The news has been dreary, to say the least. Or, as my colleague in Chicago, behavioural economist Steve Wendel says, “things are a bit nutty out there”. I have personally seen my portfolio dip dramatically in value. And I can safely conclude that this is not just my experience.
The most obvious factor is the coronavirus pandemic. Adding fuel to the fire is the crude oil war between Saudi Arabia and Russia. The Yes Bank crisis points to a bigger malaise in India's financial system. Infusing volatility into the drama is foreign players pulling money out of the Indian market.
As stock prices tumble, Mint had a very interesting article on stock market valuations.
Indian stock prices have gone up over the past 7 years without a commensurate rise in company earnings. The PE of Sensex stocks was 17.09 in 2012-13, and 26.89 in 2019-20, the highest in more than two decades. This means, on an average, investors were willing to pay ₹26.89 to receive ₹1 of earnings.
The daily ratio peaked at 29.18 on December 19 and 20, 2019, before plunging to 19.78 on March 12, 2020. Valuations are getting more attractive.
Which means that quality companies can be bought at much better prices.
Remember, declines are never a curse. Not if your vision is to create wealth years down the road. A tumbling stock price is not a tumbling business. It says nothing about the worth of a company.
Having said that, the coming quarters may be bleak and will test your mettle as a stock market investor.
In that light, I would like to share the views of VITALIY KATSENELSON, CEO and CIO of Investment Management Associates.
I remember 9/11. In addition to mourning all the innocent people who died, I remember being scared, like everyone else. Not knowing what is going to happen next is scary. I remember the continuously falling stock market. After a few months – it could have been weeks – the shock wore off. 9/11 sent the economy into a mild recession, not because of direct economic losses but because for a few months our patterns of travel and consumption were interrupted. The 9/11 analogy is anything but perfect, and there is no perfect analogy. But what I remember is that at the time I didn’t feel we could get back to normal. We did. Today 9/11 is just a distant memory, and COVID-19 will be, too.
Just look back on the last hundred years – the stock market and the economy survived two world wars, the Cold War, the Korean, Vietnam, Afghanistan, and Iraq wars, 9/11, the Great Depression and the Great Recession, not to mention the Spanish Flu of 1918 – and I am sure I forgot something.
Every single time, the market sold off and then it came back, because company earnings did not disappear. This time is unlikely to be different.
We are not afraid of a recession.
We don’t think the Coronavirus will send us back to Stone Age.
We do think the Coronavirus is most likely a recession-inducing virus, with its own unique characteristics and extra-scary headlines, including death counters on the nightly news. It will come with a lot of fear and uncertainty. But despite all the uncertainty and human suffering, the financial consequences are likely to resemble those of a moderate recession (higher unemployment, lower earnings).
Recessions are not the end of the world; they are a natural process, just like a forest fire that cleans out dead wood. Recessions are good for the economy in the long run, though the short term is painful, not just for investors but for people who get laid off.
But recessions end and the world goes on ticking.
We don’t own the market.
We own quality businesses with strong balance sheets, great moats, great management, and recurring revenues. Many of our companies pay great dividends, and most of them are non-cyclical (they will not be impacted by recession). We will look at each stock, value it, and evaluate its risk as the COVID-19 situation escalates.
The more rational we are, the better decisions we’ll make.
So we shall continue to stick to our process. We’ll continue to dispassionately identify high-quality companies, value them, and figure out how much margin of safety (discount) we need. The core of our process won’t change.
We will be flexible.
We may do tactical tweaks to our buying process. We’ll be buying in smaller increments. Instead of building a position through one or two purchases, we’ll buy in smaller sizes, because uncertainty induced by the virus may result in greater volatility and thus better bargains.
The headlines will get worse before they get better, but this virus will eventually die out. That is what viruses do.
