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Podcast #25: How do you invest through a panic?



‘If you were to think of yourself as not as risk averse and you can do a 50-50 allocation and you’re currently at 90:10 then take the remaining out of the debt markets over a period of time and invest over the next year rather than just now. Because if you were to time things then SIP wise this is a great time to start. You’re starting at a valuation that’s much lower than 2 months ago – in fact, much lower than probably 2017. Today you are getting prices of 2017, yesterday morning you briefly got prices of 2014. You get 6 years of economic growth without really having to pay for it.’

On today’s show, we discuss the extreme volatility in financial markets and the Covid-19 pandemic affecting our daily lives. Is this a panic? How to we invest through this storm?


Shray Chandra: Hi everyone and welcome to a milestone episode of the Capitalmind podcast. This is episode number 25. We’ve been doing this for just over a year now and it’s really been lots of fun. And while I wish we were doing this under less stressful and difficult times – but today’s episode promises to be fairly interesting. So just to get us started, I’m Shray Chandra, and I’m here with my colleagues Vashistha Iyer and of course Deepak Shenoy. And we’re here to discuss what has really been one hell of a week.

So Deepak, what just happened? Yes Bank failed, and that feels like it was a lifetime ago. Fintech startups, some very big names were out for a couple of days. The coronavirus has started gaining traction even in India. Oil prices fell by a third. And then the stock markets collapsed dramatically – the Nifty hitting a lower circuit and then finally rebounding late on Friday afternoon.

I think we’ve aged years in a week. Can you help us put this in perspective… what’s really going on?

Deepak Shenoy: I think the Chinese curse has hit us all. We’re living in interesting times. More interesting than we wanted. But that’s how it is. The three things that seem to have impacted us the most – and you’ve mentioned them – is the coronavirus which we don’t really know the impact of today because we only know in bits and pieces about how crazy it was in China, how crazy it is in Italy and Iran and right now how crazy it’s likely to be in the US having announced an emergency about it and how India is also reacting to it which is by cancelling all Visas of foreign nationals, by tracing every single individual that’s come in and tracking how they’re doing in terms of quarantines, in terms of isolation.

The panic that seems to be ensuing is actually gonna cause a lot more damage than perhaps the disease itself. I’m not saying that the disease is not killer but it is definitely — it spreads a lot, but by definition something that spreads a lot but doesn’t kill too much is actually a pandemic (panic-demic?). It’s something that can really really cause pandemonium. That panic itself is causing a lot of fear in the economic markets. So you have a fear of shut downs, businesses shutting down, lock downs so you can’t leave cities, you can’t leave territories. Businesses not allowed to function because they involve people gathering like restaurants, pubs, bars and parks, sports facilities, and clubs. So you have all of these things causing further layers of panic and that’s what’s also brought the stock market to an extreme. Add to that the Indian layer of things witch Yes Bank. So Yes Bank bank being a scheduled commercial bank – 300,000 Crores in loans roughly. They have a huge balance sheet. This was the fourth largest Private Bank, probably the fifth even now. We Had to set up a moratorium last week.

(This) spooked a lot of depositors who couldn’t take their money out because until the moratorium is lifted – which will be next week as we’ve found out yesterday – for this time they won’t be able to touch their money. This causes a payment crisis for integrated partners – like the startups you mentioned and also of course the fear is that people now no longer trust private banks and they start saying as soon as the moratorium is lifted I’m gonna move my money to a public sector bank.

They start moving their deposits from other banks to public sector banks, just because they’re afraid. So this causes another layer of panic and you can see parallels because the way the reaction is with the coronavirus, where you said OK, we have to panic early. We have to stop people from meeting. So we’re gonna setup the rules that don’t allow people to meet. And therefore slow down the spread.

In a similar way the Yes Bank moratorium in a sense said we won’t allow you to withdraw deposits more than Rs. 50,000 until we’ve sorted out this mess. And when we’ve sorted out we hope that the exit of depositors will be slow rather than all sudden which would cause a crisis.

