If you thought that there are bulls and bears in the market, you are grossly mistaken. The market has always been about opportunities and always will be about opportunities. A bull will not keep buying even when they see a shorting opportunity and the same holds true for the bears. Remember the old adage in the market, “Bulls and bears may make money but pigs always get slaughtered”
Bullish and bearish are just states of mind…
Are you bearish or bullish on markets? Is this not the question you have heard umpteen times? Quite a tough question! What do you do in this kind of a market where the Nifty has moves up 80% from 5200 levels in August 2013 to 9100 levels in Mar 2015? And then, the market volatility intimidates and threatens to give it all up.
Should you be a bull or a bear at this moment? The bigger problem most investors face is the bombardment by 24X7 live media which keeps throwing esoteric words like bull market, bear trap, short covering, bottom fishing etc..
In the real investment world, most of these words really do not add much value. As an investors or a trader there are certain ground rules you need to follow before deciding whether you want to be bullish, bearish or you want to stay away from this debate altogether. Here are the ground rules…
Setting ground rules on bulls and bears
Keep an eye on valuations:
This is a basic rule I keep telling investors. You just cannot ignore valuations in the market, as defined by the P/E ratio or the price earnings ratio. At a P/E of 11 in March 2009, it just did not make sense being a bear, notwithstanding what the India-sceptics may have said. Similarly, at the peak of the bull market in December 2007, when P/E was in the range of 28, it just did not make sense to be a bull, irrespective of what your got-rich-quick neighbour might tell you.
Keep a close watch on volatility in the market
I keep telling investors that a volatile market is the perfect arena for innocent investors to get clobbered. Don’t every think of being a bull in a scenario where volatility as measured by the VIX is above 30. It can only lead to one of the two outcomes: i.) Volatility comes back to normal in a jerk … or … ii.) The market comes back to normal in a jerk. Either way, if you try outguessing the market and trying to be a bull or a bear you could be in trouble. One only needs to look at the historical range of volatility. A level of 15 is close to the bottom and a level of 30 is close to the top for VIX.
“Risk comes from not knowing what you are doing. Losses stem from not doing what you should be doing”– Anon
LOOKING BEYOND THE BULL / BEAR DEBATE
- Look at your portfolio mix first. If you are already having 40% of your portfolio in technology stocks, please do not buy the Infosys bull story. Avoiding too much sector weightage is a cardinal rule. You can do a switch of tech stocks to keep your weightage under check.
- There are bull and bear sub-texts in all kinds of market. Remember when markets were tanking from the level of 6200 to 5200 in August 2013, technology stocks like Infosys and TCS were still giving positive returns. Pharma companies like Sun Pharma and Lupin also continued to outperform the market. There is rarely an all-out bull market or an all-out bear market, except in very extreme situations of a global sell-off.
- Between 2007 and 2013, the Nifty effectively did not go anywhere and just travelled all over the place before reaching a level of 6200. Most of the frontline banking and capital goods stocks were anywhere (between 30% to 50%) below their peak levels. But during the same period select stocks like TTK Prestige or Eicher Motors actually gave multi-bagger returns in excess of 2000%. The whole problem with bull / bear arguments is that you actually miss out the real story and the actual opportunity in the market.
- The last thing you need to remember in this debate is that “Cheap crap is crap anyways” Don’t try to buy a stock clobbered for fundamental reasons even if the overall market has reached a bottom. Take a look at stocks like Punj Lloyd and Suzlon. They are so deep in debt that no amount of market undervaluation can make any difference to their fortunes. The danger in this bull / bear debate is that you may end up buying the wrong stock at the bottom and selling the wrong stock at the peak.
CLASSIC CASES OF SUCCUMBING TO THE BULL/BEAR STORY
Let me share 2 examples of the kind of errors that investors commit in this process. At the bottom, post the technology crash in 2002, an enthusiastic investor tried to heavily accumulate stocks like Himachal Futuristic, Pentamedia and DSQ Software which were 90% down. Needless to say, buying a worthless stock at the bottom of the market is no great idea.
In 2010 when markets had started picking up post the quantitative easing announced by the US government, a bunch of investors accumulated stocks like Kingfisher Airlines and Deccan Chronicle. Their argument was that either the banks or the government will bail them out. Well the government changed, banks wrote off the money and investors were left with worthless paper
TAKEAWAYS FROM THE BULL / BEAR DEBATE…
At the end of the day, being profitable in this market is not very difficult. Of course you need to eschew the temptation to ride every bull market upwards and every bear market downwards. In the most likely scenario a market at around 11-13 P/E with low volatility is always an attractive market. Buying quality stocks from the frontline space, which are not in our-of-favour sectors, will surely make you money. In this scenario, please do not believe the “Markets are finished” argument
Also, at a P/E of above 23 and a volatility ranging above 30, the market is getting heated up. Your first target to exit should be the high-beta names, especially the multi-bagger stocks which have a high beta vis-à-vis the index. Then don’t believe the oracle that comes and tells you that “Bull run will go on forever, as this time it is different”.
Will this strategy of ignoring bull and bear calls work. I am sure it will. The typical pig in the market is the one who falls for a bull argument at the peak and for a bear argument near the bottom. In the process, you may miss out on the last mile fun and excitement. But then, that is not the reason you are in the market, anyway.