What’s happening to stock markets, economy & your portfolio?

I recently read Rohit Chauhan’s post titledFacing Despair.For those who don’t know him, Rohit is a very capable Indian value investor with a decent track record. Many issues covered his post are also going through my mind. So I thought it would be a good idea to refer to it as a starting point.
In previous post, I mentioned that it made sense to choose companies having an inherent ability to suffer (but not die), instead of those which ‘may’become multibaggers (but have very high mortality rates) when building the core of one’s portfolio. You can read more about our logic here.
What got me thinking is that it actually seems true that days of high growth may be over. A 3% to 5% growth rate may have become the new normal. So all calculations assuming economy growing in excess of 9% and investments returning CAGRs of more than 15% need to be redone to arrive at more sensible investment decisions. After all, its all about ‘not making mistakes‘ in the market. This may sound too pessimistic. But this time around, problems are not in external environment alone. This time around many of these problems lie within.
And the last line of Rohit’s post is quite an eye opener. “I have a day job to support my family. I will not starve even if my portfolio goes to zero”. This statement shows that our portfolio related decision making depends a lot on how we and our families manage to fund their expenses. If you fund it through stock markets, i.e. trading etc, then your decision making may be different from mine. Just like Rohit, even I have a day job and I will not starve if my stock portfolio goes down to zero. I have taken care of the downside, if you ask about my overall wealth. As far as my stock portfolio’s upside is concerned, it will take care of itself. I have a time horizon which is longer than most people. And I am ready to wait out this storm. I am not going to lose my sleep over this. I will rather use this time to keep accumulating good stocks, great stocks and stocks of companies which are here to stay till the time when Indian economy starts looking up again.
I may be totally wrong in assuming that things may not turn around anytime soon. But that is the risk of using assumptions.
Note 1 – If you have read till here, you must have noticed that this post is using the term ‘I’ instead of ‘We.’ This post is written by Dev. The other Stable Investor (Shubhang) does not completely subscribe to this view and has recently started dabbling in short term trades. And for record, he has been making a lot of money in his trades (shorts). 🙂 He still maintains a long term portfolio. Just a disclosure to keep the readers in loop.
Note 2 – Some personal commitments have led to reduction in site & FB page’s update frequency. Hope to change it soon.

Ability to Suffer

No. We are not talking about your ability to suffer. We are talking about your portfolio’s ability. But how can we use the word ‘suffer’ for investments? Are these alive?
How is your portfolio’s ability to suffer and survive?
Just assume that you had to hire some bodyguards for your security. Whom would you hire? Someone who is flashy and reckless and volatile? Or someone who is stable, secure, solid and can suffer for you during hard times? You would definitely go for the latter. After all, it’s your life that is at stake. Isn’t it?
Now consider your investments. Every now and then, markets would crash and economy would take a dive. So during such tough times, where would you park your money? As far as we are concerned, we would choose instruments / stocks which are like the second type of bodyguards discussed above. Now if we want to invest in shares, we would choose companies which have the ability to suffer and survive the downturns. These companies would not become financial dinosaurs (extinct) during tough times. These would lay low and wait for the storm to pass. These would not try to do anything heroic and would focus more on survival during such times. And as soon as the bad times start to recede, these companies would spread their wings and come out leaner and stronger.
So when economy is slowing down and markets have not done anything for last 5+ years, wouldn’t it make sense to put your money in companies which can survive the downturn? Companies which have seen such downturns in the past and have come out stronger?
Companies like GE, Exxon Mobil (in American markets) have survived depressions, recessions and downturns for a reason. And the reason is their ability to suffer (& survive). Even in India, there are companies which have proved their mettle every now and then. But even then, we look for potential multibaggers; which 49 times out of 50, would not survive the next big crash.
Always remember, more wealth has been created in markets because of ‘Compounding’ and not because of ‘Multibaggers.
Think about it.