The past few days have been terrific to be in the markets. Indices are hitting new highs every day, broader stocks have begun to perform and portfolios are looking good. However, I’m currently facing a problem which I guess would be faced by some, if not all of you. It is, how do we deploy additional money to work when the prices have moved up significantly from what they were, not just in March-April of 2021 but even in January 2021 when the last time market had peaked.
Last bear market was party time for investors. I remember literally running around with joy as the prices fell every day and you could buy the best stocks at throwaway prices. Reliance was 900, SBI 150 and ONGC 50. Anyone who was courageous enough to invest when the markets crashed, made a significant amount of money in close to one year or less. Someone who was prepared with research on stocks to buy, had cash to average down as much as possible and to hold a portfolio which was down 40% found it exciting to be alive in those days.
The tables have turned now. Some of the stocks have hit fresh lifetime highs and are going North every week. Let’s say a broking company. If you thought it was available at 10 times earnings and was a steal, it moved to 25 times earnings in a month and you’re not sure if you want to buy more of it. This is the classic Bull Market dilemma: Do you want to invest more and find out it was the top and you’ve no money left when the markets turned? Or, do you want to hold some cash for the elusive correction and see the markets double from here and miss on the biggest bull market in history( if it turns out).
People who have seen a bad bear market always face this dilemma. Listen to veterans who said they were afraid consistently to buy stocks in 2004-05 as the prices had doubled in two years and didn’t know if it was the top. Same goes with US markets as the bull run which began in 1982 lasted until the dot com crash in 2000-01. This was the longest bull run in American history, only intercepted by Black Monday crash of 1987. Our Sensex went 5x in 4 years between 2003-07. So the dilemma is not without parallels. We can only be wise in the hindsight. As long as the cycle lasts, you can only do as much. This is why investing is simple, not easy.
People say bear markets are the time to relook at the portfolio, get out of junk,do more research and so on. This sounds anachronistic to me. I believe that a bull market is the time to be concious. You mustn’t be fooled by rising prices as being correct or being an expert stock picker. You should always remember that a twenty percent crash can happen any time. So you must not buy junk, at any point, at whatever price. This will help you sleep peacefully when the portfolio is down 30% because you know that the underlying businesses are sound and making money.
As prices move up, you are forever torn between the temptation to buy more or holding cash. I personally have found it against my nature to hold any cash with me. There are big guys like Seth Klarman who held close to 40% cash( for his portfolio, it was almost $10billion) for over seven years before finally deploying in 2020 Covid-19 crash. Why I don’t keep cash is because timing the market is a bit speculative activity. Being proven right has 50% chances. If I can identify companies which will grow bigger and better over the next 5-7-10 years, I should be willing to see their prices go all over the place for three-six months because the underlying business will work out well.
The fear of not having cash is also real. If the markets go down 20%, you’ll be able to average down even more and will have more quantity of the stocks you own. However, in case you can’t do that, all that you’ll miss is a transient opportunity of owning more at less. This is life. Nobody has limitless supply of money to keep buying whatever you want when the prices fall. You are not the Fed, period.
The saving grace is my belief that this is a long bull market which is yet to even mature as more and more prominent voices remain sceptic. As an Individual Investor, you’re free to underperform the market and hold a minus 30% portfolio for two years without losing your job, as long as you have conviction in your holdings. The joy of making money in the long run is always the ultimate objective. In the short term, the tug of war continues between Fear of Missing Out vs Is this the Peak!
Life is all about Compounding! 