This time is different…

Hola and long time no see on this blog. Apologies for not posting regularly (of course, I doubt anyone in the world noticed). Caught between work, investing and a bull market, things have been quite busy.

All right then. With SEBI rules and all that, I will obviously not even venture into mentioning any stock names, much less recommend them anymore on this blog. And given that I post so infrequently, I again doubt my recommendations (if I had any) would have been taken seriously by anybody.

But I do want to point out some unique things that are happening in this market and especially focus on some tidbits of conversation around this bull market:

1) Everybody wants to quit their job and get into full-time investing: With people making 2x, 3x of their portfolios in the last 1 year, a very common theme has emerged – that of quitting job and doing full time investing. Sounds very sexy. Sounds very carefree. Nobody to report to. No more appraisals. No more HR mails. Pure meritocracy (and no bicker politics) in the sense that Market will reward you if your reasoning is right and punish if the reasoning is wrong. Very liberating. The idea in itself is so magnetic, that it can leave best of the folks high and dry. I am highly tempted to do this too, no doubt. I don’t think it’s a bad step if a) you know that you have enough assets and income to back you even if your portfolio tanks 50% from here b) you have a fair idea of what to do in your spare time as investing in general is very boring and would require only short bursts of massive activity (unlike trading) and c) you are actually passionate about investing and learning its million nuances than just being attracted to the idea of not having to report to anybody/hierarchy.

2) 80% of story in 20% of time: Since our memories weigh the recent events more highly, this quote will be attributed to Basant sir, but I can assure you that many senior and legendary investors have said the same thing. I have massive respect for Basant sir (and the education he provides constantly) along with other legendary investors but this is precisely the wrong time (start or middle of a raging bull market) for such utterances. People remember quotes and not entire interviews and thought process. What is 20% of time? What is 80% of story? How much time should I spend so that the 20% of time is actually useful to learn 80% of story? My read is that legendary investors have sifted through so many stories, so many stocks, been through multiple cycles that they have various heuristics to understand which story may run well and which story may not (and still be only 60% right). Investors who are on the learning curve, in my opinion (and that includes me), need to spend as much time as it takes to know everything about a stock as possible. They need to have an illusion of control, atleast thinking that they know everything about a stock before clicking the ‘Buy’ button. When they have sifted through enough stories, and been through one bull-bear-sideway market cycle is probably when they would know and really understand the meaning of ‘80% of story in 20% of time’. Till then, using such statements to justify a thesis would be a recipe for disaster.

3)  This is a stock picker’s market: This is an all-time favorite. I really don’t know what the statement means as it is used in every type of market (bull/bear/sideways). I had already shot off a warning on twitter for anyone who wants to use such statements. For the sake of brevity, will avoid repeating that threat.

4) Is it 2005 or 2007: This thought has been running through many investors’ heads (including mine, evidenced by my twitter thread). Stocks have been moving up so fast that everybody has started estimating FY17 and FY18 earnings. Portfolios have moved up 2x, 3x or more depending on the stocks and portfolio allocations you have done. People are scared if there would be a massive correction from here and equally excited about another massive run from here to say 35000 on the Sensex. Which one is it then? 2005? or 2007? Or does it matter at all that even in massive bull runs, there are routine corrections of 20% in due course. Or that your CAGR will be quite healthy even if you don’t score big over the next 3 years?

2013	2014	2015	2016	2017	2018	CAGR
100	125	250	275	302.5	332.75	27%

Above is an illustration of any investor who started with Rs.100 in 2013 and ended up with Rs.250 by end of this year. Even if this investor takes this money and puts it in a fixed deposit giving 10% returns (well, take 7% in case you are tax-sensitive), 3 years down the line, with a risk of zero capital loss, he/she is going to end up with a healthy 27% CAGR. Legendary investors will tell you that a 27% CAGR is an absolutely great number to have. What they may not ask you of course, for the risk of sounding rude, is how much of your net worth was in equities before you put it in fixed deposits. We all know the math. We all seem to know the trick. But what do we do?

Bah, who cares about data. Is it like 2005 so that I can buy more? Or is it like 2007 that I need to sell? Tell me that first.

5) The fallacy of selling 20% below the top: Which brings me to my next and favorite topic. Nobody wants to leave the party that is going on. Value investors are very famous and take great pride in laughing at the stupid statement of former executive of Citibank saying “”As long as the music is playing, you’ve got to get up and dance.” We laugh and laugh at that stupidity. We quote Buffett. We quote Munger. Why, these days, we have become more exotic and even quote Daniel Kahneman and his super book ‘Thinking, Fast and Slow’. But almost no-one wants to exit the party. These days, the hypothesis is even better. These days, investors say that ‘let the market reach the top and then correct…we’ll all get out 15%-20% from the top’. Let me explain this fallacy through a famous picture:

That’s the chart of the IT bubble – starting from 1996, all the way till 2001. All those investors who say ‘let the market reach the top and then correct……’, would they want to get out at all the points marked ‘Red’ in color? How would they know in advance? Conversely, in reality, wouldn’t most investors get out at all the points marked ‘Green’ in color? Not really. Every investor worth his salt wants to get out at the point marked in ‘Orange’. How many can do it? I seriously doubt if it would be in high single digits.

Then again, the lure and the logic is too irresistible. Combine fallacious logic with your neighbor (rather, twitter/whatsapp friends) making more money than you everyday – and you have got a dynamite waiting to blow up. We all want to dance till the last minutes, irrespective of how many times we read Buffett pleading ‘the clock has no hands’.

6) Impact of social-investing: Post the 2008 crisis, a new kind of animal took shape in the world and seems to have impacted the markets in a big way. The animal of crowd-sourced investing/social investing/forum investing/whatsapp investing. This has been a massive boon for all investors to connect themselves to superb investors across the country. I have personally benefitted, both monetarily and otherwise by picking brains and discussing stocks and worldly wisdom with some super investors and have learnt quite a lot. If one has already networked in the wave, it would hold him in good stead in the future too. Given recent SEBI rules (to circle back and tie in to the first paragraph of the post), unless clarifications come, there are hardly going to be any stock recommendations in blogs and forums henceforth. Given that most investors have caught onto the mantra of “‘scope of opportunity + management quality’ is enough to understand and invest in a story” (never mind that each parameter in the equation itself is a universe), how would the investors cope with no recommendations would be fascinating to see. In fact, I think that ‘scope of opportunity’ has been defined so widely that maybe sometimes even promoters are shocked and surprised at how wide we have defined ‘scope of opportunity’. The investor seems to say ‘aapko pata nahi aapki company scope ki taaakat’. There might be some Ph.D down the line, maybe in 2025, who would probably write a book on how SEBI rules had far reaching impacts on how investors in the millenial age behaved in the Vision 2020 age.

Prashanth has a wonderful post on investing and social media. Read, if you haven’t already.