Rudyard Kipling’s famous poem “If” started with these lines, which can be extended to investing as well.
If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies
The last one week has been very eventful. For an investor with a reasonably long time horizon, one of the most important things to do, is to take a step back (or rather many steps back) in such situations and focus on the really important aspects.
Today the noise and chatter on news and social media about credit, liquidity, bond rates, asset liability mismatch has risen to a fever pitch. I am not sure if all the commentators really understand the nuances of the problem or if they are just regurgitating what they are seeing and hearing. I for one, sure don’t understand the intricate details of credit and liquidity crunch well enough to have an informed opinion. I realize that if liquidity is a problem and it gets big enough to cause major harm, then the authorities will step to provide that liquidity. Much the same way that the US Fed did during the 2008 financial crisis. In well functioning economies, financial systems are not allowed to collapse. Too much is at risk for all stakeholders. As Seth Klarman recently mentioned in his lessons from 2008 article, “The government – the ultimate short- term-oriented player – cannot with- stand much pain in the economy or the financial markets. Bailouts and rescues are likely to occur, though not with sufficient predictability for investors to comfortably take advantage. “
There are other macro headwinds like oil prices and currency fluctuations. Some of these feed off on one another.
With that premise, at times like this, it is always better to take a hard look at one’s portfolio holdings and ask himself these three questions:
1. What really has changed?
2. How have the changes affected the value of the investments under consideration?
3. Am I sure that my analysis and understanding of the changes is rational and is not being overly influenced by the immediacy and the severity of the news?
As investors, our job is to understand the business we are invested in. We need to continue to focus on that business and the reasons why we have bought those businesses. Most of the time we get pulled into fruitless macro discussions, without pausing to ask how it impacts the companies we are invested in.
I am a strong believer in Warren Buffett’s statement that he never has an opinion on the stock market because, if he did, it would not be any good, and it might interfere with opinions that are good. I have tracked the short-term market predictions of many investors and have found that they were correct less than half the time. Bottomline is that no one knows what the future holds. And we can’t make an investment case by looking at the macros.
Another learning over the years is that if I have conviction in a particular stock, it is always prudent to buy on the way down in tranches. Most of the time, we wait till the dust settles, but by that time, the prices are back up again. Buying high-conviction stocks at a time of major uncertainty has proven to be a profitable exercise.
In ending, let me also say that these are times, when it is good to take a break from the markets and catchup on the book that you always wanted to read or the Netflix or Amazon prime show you always wanted to binge watch but never really had the time 😊
This article first appeared in Economic Times ET Markets - https://economictimes.indiatimes.com/markets/stocks/news/credit-liquidity-bonds-but-what-do-they-have-to-do-with-my-stocks/articleshow/65961776.cms