The third thing that’s added to this is the fight about shale oil and crude oil between America and Russia and Saudi, where Russia refused to cut production of crude and Saudi said listen I’m not gonna be the only one cutting. And Saudi said I’ll actually increase production and this has resulted in a massive drop in crude prices from the late-40s, early-50s to as much as 31 dollars a barrel. This massive reduction causes, in the short term, credit freezes in the US because a lot of these (shale producers) are financed through junk bonds – or what is called the high yield market. The high yield market is frozen and in order to now ease that we’ve had a lot of regulatory action and now that is actually soothing markets’ nerves because everybody is in panic mode but it’s probably gonna help in the longer term. Some of those include rate cuts. So America’s cuts rates – 50bps. Canada’s cut rates. England’s cut rates. Australia’s cut rates. ECB has promised to add more money because they’re already in -0.25 – they have no idea how to cut from there. And you’ve got a bunch of regulatory measures as well.

Fiscal measures as well. From the US you’re gonna get a bit of stimulus. From the US you’re also gonna get 1.5 Trillion Dollar QE. That dwarfs I think the first two QEs put together. Perhaps all of them. But we’re getting all of that literally in one or two days just to be able to calm markets. Yet markets have been down tremendously and surprisingly when the US announced emergency yesterday the US market went limit up. So it’s been a very interesting week. And in all probability the coronavirus is just getting started. Like Vashistha told me earlier today we had a 100,000 cases last week. Today we’re at 150,000. And India hasn’t even gotten started. So I think there is a lot more to come. But this is probably what they say is the prelude – the opening act of what is gonna be an interesting two months.

Shray Chandra: All right. So, when I look at it you know thinking of the stock market collapse that happened on Thursday and a bit on Friday before the recovery, there’s this famous quote which is obviously attributed to Warren Buffet which is “Be greedy when others are fearful, and fearful when others are greedy”. Well my experience was pretty weird. Everyone I met kept asking me are you buying, or is now the right time to buy. That’s extended all the way today to WhatsApp and email and the like. So do I just know a lot of contrarian people or what’s the deal here? Do you think now is really the time when you should be piling in or what do you make of this situation?

Deepak Shenoy: So you know Shray the worst part about experiences – you end up being more cynical than you should be perhaps. But one of the problems that you have been like through a 2008 style disastrous collapse is that you know that the first fall isn’t the final fall. We’re really 20% away from the peak. And let’s try to put that analysis on two layers – quantitative and qualitative. So right now in the last three months foreign investors have taken out 39,000 Crores out of which 25,000 Crores are in equity alone. And 39,000 Crores is more money they’ve put in the first two months. So, literally just March has offset whatever they put in Jan and Feb.

Vashistha Iyer: It does seem like it’s just the FIIs are being afraid. Everybody else seems to be greedy.

Deepak Shenoy: Yes. It does.

Vashistha Iyer: We had the highest inflows in February right.

Deepak Shenoy:  We had about 8,000 crores more in February. So it seems like people are greedy when FIIs…

Vashistha Iyer: And Institutions are matching whatever FIIs are selling.

Deepak Shenoy: And literally yesterday I think there was a 6,000 sell by FIIs and 5,800 inflow by domestic investors. So in a way Institutions (and retail) seem to be negating each other out. And the retail, some of retail, is panicking. Some of retail is putting in money.

Vashistha Iyer: But have you seen, like, in our own community and as Shray was saying, everybody seems to be saying ki kya khareedein. What should we buy? Give us ideas. And even Twitter seems to be: boss – bottom is done. Let’s buy. This is a great time to buy. If you’ve been waiting for 2008, don’t wait any more. This is what you’ve been waiting for.

Deepak Shenoy: Yeah, so I think one of the things that you know if we get to a point of understanding of where things are you’ve got to balance this out with a little bit of subjectiveness, and a little bit of data. Let’s look at the objective part. Let’s look at the past history and say would this be the time to literally sell your neighbor’s house and buy everything?

The answer has been that in the past a 20% fall hasn’t really been indicative, in such a short time, has really never been indicative of the amount of time it takes to form a bottom. From 2000 we calculated about 12 such times when the market has fallen more than 20% and then from that point has recovered 20%. So actually we fell about 30% now hitting the lower circuit and then the market closed down 20% from the peak.

