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.

Why they don’t discuss these 2 things on Indian Business Channels?

Have you ever watched channels like CNBC-TV18, NDTV Profit and Zee Business? Do you remember what they discuss on these channels? As far as we can remember, they discuss about investment ideas, target prices, breaking news, directional calls, trading strategies, etc. But there are 2 things that they never discuss:

  • Time Horizons
  • Size of stock holdings in portfolio

But before we talk about importance of these two things, we will like to thank these channels for showing us the real beauty of stock markets!! (Don’t worry: the link takes you to Google search page, no malware or spamware would be installed on your device). 🙂

Sonia Shenoy CNBC TV18
Oh My God!

So why are Time Horizons important? It’s because it helps in deciding whether we should be affected by daily price movements (& news) or not. For example, when Maruti had labor unrest in Manesar and stock was hovering around Rs 1000, it should not have affected an investor with time horizon of 10+ years. The labor problem was a short term blip and provided long term investors an opportunity to pick up a great stock at very cheap price. And as we later saw, Maruti ran up to 1500 in no time at all (i.e. 50% up in 3 months!).

Now we come to Size of stock holding in portfolio. By having a cap on size of individual stock holdings, an investor can keep a check on his risk levels. It also helps in not getting too emotional about a single stock. You may hold the best stock in the world, but putting all your eggs in one basket doesn’t make sense. One bad quarterly result and your entire portfolio comes down crashing. But there is a flip side to this approach too. You can pick as many winners as possible, but if you’re not invested in them to a degree that their positive movement has a significant impact on your portfolio, you are essentially failing.

So to tell you frankly, we watch business channels for entertainment and glamour. 🙂 What about you?

Disclosure: No positions in Maruti Suzuki.


3 things to do before investing in stock markets

All of us want to make money in stock markets. And given a chance, we would love to become Warren Buffet (lol) 🙂.  But we believe that stock markets are inherently risky. And when dealing with risks, one should be cautious to start with. According to us, there are 3 very important things which should precede investments in stock markets –

Build an Emergency Fund
The goal of emergency fund is to have around 6 months of expenses in savings. This can be for more than 6 months too but minimum we suggest is 6 months. The emergency fund is not an investment. It is simply a pool of funds which can be dipped into in case of emergencies. One should not risk emergency funds to earn higher interests. This fund should be parked in only the most liquid of assets like Savings Account. Though this may seem like a lot of money being used to earn minuscule returns, the fact is that it helps in building personal financial security. If you decide to invest in stocks before having an emergency fund, you may have to sell your investments at a time when markets are down and you would then be forced to lose money.

Pay off high interest debt
Paying off high interest debt, especially those of personal loans and credit cards is a must. Many such debts have a 15% + rate of interest. And since it is nearly impossible to find a guaranteed return like that in stock market, it makes sense to pay off these high-interest-rate debts. (One can continue to have long term debts like home loans, etc even when entering the stock markets)

Understand yourself (& your risk appetite & investment time horizon)
Stock markets are not for everyone. If one is not comfortable with occasional rise and fall in portfolio value, then stocks can give sleepless nights. One should never invest more than one can afford to lose in the short term. Before investing even a rupee, one should understand that there are 2 type of risks associated with stock investing; namely company risk (possibility of company going down) and market risk (possibility of overall market going down). There is no way one can avoid these risks. But these can be reduced. And as they say, it is not about avoiding risk that matters, but how to manage the risk that is more important. Another must do for future investor is to figure out why they are investing? Answer to this question itself will give them a direction on where to start. 


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