigger positions. The market is a great teacher, try to learn as much as possible!

Whatever I have written above is from the point of view of 'investing'. Traders and speculators, for whom a company is merely a price quote on a ticker, may think differently and I humbly and readily agree to all their objections and surrender without a fight!
Well, those were my thoughts on the topic. Hope they made some sense. I would eagerly welcome your views and comments. Learning never stops and I would love to learn a lot from you.
Cheers and happy investing!!


scorpio said...

Let me add another frustrating thing :D
To learn how to pick cheap stocks is time consuming and needs lot of reading and practice.

I still lack it and so speculate and not invest.

Over 4 years, I have not been able to read a full annual report. I guess once we are used to it, it could be fun reading them..

Neeraj Marathe said...

Hi Ashish..
Yes i totally agree that learning to pick cheap stocks is quite fact, i think it is a lifetime process and all of us would always learn something new every now and then.
I really appreciate that u openly stated that u speculate and do not invest. I know a lot of 'investors' who are really speculators. In the end, they dont really know what they are doing. If the stock price jumps, they book profits and exit, whereas if it falls, they tell themselves that they are long term investors, and hold on!
Cheers! Neeraj

Anonymous said...

Well congratulations on ur amazing posts so far. Loved All of them. Please keep sharing ur ideas and perceptions as they seem to be totally independent and appeal greatly to an investor like me. will certainly try to comment on particular posts. Thank you

Neeraj Marathe said...

Dear Anonymous (cool name, i must say!)
Thnx a lot for the encouragement. Hope to hear more from u..

Inquisitive Stranger said...

Hi Neeraj,

Very Good Post, Specially for someone like me, Just started investing but Sincecerly cant do any analysis, Have been reading from past 4 months now, Started with TIP guy. He is awesome, Just following him on what he says, I know he you and everyone says to do your own research, trying may be will become like you guys some day as of now,whatever little i have trying with it.

Keep wiring similar post, very encouraging.


Neeraj Marathe said...

Hi inquisitive stranger,
Thnx for the feedback. Yes, i agree it is difficult to do own analysis. It takes a lot of time and effort. One must continuously read read and read..
Good to hear that you have started off in the market by 'investing', not 'trading'..TIP guy is absolutely fabulous, i agree. I really like his structured thought process and attention to detail.
hope to hear lots from u..

Brijesh said...


Not to follow noise and having faith in your ideas is a huge step. This is uncommon and rare and if one believes in this , this is the way to go. The book " Big Short', once again re-inforces the belief , shared by you in the posts - read , read, and your own research will give returns which could beat the market

Neeraj Marathe said...

Thnx Brijesh for that extremely mature comment..'Big Short' has been recommended as an excellent read to me..currently i am going thru a Montier phase, but will surely start off on it.. :-)

Jigar Punamiya said...

A great n bold discussion, which is rare.. A good one..!!

-Jigar Punamiya.

Neeraj Marathe said...

Thnx Jigar,
Hope to hear more from u..