Vashistha Iyer: Yeah that 30% was just for 10 minutes.

Deepak Shenoy: Yeah, I won’t take that as too much but assuming that you know we were to track this. We’ve seen a number of days. So for instance in 2001-2002 you had a 218 process of bottoming out. That means it took 218 days from the top to bottom. And the bottom was roughly 41% below the top. In 2010-11 there was a 29% fall from the top to the bottom. It took 414 days. So like this you tabulate all of them. The fastest fall was in 2006. Only 44 days to find a bottom of 32%. Now what is a bottom really? A bottom is a point at which if you had bought you would have made 20% from there at some point. That means wherever the bottom was if it fell from 6,000 to 4,000 from 4,000 if you had bought it it would have gone to 4,800 and that 4,800 is a 20% gain for you. So that’s all I’m asking about.

So if anybody is buying today, they’re saying listen the market is gonna recover 20% from here. The answer to that question is that we’ve had about 60 days from the time we made a top. That was an all time high. To now. In these 60 days we’ve fallen roughly 20%. And in that is 20% this a bottom? So the median number of days to find a bottom in the last 20 years has been 118 days. Average is a little bit higher. That’s roughly twice the amount it’s taken now.

If we were to be an average correction, we’d have to spend another 60 days sitting here waiting to find the bottom. And even then the recovery will still be 30 or 40 days away, and assuming that you could find the bottom I think you’d be able to establish that you’ve found a bottom in about 120 days roughly. So given that I think you know waiting for another 2 months or 2 and half months – I’m talking calendar, not trading days – so in effect you should wait another 60 days for finding a bottom.

But also, quite clearly looking at the subjective aspects of things – is corona done yet? No. We haven’t yet seen panic hit the street. Just assume that Corona becomes a big thing in India. It will – it’s not about if, it’s about when. The problem that we’re trying to solve right now is not that the Coronavirus will come to India. It’s just that we don’t want to overwhelm the medical system by having all the cases hit us at once. That’s why we’re shutting down so that people don’t have to congregate. And therefore there’ll be one off cases that will slowly rise, and they’ll be controlled over time.

That means that everybody in India in some way or the other is going to get impacted at some point. The question is about when. We are at a relatively early spread situation. Which means we’re less than a 100 cases. Let’s assume we’re probably at 5,000 cases, we just haven’t tested for them. Remember that comorbidity – which is basically saying older people get impacted a lot and older people who do get impacted have other conditions like diabetes and heart diseases and so on. There is a potential that when they get impacted people don’t think it’s a coronavirus they think it is one of the other factors. So there’s a lower diagnosis of the disease. So the impact right now probably is not even known. So once it starts growing is when we’ll see how bad the spread is. The economic and social impact of it is still minor. You’ve seen restaurants shut down. You haven’t seen businesses have to completely shit shop because they can’t afford to pay rent or their salaries any more. That’s also gonna happen at some stage because we hope the current shutdowns are only for a week each. That’s all you need actually to help this spread slow down. More people to work from home.

And because at some point life has to get back to normal. And given the way this disease spreads, as long as we get enough people inured from the virus so that people who are affected are lesser in number, that will come across. You’ll be able to control the spread of the disease. I think where we are right now, is the early part of the crisis. We haven’t seen onset. We haven’t seen numbers. For a country the size of India, 5 or 10 thousand is nothing. Remember these are affected cases. The number of people who actually die from it may be a substantially smaller quantity as well.

Until those numbers come – think of them as levels – the first level will be when it starts to affect all the major cities, then the numbers start to hit 1,000 – 2,000. The second level will be when it starts to hit 10,000 and 15,000. It’ll probably start turning back only when it crosses 25,000. We’ll be able to know if the numbers are still growing exponentially or slowing down. The slowing down part is when there is a recovery. Put another way, how many of us actually know someone who has actually got the coronavirus. None of us probably do. And I don’t know anybody. We’ve now heard of anybody in the (Capitalmind Premium) Slack group that we have of people who’ve actually got it.

