Sunday, 26 May 2019

The Beauty of the Bear

When it comes to bear markets, there are two types of reactions. The first is that of outright dislike (I belong to this camp). No one wants to see their wealth erode, so this reaction is quite understandable. The second reaction is that of excitement, which is not natural but induced. Why be excited? Because now you can buy good stocks cheap.

I doubt the people in the second camp. All they are doing is denying the reality so that it doesn’t hit too hard. If Warren Buffett gets excited about buying stocks cheap, that’s still understandable. But when the guy next door assumes an expression of nonchalance at the latest market fall, I sense fakery. We have been indoctrinated to “not” feel the pain of the bear market and express excitement. That forces us to dismiss the pain of losing money. Worse, we think it’s something to be ashamed about. 

Recently, I have started looking at bear markets in a different way. They do cause pain but there is wisdom in that pain. While a bull market makes any rookie believe that he is a star investor, it’s the bear market that unravels your stock-selection strategy. In a bear market, you inevitably have to reevaluate why you did what you did. Most likely, you will find some fault with it. You can’t find these errors in a bull market. Once you fix them, your returns can be even better.

Hence, while bear markets are indeed painful, if you sustain through them, you become a better investor.

If you deny the pain of the bear market, you will have no reason to act on your investment methodology. On the contrary, you will begin buying more of what you own, thus compounding your mistake. 

When Buffett gets excited about bear markets, that’s because he has endured multiple bear markets and understands their nature. For most of us, it will make sense to first start appreciating the beauty of the bear.

Friday, 10 May 2019

The Power of the Stock Price

If you ask a fundamental investor about the importance of the stock price, you will probably get a look of disdain. He will tell you that valuation matters, not the price. Price alone conveys little. Plus he would advise you not to pay attention to the price; just worry about the fundamentals.

The fundamental investor is right. But the problem is that his wisdom is seldom followed. Interestingly, he himself also fails to follow it. You like it or not, stock price is the uncrowned champion of the stock market. 

It is the price that creates the narrative. Recently, a company announced its results. Analysts felt that they were mediocre. The stock price should have fallen. The next day, it didn’t. On the contrary, it climbed a fraction. The narrative quickly reversed. After all, the results weren’t bad either. 

The problem comes when the stock price becomes the foundation of making a judgement. Because the stock price of a leading bank has fallen, analysts have eagerly engaged in a fault-finding exercise. Similarly, because the stock price of a leading consumer-durables company has been on an up-move, analysts are ignoring its valuations; everything’s hunky dory with the company.

Apart from creating greed/fear in investors, stock price also drives their confidence. It’s not their own analysis or the company’s numbers; it’s the stock price. A falling stock price makes them doubtful; a rising stock price makes them cocky. 

What’s the solution then? That’s not easy. Given your biological wiring, the stock price will always influence you. Better don’t see it. Once you have a strategy in place, follow it in letter and spirit. Check your portfolio once a week or fortnight. No matter how good an analyst or investor you are, at a subconscious level, the stock price will influence you if you see it by the hour. That’s the power of the stock price.