Greedy, fearful and all that

Winding the clock back a year, to revisit a different world altogether

A year ago, just as Great Indian Sale went live, I wrote about investing amidst panic. A year, even one that feels a lot longer, is too short to judge soundness of words or actions. Further, it’s incongruous to discuss fearful at a time when greedy is the norm. However, this whole greedy-when-fearful thingy is best appreciated before memories inevitably fade. While I hope we don’t have widespread panic anytime soon, there will always be localized gloom around specific companies and industries. Buggy Humans can do no better than to think of stocks as businesses, have a long-term orientation and seek safety margin by buying into good businesses amidst pessimism. So, I am re-sharing my essay from March 3rd, 2020. I’ll subsequently revisit other writings from peak-panic-phase, including those that didn’t age well.


Investing when scared: Coronavirus edition

Which companies do I want to own at all? At what price? That’s all there is to my job. A short shopping list. Two columns: company, buy-price. On a well-caffeinated day, I know this in my head. On other days, I need a post-it note (yup, I am a Luddite). If prevailing price is lower, buy. Else, nap. As months pass, I update the second column. As years pass, the first.

Key question in every panic: does this change any line-item on my shopping list? This is the filter through which I parse every ‘terrible’ thing that happens in the world around me: terrorist attacks, election outcomes, stagflations, recessions, superbugs, selfie sticks. No matter how bad the event, it is professionally a non-event if it doesn’t impact my shopping list. During or after each existential crisis, it’s worth doing a line-by-line review, asking: Do I still want to own this company? At same price? With a high bar on the former, and a conservative approach to the latter, my answers are usually yes and yes.  

Why bring this up now? Writing about current affairs doesn’t age well. However, hanging boring yet timeless truths on a topical hook can make it stick better. Hence, this essay on investing through fear, with a click-bait title (sorry). I’ve been lucky in when I started investing. There have so many earth-shattering events that didn’t end up shattering the earth: Lehman panic, great recession, European country flirting with bankruptcy every summer, Brexit, election outcomes that broke friendships, stagflation, policy paralysis, something about Anna Hazare’s diet, demonetization, GST, assorted viruses including the current one. And some of these may have even left the world better off. While living through each event, it was scary as hell. However, focusing on the basic questions listed above, rather than on headlines, led to good things happening, at least professionally.

Why don’t the answers change? Assume that we’re not dealing with an extinction-level-event. A diminished near term outlook doesn’t really change what a business is worth. People avoiding travel and other discretionary spending would directly impact economic outcomes. More generally, gloom tends to feed on itself in unspecified ways, leading to indirect impacts that may be more material. I cannot predict how bad things will get or for how long it will stay bad. Let’s go with a few bad years as an unscientific placeholder. If you believe, as I do, that the value of a good business depends on its general trajectory over decades, a few bad years don’t change it by much. Further, some of what’s lost in bad years is subsequently regained. In any case, the reason for adopting a conservative approach to valuation is an implicit expectation that bad years are inevitable, although we don’t know when or why. The problem with stock market participants is that the most commonly used valuation shortcut is a PE multiple on (a monstrosity called) forward earnings. This is so habituated that most forget that this is only a surrogate for valuation, not valuation itself. When a crisis leads to weak and uncertain near-term outlook, this surrogate gets messed up, along with the minds that are accustomed to it. For those without such bad habits or who are able to look through them, value is roughly unchanged, at least for robust businesses that aren’t dependent on kindness of strangers for survival.

What am I not suggesting? I am not recommending broad-based purchase of stocks. At all times, retail investors have no business buying individual stocks. Further, despite a correction, many ownable businesses are expensive and many cheap businesses are unownable. For those smart enough to have an SIP into a low-cost index fund, nothing’s changed. Just keep it going. For professional investors with a clear objective function and investment process, it’s worth asking whether anything has really changed. For those whose objective includes a need to look smart over the near term, things have certainly changed. For the few who are lucky enough to operate with a longer time horizon (or who can survive looking stupid over the near term), I argue that not much has changed, though it may feel like it has. This is the time to back one’s investment process rather than second-guess it.

What if it’s an extinction-level-event? Chuck the shopping list. Eat gulab jamuns for breakfast. Tell those you love and owe what you should have already told them. Let kids know that screen-time is a myth. More seriously, while nothing has zero probability, we have to go by big history. Then again, we have no experience in this matter.

Why so callous? My idea isn’t to trivialize a biological crisis that comes with way more human suffering than a financial crisis. Since I have no expertise in either diagnosing or mitigating an epidemic, I might as well stick to less important aspects that I am qualified to comment on. The world can do without an additional person indulging in moral preening or pretending to be an expert (there seem to be more coronavirus experts than cases). I know nothing about the bug, its prospects, our prospects or ramifications of it all. All I am qualified to do is to share a limited perspective on how to view a crisis through a cold capitalist investing lens.

After 9/11, George W Bush asked people to go shopping. This time around, I don’t know yet if I will. But I keep my list vetted and handy, just in case.

(PS. I cheated a bit with my opening question. Its full form has an extra word at the end: Which companies do I want to own at all? At what price? Why? I mostly write about the ‘why’ part. A way of thinking, how to arrive at the shopping list, means to an end and all that. However, the end-goal of all my pompous philosophizing is to get to the list. And to act on it at a time when it’s excruciating to do so. To focus on the last bit, I downplay the ‘why’ part in this essay.)

Originally published at