Once we find that one person – I know the name, I have seen this person, I’ve met him at some point in my life – and that person has got the virus. That’s level one. Level two will be somebody like literally next door to you. So it’s like in your neighborhood, in your school, in your office, that you know personally and therefore you could have at some point in the last few days been in contact with this person and potentially gotten it. That’s level 2.

And 3rd is when you’ve had some kind of direct impact – within your direct family and so on. So these are the three layers at which we should expect it to happen. All of this will happen over time. If it happens over the next 3 months saying one month later I hear somebody, 2 months later somebody in my neighborhood get it, 3 months later I might get some small symptoms of it, then it’s OK. But if all this happens within a period of one week, then the spread is substantial. So you have a much more spread out disease. I think the crisis is not over.

Yes Bank situation may have been resolved to a certain extent. You have a situation where they’ve announced a moratorium to be removed on Wednesday. So hopefully that will be behind us. We’ll see how that evolves as well. Hopefully that does not result in more bank related panic. But the rest of it I think there’s still a lot of time to come. And therefore if you think of a person saying this is a time to buy, I’m saying this may not be the only time to buy. This is a good time but there will be equivalent times or worse. Another way to look at things is the Nifty price to earnings ratio.

Right now it’s about 19. Which is average. Roughly decent amount of time is spent here. This is the average time to buy and this is not a great time to say listen sell everything else and just buy equities. If the Nifty PE were to fall to 14, it would be a fantastic time to buy.

Shray Chandra: But what does that mean – what levels would that correspond to.

Deepak Shenoy: Given the Nifty earnings right now, it corresponds to roughly around 7,500. Give or take a little bit of earnings growth, we’re talking about 8,000 levels. It’s not too far away when you say oh, this is a great time to buy. But right now I’d say best this is buy, but buy in chunks over a period of a year. And when it reaches those points when it’s so juicy that you can’t stop buying – that is the time when you’ll say I’ll put in a little bit more money.

Shray Chandra: Well, one thing that’s just struck me as different this time – when it comes to the 2008 crisis that we’ve now heard of incessantly, or the other sovereign debt crisis or other crisis we had. They were all in some senses financial or in some cases market crisis which then had painful real world impacts. Here it seems to be the other way around. We’ve started with very painful real world impacts. Things are slowing down. Economic activity has really slowed down. Or stopped in some cases altogether. And that is in turn, justifiably I guess, spooking the stock market and other financial institutions. So since we haven’t seen one of these in a while, maybe 9/11 was the last one that we’ve heard of in that sense, how is this kind of a crisis different?

Deepak Shenoy: You know Shray the issue with financial crises is that they are financial market led crises and what they do is they freeze the markets. They freeze liquidity. So as a business I want working capital – I’m not getting it. This can be solved financially, right. Somebody can say listen I’ll inject capital and I’ll make sure people lend to you. So you then can continue your work. See a drop in aggregate demand but over time that can be solved by using purely measures of liquidity and additional financial capital. But one of the things that happens in a real world crisis is – and this might actually be quite optimistic as well – is that it tends to be formed out of less leverage rather than more. Which means people are actually seeing a lack of both supply and demand.

People who produce goods can’t get them to me because the people on the ports aren’t working and so on. That’s a supply side problem. The demand side problem is that if I stay at home, I’m not gonna go anywhere and therefore there’s no demand for oil or petrol or crude or restaurants or pubs or therefore electricity and so on. So there’s a lot of demand side pressure that goes down.

Both of these are problems. Because they can affect everything. And the financial economy is obviously scared because if I give you working capital today, you can’t do anything with it because you don’t have people coming in to work in your factory. So when this crisis goes away, there’s gonna be that problem. What’s gonna happen right now is people who are looking there and saying listen I need a lifeline – I need to be able to pay my workers. Because if I don’t pay them, they’ll never come back. I’ll never be able to restart my factory. But if I pay them and they’ve not got any work done from them during the time I’ve paid them, I will go out of business. So you need to be able to either give me a loan or give me a grant or give me time. There are landlords in the US saying listen if you can’t pay rent because of the coronavirus, I will not charge it to you. So I’ll give you a month free. This is stuff that we have to do but also with technology a lot of the things – there’ll be time compression of recovery. So if you look at where we are today, and where we were in 2000-2001, if you got a similar crisis around at that time, just getting people together would’ve been a lot more difficult without let’s say tools like WhatsApp and Twitter that are so ubiquitous now that you could form sub-groups… China is much more matured and they track every citizen.

