Of recaps and year end report cards
We are going into the home stretch of 2022 folks! Not a bad time for a recap and ponder how you’ve gone about investing over the past 18 months. Why 18 months? Because the market started showing signs of froth from July 2021, the headline index rose from 15.6k odd to 18.5k odd in one straight line between August and October mid 2021. Mid & small caps continued to party through Q3 FY22 before gravity eventually got to that segment too.
Evaluating your own behavior during such market pivots can reveal the true patterns that drive your investing decisions. With the headline index reclaiming the 18.5k level, one can assume that the pivot has matured, though the action may not be fully done yet.
How to mess up at investing? Here’s the most common way
1) Buy stocks at prices that are higher than warranted, driven by FOMO
2) Keep buying the favorites of the previous run as the cycle turns
3) Sell out near to the bottom driven by fear
4) Perpetuate this cycle over time
When we look back at our monthly newsletters and the email communication to our paid subscribers, we kept harping “don’t chase prices higher” between July 2021 until April 2022.. Momentum can be a sexy train to hop onto only if one knows when to disembark, easier said than done. We ensured that (1) above did not happen. We took a few months to make up our minds on which pockets could be the next set of winners. While we aren’t completely sure of this yet, we did start taking a few calculated gambles starting from July 2022. These new additions are the ones making newer highs while the favorites of the previous run are stuck in a limbo. This is how every market pivot goes. This time around we weren’t guilty of (2)
In spite of this, a few of our decisions could have been taken far quicker in hindsight. We may well turn out to be guilty of (3) on the odd stock but that will hopefully be compensated by other stocks in the portfolio that do well. The value bets that we started taking in H2CY22 saved us through H1CY23. We did see the bout of volatility coming based on behavioral indicators but we could not have predicted exact mechanics of it. Once again, this is how pivots always go, one only learns with experience. Bad experiences aren’t easy to go through but they teach us best. Investors kept worrying about Brexit, Demonetization and the Trump era through H2CY16 only to get surprised by the ferocious small cap rally of CY2017. Those that lost their minds in H1CY22 over inflation, Ukraine and recession stare at the headline index level in disbelief today. Counter trend behavior is easy to think about but tough to execute.
You should objectively evaluate yourself on how you managed the market pivot over the past 18 months. Else you are doomed to repeat the same mistakes again.
The other thing to evaluate is if you enhanced your skills through the bout of volatility. Beyond a point there is no value in staring at the screen as prices trend lower. The brain needs to kick into action and get things moving when emotions want to stay glued to the screen driven by fear.
Looking back, we did make progress in CY22
- Increased the breadth of our coverage across sectors
- Started picking up a few complementary skills like Technical Analysis
- Beefed up the research team by making a couple of full time hires
I learnt this during my days as an operating manager that a dull business outlook is a good time to start investing into the business; for when the eventual uptick comes, you will be in a better position to ride the positive part of the wave. Today we have our analysts researching two new businesses every month in sectors like financials, capital goods & engineering – those we didn’t have much coverage on till last year. If you’ve been tracking the market you very well know that these sectors have been the outperformers since July this year.
We hope the effort of the past few quarters will pay off for us and our investors as the market goes into the new year.
On the personal front do make constructive (and realistic) NY resolutions and prioritize your health & well being over everything else. If you find yourself stressed out over things you don’t really care about, it might be time to take a step back and ask yourself some hard questions.
You may not be able to change too many things immediately but you might get to a better appreciation of why you do the things you do. Recognizing the patterns and motivations behind why you take suboptimal decisions is half the battle.