Year end update: 2019-20

The year of 2019-20 has been easily the most eventful of our investing careers. It started on a dull note and there was not much to cheer in broader markets in India almost till the end of Quarter 2 until 20 September, when the surprise corporate tax cut announcement brought life back to the broader markets. Our strategy, being focused on finding trending stocks, was well in play even before that and with some support from the general sentiment, we were able to push the envelope on returns on our portfolio. The market was in a healthy momentum almost until the end of February in spite of the economy chugging along a little slowly. But then the world was struck by a tsunami called the novel coronavirus pandemic.

What has already happened in the month of March (in short):

– The corona virus ‘scare’ is no longer a scare but a full blown pandemic all over the world

– Businesses have been hit hard, especially travel, leisure and airline sectors, along with their supporting institutions and sectors

– Entire countries have been locked down in order to stop the exponential spread of the coronavirus pandemic (which is good for public health but extremely bad for the economy, businesses and thus stock prices)

… and a result of these were that the global stock markets were in a free fall during the entire month of March

So, the world is staring at a mega crisis, the kind of which hasn’t been seen since World War II, and this time, the entire humanity is united as one against an invisible enemy.

These are the sort of fat-tailed risks that, as an investor, you cannot predict, but you can surely prepare for. As portfolio advisors, our #1 fiduciary responsibility is to protect investor wealth. ‘Returns’ come 2nd in our pecking order. We had expected a complete lock-down in India, and hence we sold half of our portfolio by the 1st week and the rest by the 2nd week of March, aiming to start investing later when the dust settles.

As a result, our model portfolio is down only -7.6% in the month of March, compared to -23.3% for the Nifty 50 index. So, our and clients’ portfolios were saved by the mindless butchering seen elsewhere (especially in ‘buy and hold’ forever type of investing strategies), where some portfolios are even looking at zero/negative returns for the time period of the last 4-5 years.

We ended up making a +21.7% (yes, that sign is correct!) for the financial year 2019-20. The comparable benchmark indices are so whacked out of shape for the same period, that it doesn’t even make any sense to compare (-26% to -46% for large and small cap indices).

Now, in order to understand what to do next or when will we start buying again, we need to separate the ‘knowns’ from the ‘unknowns’.

What we do not know for sure:

– We do not know when will the lock-down end or how long will it take for businesses to recover

– When or where will the markets bottom out

– When will a cure/vaccine be found, if at all

What we know for sure:

– Markets will make a recovery from the absolute bottom in the midst of depressing news everywhere

– Some sectors and stocks will not recover to pre-coronavirus prices

– India’s GDP growth will slow down or may even go into a contraction for a few quarters. As a result, consumer spending is likely to be constrained till supported with lots of fiscal stimulus/helicopter money. A fresh wave of bank loan defaults for stressed sectors cannot be ruled out.

– But as they say, the stock markets are forward looking and at some point, the prices will start to discount this new world order. Moreover, the next bull market will double portfolios in 1-2 years from today.

– The maximum risk (permanent portfolio loss) that we tolerate. We are in cash because the current market volatility doesn’t support our risk tolerating ability.

– Many of the next bull market’s leaders are likely to be completely different from the previous bull market’s leaders. One cannot blindly buy the pre-March trending stocks, just because they have fallen a lot.

The way ahead:

– We are starting on a completely clean slate in the new financial year 2020-21 since we are not holding any stocks right now

– We will wait for markets to settle and the volatility to dissipate. 3-4% changes in Nifty in a day is not normal. Until then, we will keep doing quick long/short and options trades in our own accounts only.

– Markets should give a clear signal that the bottom may have been behind us. We need not catch the exact bottom point of the market.

– We would look to Identify the post-corona new world order and understand the next sectors and companies to invest in. Slowly start investing in them in a staggered manner.

In these volatile markets, one is bound to be confused on how/what/how much to invest on their own? Take advantage of lower stock prices and invest using our trend following investment strategy.

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