Vashistha Iyer: On the flip side we wouldn’t have panicked this badly.

Deepak Shenoy: Yeah I mean it does add to both layers. You get panic at some level. You get WhatsApp education from a university that tells you, you know – drink a lot of water.

Vashistha Iyer: Does drinking alcohol help?

Deepak Shenoy: Well it helps a lot of things I guess. But that’s the one thing I liked about the WhatsApp message. Because if you had alcohol, it’d kill something in your throat. It’s good to have justification. Let’s see if after a while it’s medically confirmed.

But the interesting thing about this is that it both helps expand and address the panic. It will also help with efforts to reconstruct the economy. Today a lot of people in cities live alone and are above 60 years old. We know that people above 60 are at maximum impact risk from the crisis. Can we as a citizenry, today (vs. say in 2000) decide to try and help people who are above 60 living on their own in localities around us? If I had to do this in 2000 I would have to start calling people on the phone and say in your locality please do this and try to coordinate all of these things. Maximum effort would be local, might be able to make some kind of basic website up which would take time. Today you can do this on WhatsApp very fast. The reconstruction effort after this is over (corona situation is under control), can be relatively much faster today. We’ll benefit a lot from being able to coordinate this crisis as well.

This also means that a real main street crisis vs. a wall street crisis has multiple layers of solutions. Some of which can be fiscal, some of which can be community based, some of which will require to be financial – it doesn’t necessarily only need a financial source of help. But we do need finance as well because if I need to refinance my loan and you’re going to increase rates for me then I’m going to have to shut down my business. I need lower rates. India has extremely high rates and all the other countries seem to have recognized that rates are too high and we cannot keep high rates. So therefore they have cut their rates to ease their economies substantially. India hasn’t yet – I think it will. In this process I think both the community efforts will help as will fiscal measures from the government or perhaps from other sources. It’s different but I think from a recovery standpoint that it will not take as long as a financial system based crisis.

Shray Chandra: All right. Let’s move back to financial markets for a second. And confront the question that we’ve been getting for the last few days. How do we play this financially and how do invest now?

Let’s think of two scenarios. The first one where you’ve been fortunate enough that for some reason you have cash lying around or you have a lot more debt than you wanted or /or you need and (debt funds not loans) and now you have the ability to deploy funds into investments. How would you advise that person to invest?

Deepak Shenoy: This is interesting because two kinds of people end up having a lot of cash. One is a person who is actually quite risk averse. Your choices as a risk averse investor will not really be to go to equity. But you will want to avoid a (potential) crisis in the debt markets. A debt market crisis can come from corporates not being able to pay down their debt. So you want to reduce the amount of corporate exposure and hope that PSUs or banks will be better able to pay. We’ve not had a bank failure in India and don’t think we’ll get one (even YES bank will fully protect all deposits and most bond holders) so if you were to buy funds I would say look at government securities based funds that are shorter term.

If you don’t mind investing for the longer term and believe, like we do, that interest rates are going to come down or not go up from here then government secured GILT funds that are 5-10 years in duration and you’ve got PSU and Banking Debt Funds at the other extreme you have overnight and liquid funds. Those markets tend to be reasonably secure. I’m not saying they are totally safe. Of course there are fixed deposits with banks and their fixed deposits with government institutions like post office deposits etc. These are also avenues you could look at.

