Where does the market go from here?
That’s the question that everyone wants answers to right now. One of the underrated aspects of investing is that even when there is a bull market underway, investing is never straightforward. There will always be enough voices on both sides; some making the case that the market is overvalued and the others vouching for how this bull run still has some way to go.
The bear case always sounds smarter and more prudent, that’s just how the human mind works. Fear beats greed to a pulp at the first sign of nervousness. This is why every bull run has those sharp 5-15% interim corrections before the real one hits. The repeating patterns that we see on the charts only indicates how human psychology plays out even when the going is good.
While this question is the one that hogs the limelight, most of our subscribers are smart enough and experienced enough to understand that the benchmark rarely tells the complete picture. Over the past 3 months the small & mid cap outperformance has already taken a backseat, even if they have made money in an absolute sense. The texture of the market is ever changing since investors compete with one another to squeeze out alpha through positioning and rotation. What is in vogue right now doesn’t offer value and what offers value has a few challenges to overcome before numbers start to get better.
In a Keynesian beauty contest, one is expected to vote for the contestant who is most likely to win; not for for contestant who one thinks deserves to win. A static investment approach that is driven off absolutes fails to take into account the game theory aspect of investing and is bound to suffer periods of abject underperformance in its long term journey. This is why we keep harping on timely calibration at Congruence Advisers, failure to do so compromises your ability to stay the course over the long term. We are practitioners who are in the business of delivering good investment outcomes over the medium term. We have seen some very intelligent individuals fail miserably at investing because they want to operate based on ideals and refuse to acknowledge the human aspects of their own behavior. Mistakes will be made by the best of investors, the key is to do enough things right so that these mistakes don’t set you back by too much.
Some of the finer questions to think about right now –
- What are the emerging pockets of strength?
- Are we still in a broad bull market or is the market narrowing?
- Which are the sectors showing signs of exhaustion? Where is momentum starting to fizzle out?
- If the NIFTY 50 has to move 10% from here, which sectors and stories can lead?
- If financials, IT services & consumption (> 50% of the NIFTY 50) are in a limbo, what is moving the index higher?
How does one synthesize these answers into a coherent set of portfolio actions?
For a start, just look at basic sector charts and get into the mode of inferential reasoning. Things are the way there are for good reasons, no investor can have a view on every single business and sector out there. We need to have a mechanism of benefiting from the wisdom of the crowd while guarding ourselves against the madness of the crowd.
A few examples below. One doesn’t need technical analysis skills to make simple price trend observations and too see which of the sectors among the below three are standing strong right now.
Clean trends that haven’t yet turned parabolic often turn out to be good fishing spots for medium term investors.
Growth investing should ideally be focused on these pockets where valuation is not yet pricey though the trend is clean and good. Value investing should ideally be left to those who have superior understanding of the particular business or the sector. We were comfortable taking a value bet on Greenply but we wouldn’t be comfortable doing the same on an NBFC today. Our understanding of the building materials sector is way superior to our understanding of lenders. Accepting the limits of your own knowledge is a healthy starting point for proactive risk management.
As a bull run matures, the calibration process should start with incremental capital. As the stocks that have delivered excellent returns start overextending themselves, cutting exposure is much easier if no incremental capital was deployed there over the past 6 months. You may not get every single move right but the sum total of all the decisions based on prudence keeps portfolio risk in check.
As a bull market matures and the market breadth starts suffering a bit, one needs tremendous clarity in execution. We can get away with nonsense in a bull market, a tough market makes us pay if we do not have clarity. Sitting on cash and waiting for the market to top out is fraught with risks too, it can take 2 years to make up for the underperformance if the market moves while we are waiting for a correction.
Time to be very nuanced, agile and have an open mind. Also time to stay balanced in portfolio allocation across market caps and sectors, what created alpha in the past 2 years is unlikely to deliver similar results from here. We need to manage the next pivot well (whenever it occurs) without giving up too much of the gains of the past 1 year.