Consider this: in two months, the Corona virus has infected almost 5.2 lac (updated as at 28th March) persons and killed a shade above 23,000 (updated as at 28th March) globally. The world is progressively moving towards a lockdown. Stock markets have crashed (an understatement of sorts, given the NIFTY’s 25.5% fall over the trailing month, 27th Feb - 27th Mar). If this isn’t pain enough, you have almost every market ‘expert’ offering a stream of philosophical market advice on how to tackle this tsunami. Greed and fear are both riding a neurotic Karma cycle. Every investor, citizen and human being wants to know: what’s the truth and how do I navigate through this storm?
The answer is less glamorous and decidedly more painful than what the mavens are willing to admit: nobody has a clue!
We don’t know the truth and we don’t have half a solution, but we are all too proud, naive and vain (even vile, in some cases) to admit it. This is not to take away any credit from all the noble folks who are tackling the problem (doctors and administrators in the real world) but every self-styled, anointed and celebrated investment expert is just in misguided or hypocritical denial. For their benefit and yours, dear reader, let me say this again: we don’t know the truth of how much this will hurt and how to get out of this mess. We don’t know where stock markets will go, not only in this quarter but even a year out.
The other thing that is definitely clear is that the real world, not just the financial world, is in serious trouble. The apparent incurability of the virus, its exponential global spread and the disruptions on full display tell me that its impact on the real economy is far more debilitating that what most spreadsheet analysts are comforting us. With the frantic and coordinated efforts being made to invent vaccines and drugs plus the massive administrative actions to ‘flatten’ the propensity of the virus to spread, maybe humankind will have the last laugh.
Meanwhile, as investors, the original challenge persists. How do we tackle this tsunami and where will it all end? I repeat: we don’t know! What we do know is that asset allocation is a bigger factor than stock selection. My thumb rule for risk lovers may sound timid to the ones who are still alive: 100 – (your age) = % of your net worth you should put into equity (stocks, MFs and FnO exposures combined). If you are very conservative, use 70 instead of 100. A thirty year old risk lover would put 100 - 30 = 70% of net worth into equities, but a more conservative person would allocate just 70 - 30 = 40% of net worth here. The rest should go to fixed income, gold and others.
Here's the good news: if you are at less than your equity asset allocation as suggested above, this tsunami is actually a good time to start nibbling! I would recommend SIPs into mutual funds (see our ready reckoner here) for the first time allocators to equity. Any allocation to equities higher than the recommended levels (at today’s low prices) indicates severe mis-allocation in the trailing period. Set it right by selling (at least the really bad, low quality stuff) at every bounce. A hard look is needed at the quality of your holdings, not how much you’ve lost. If buying a high quality business at ‘any price’ worked in the trailing few years in India, it may well be that selling a low quality business at ‘any price’ will work hereon! Staying wedded to such duds in your portfolio destroys self-esteem and blunts your investment mindset. Make a ‘detox’ exit from these stocks and don’t regret what price you exited at.
For folks with very large MF investments, I’d suggest a ruthless review of your existing MFs (SIPs and Lump Sum holdings) based on responsible (or otherwise) stock selection by your FM,not performance (everything’s fallen, so this is not a useful measure!). Several debt funds, too, have suffered mark downs owing to reckless purchases of securities issued by less than credible firms. Any FM who invested in equity or debt issued by DHFL, Yes Bank or Indiabulls (for example) needs to be asked some tough questions. I admit it’s only in hindsight but the questioning must happen.
The obvious sales pitch for those of you who are looking for a basket of stocks to self-manage is to check out the Invest in Ideas link on our homepage. This will take you to a curated list of baskets whose performance you can track and manage (with our research advice) over time. Similarly, we have baskets of low cost ETFs that mirror index performance at low cost. If you have more conviction in some specific stocks, you can try StockSIPs in them. We have a list of such recommendations, too (click here).
Meanwhile, volatility is the staple food of the compulsive trader. So if you enjoy ‘playing at the tables’ for entertainment, do it. But do it with small (and frequent) bets. And be disciplined enough to cut your losses as per your trading strategy. Aspire to make only ‘net net’ profits over time, and not to get all your bets right! Finally, the most important thing to know is that some serious money will be made once markets turn around. We really don’t know when this will happen or how or why). But once this happens, the money making opportunity will be too good to pass. Despite being a balance sheet lover and full time moat analyst (failed, wannabe Buffet), I must confess that the chartists deserve substantially increased respect hereon. Their ears and sensors will give us the first few signals to start allocating back into Dalal Street. Till then, happy trading, asset allocation and exiting the junk.
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