If you were to think of yourself as not as risk averse and you can do a 50-50 allocation and you’re currently at 90:10 then take the remaining out of the debt markets over a period of time and invest over the next year rather than just now. Because if you were to time things then SIP wise this is a great time to start. You’re starting at a valuation that’s much lower than 2 months ago – in fact, much lower than probably 2017. Today you are getting prices of 2017, yesterday morning you briefly got prices of 2014. You get 6 years of economic growth without really

Shray Chandra: Without having to pay for it

Deepak Shenoy: Yeah! That’s effectively how you can think about it. If you’re saying 2017 prices to now we’re getting 3 years of economic growth which hasn’t been great but it’s still better than nothing, you also know in your mind this could also get worse – do an SIP – it doesn’t matter. It’s so much easier to say I’ll start now and add more later. Psychologically it adds to the behavior that if it goes down you can invest a bit more and still have money in debt (sidelines).

Vashistha Iyer: SIP into what Deepak? We did a webinar yesterday with our premium customers where you showed how bad SIP returns have been on Nifty

Deepak Shenoy: Yes, it has been bad on the Nifty but that also means that equities which are volatile tend to create pockets at which today the earnings are low but if you look 2 months ago the returns were far superior.

That means when the Nifty starts to make all time highs, your returns look reasonable once again but if you look at lows like yesterday, the returns are temporarily low. If the equity market is to perform equivalent to the underlying economy itself – the nominal rate of return the economy gives you, it’s likely the stock markets will also give you that much. If you look at 6% economic growth and 4-5% inflation then you should get 10-11% p.a of stock returns.

From 2010 to now, 11% returns should have pushed the index to 13-14,000. If it hasn’t reached those levels you are lagging behind the economic growth that the country has given you in the first place by nearly 35-40%. This is a bullish case for starting your investment, just a reversion to mean where you just get economic growth and no premium to that, you should get about 30-40% from these levels. But it won’t come immediately. It may come over the next 5 year. It may not just be 35-40%, it might add the economic growth of the next 4-5 years as well. What happens because of the underperformance of the index over the very long term, you get outperformance if that is the point at which you start investing.

One of the fundamental problems I’ve also had has been that we’ve never had meaningful earnings growth come into the index for the last 4-5 years. We were paying a lot but there was no growth coming in the economic engine itself. The earnings weren’t moving. For the first time, the last 6 months has seen economic growth in the index itself. Of course the next 2 months/quarters will be horrible, we already know that, but the subsequent 2 quarters will then see a mean reversion as well. If you don’t watch movies for 2 months then all the blockbusters will be released after the crisis is over which means you might start going to 4 movies for some months rather than 1.

Economic activity is also going to be bunched for another two quarters so we expect earnings also to be bunched around those 2 quarters. Earnings will be bad for say 2 quarters and then much better for the following 2 quarters. It will balance out from an earnings perspective. If earnings growth continues to remain then you’re getting an economic engine at a fair cost. I’m not saying a very good (or cheap cost) but a fair one. It might get to a point where you can buy a rupee of value for 50 paise, I hope that doesn’t happen because it implies a rapid destruction of market value from here but if it happens then it really becomes so cheap. From an investing standpoint the prices are fair so I’ll invest at a fair level as well with SIPs increasing but when it becomes very cheap then I’ll bunch say 6 months of SIPs and put it in today. That’s more like an investment plan for a crisis – my answer to whether I should put everything in today is No unless the market is so cheap it’s like shooting ducks in a row. But this is too much Buffett already.

Shray Chandra: So let’s push for some names, if you’re looking for where to put your equity exposure now, would you like at large caps, just do index funds, where would you go?

Deepak Shenoy: The large cap mechanism is this, all of the big money comes into the large caps. We’ve seen FIIs pull out money, they’re getting a 1.5 trillion dollar QE in the US that’s Rs 100 lakh crores, assumes 0.5% of that trickles into India, and the last few QEs it has, that’s Rs 50,000 crores and that’s more money then all of these folks have taken out in the last few months and they’ve caused a 25% drop in the market. Assume they cause another 20% drop in the market, they’ve still taken out only Rs 50-60,000 crores and that money is going to come back just through the trickling down of QE. Where’s the money going to go? It’s not going to go into small and mid caps.

And look also at Indian behavior, if we’re upping our SIPs in Mutual Funds, MFs will buy large caps because if you put 18,000 cr in a small cap fund he has no small caps to buy. If you consider Rs 18,000 cr in a mid and small cap fund then every investment of his is say Rs 180 crore. If each of these investments is 5% of the company, then the companies have to be Rs 9,000 crores (or is it 3,600 crores?) – there are maybe about 70 companies of any investable nature of that kind. That’s not enough for a mid cap fund. So I don’t think the money goes into small and mid caps, the money will start going into large caps and that will trickle down. So investing in large caps is essentially like investing in the Nifty or the Nasdaq 100. The guys who make money in this downturn are likely to be like Zoom or Amazon (I don’t want to go to a shop so I’ll order on amazon) or i’ll work from home and use Zoom or Microsoft teams or I’ll use my Android phone with Skype on it.

All of these are products owned by listed companies in the US so you want a combination of these. We have a combination of these in Capitalmind wealth, just to plug our wealth management service here, we do this consistently we have a 33% allocation to the Nasdaq 100 and a 67% allocation to the Indian top 100 and this actually becomes a very simple way for you to invest without having to think about which stocks to buy.

I don’t know whether HDFC Bank will be the leader of the next (bull run) movement and I don’t know if Reliance will be the leader of the next movement. All I want is the top 100 whoever that might be. If in 5 years the leaders have changed, I don’t want to make the prediction of picking the winners, I want that decision made for me, you can accomplish this by buying ETFs (index funds works too, in some ways even better) a combination of India+US index funds/ETFs has done better than 85% of the large cap oriented mutual funds in India over a long period of time, unless you’re a stock picker you should just choose a passive way to invest.

Shray Chandra: Ok. That covers one scenario. Now let’s look at the person who like most of us is already substantially invested and has unfortunately now seen sharp losses and isn’t feeling too great. What should they do?

Deepak Shenoy: Two things about these losses. You start feeling risk averse and feel like you should have taken less risk. There is the Uncle Point which I think was in a Jack Schwagger book.

Shray Chandra: As long as it wasn’t Warren Buffett.

Deepak Shenoy: This guy talked about the uncle point at which you give up – what’s the point for you? If you’ve invested 90% of your money in the stock market and you lose 35% – you’ll feel absolutely miserable. This is your uncle point and you’ll stop doing more. If you haven’t reached that point yet it might still be wise to stay put but not to add more because your concentration in equities is still fairly high.

If you feel your concentration in equites is fairly low then you can still build up now simply because when sequences haven’t happened, you still haven’t found if people who have got the virus are close to you, you haven’t found the market ridiculously cheap – none of these events have happened that point you to stay the crisis might be over. Therefore putting in a lot more money at this point is a bad idea.

If you’ve taken losses till now, if you’re feeling really miserable then take out some money and put it into debt funds. If you’re not heavily already allocated to equities (if you were 75-25, you’ll now be 70-30 from the fall) if it’s fallen to a point where you can add more and still be comfortable – that’s the time to start adding over the next 6 months. It’s a very boring thing I’m suggesting, most things people like to hear “this is the time! Buy everything that’s available! Buy HDFC Bank, Reliance!” Unfortunately that is not the right answer at this point and I think the issue really is that you want to make decisions but at this point you should not want to make decisions, you should want to figure out when you’ll need to make the real decisions.

Right now is the time to sit back and say – if this happens I’m going to put in more money, if that happens I am going to take out more money. If all those decisions are made right now you’ll end up feeling miserable. The other point is that the zen thing. You have to take yourself a little bit away. The more you talk to people who are making decisions for themselves, the more you panic internally. If somebody is buying groceries today you’re like I should buy groceries. If someone is saying I have 3 months of toilet paper and you’re thinking you don’t even use toilet paper (this is an Indian joke) you might buy 3 months of toilet paper. The problem really is that people take decisions sometimes simply because they feel the necessity to take that decision now rather than delay that decision till later. It may be time for you to start thinking about the fact that looking at your portfolio a little bit lesser. Trying to make decisions slower than they are will actually help you go through the panic – it’s like your own coronavirus in your brain. It’s causing panic and you have to shut things down before you start making decisions.

Shray Chandra: All right. Let’s run with that. You’ve been through various financial crises before. I believe you were running an algo fund during the 2008 financial crisis. What if you do nothing. You only react after this whole thing is over. The markets are up 20%. You didn’t get the bottom and every time you go to a party in the post corona world and everyone you meet tells you how they traded brilliantly are now up to X or whatever. Other than the social shame and Fear of Missing Out, what’s your advice in general about trying to figure out the bottom and whether that’s realistically possible?

Deepak Shenoy: Yeah, the biggest fear is missing the first 20%. I caught the bottom vs. I caught it 20% higher. Let me give you the example, it’s a bad example but (it happened to) me. I was sitting in Oct 27, 2008 in Delhi in my in-laws house and I was trading the markets at the time. The market had fallen from 6,000 in January and by July-August it was at 4,000 and by October 26 it was at 2,800.

On that specific day it had fallen for a few minutes to 2,200. I had gone long at 4,000. Remember 6,000 to 4,000 is a 33% fall and it was a bigger fall than we’ve seen so far in 2020. We thought if the market has fallen 33% then there can be no more. Then I saw it fall another 25% all the way to 2,800 and I was like – fine – I’m fine here. I can put more money here. The market then slipped to 2,200 for a few minutes. This is 600 points – another 20%+ – further down. I don’t know anyone who would have the mindset at that time to say sell whatever else you have and buy stocks like crazy at 2,200. Today it sounds very easy but that time it was absolute pandemonium. You couldn’t press the f1 button which is the button you need to press to buy on that terminal – I just couldn’t do it.

Now obviously some people bought in at those levels (almost by definition) and it went to 2,800. If you had bought at 2,200 and you are where you are today – in 12 years you could have got 4x your money. If you would have put in 1 lakh – you would have 4 lakh. Forget that, let’s see I missed the first 20% and you enter at 3,000 which is nearly 35% up. I’ve missed the first 35% of the recovery, I would have still made 3.3x – 1 lakh would have become 3.3 lakh rupees – I would still be fine.

Let’s say I missed another few months and I didn’t even do anything because the first recovery happened in 4 days. Even if I didn’t do anything and I waited for the last intermediate high to be taken out – that happened in March 2009 or so. If I waited till then and then bought, I would have still bought at 3,200 which means my 1 lakh would have become 3 lakhs. It’s still meaningful and it’s still ok for me to do it. So if you miss the first 10 or 20% – it’s not going to kill you, you may not have bragging rights and perhaps all of us don’t need bragging rights. If you do this SIP mode one of your investments will be close to the bottom. So you can always use that as bragging rights and say I invested at the bottom and you don’t need to tell people that it was only 1% of the total amount you invested.

I might be completely kidding myself, there may be no impact, there may be a vaccine found tomorrow and markets will go straight up from here, in which case also, because you did an SIP – you would have had one SIP in on Monday and that would still be close to the bottom

In one way the issue is you can’t find the bottom – if you are a gifted stock picker – that probably isn’t listening to this show in the first place, most gifted stock pickers can’t find every single bottom so at some point it just makes sense to say do it in a meaningful way. If the market has to go from 1,000 to 3,000 – does it matter if you get in at 1,000 or 1,200? Answer is maybe, maybe not. It’s not a meaningful difference. In 10 years, a 20% return on the market – ok a 15% return in the market would give you roughly 4x of your money. So your 1,000 will become 4,000 (mistakenly says 1,400 ignore).

Whether you got in at 1,000 or at 1,400 will make no meaningful difference for you. In fact you’ll probably have more confidence at 1,400 than when it is languishing at 1,000 so you’ll put more money in at 1,400. So you are quite likely to have made more absolute money at that point. I’m talking of a stock that only increases 15% p.a – I say only because on twitter you can find people who can make 15% every day. So it’s almost like saying if you’re gifted you still can miss the 40% and still be ok.

Shray Chandra: Fair enough. I think on that note we can call it a day. So everyone let us stay safe and hopefully the next podcast we do doesn’t have to be on Zoom. See you next time! Thanks Everyone!

Deepak Shenoy: Thanks everyone! Wash your hands and be kind to your family and hope all of you are safe.


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