Upset the established order, and everything becomes chaos

The majority of my writing inspirations happen during my travels. So as it happens in most of my business travels, I catch up on an early morning flight. It has become a sort of routine in the past year to board a cab, reach the airport in a sleep-deprived state, open digi yatra, face scan at the entrance, and then undergo the security check. So, for the umpteenth time on a recent business visit, I expected to have a similar smooth experience.

But, much to the chagrin of all stock market enthusiasts I would say: 

“This time was different!”

To begin with, the airport had recently expanded to a new terminal. I de-boarded the cab at the old one and had to walk down half a kilometre to the new one. The new terminal had only one entrance gate operating and that too without Digi Yatra! It took me a good 5 minutes to locate the email containing the boarding pass, download it and then search for my ID card for verification. Fiddling with my mobile & documents I discreetly observed that there was no one else who seemed to be in the same state like me. All had their essentials ready and appeared so much calmer that made me look like a first-time plane traveller. Next came the security officer who made no efforts to hide his displeasure for having to zoom and scroll the pdf of the boarding pass.

Then at the security check, the tray retrieval system was different and the scanning officer seemed to check each one’s luggage with extra precaution. My frequent traveller’s heart skipped a beat & drops of perspiration began to form in the well-air-conditioned airport. The security officer trained to read body language poked me more thoroughly than usual. My heart raced and I am pretty sure my facial expression would have been screaming my internal anxiety & nervousness. In the end, nothing untoward happened and I boarded the flight without any issues. However, the whole experience left me thoughtful. What made me so nervous & anxious?

Well, the reason was uncertainty!
I was thrown off from my usual expectations putting me in a state wherein I felt out of control.

It reminds me of that famous scene from Christopher Nolan’s masterpiece, The Dark Knight

“The Joker: I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few drums of gas and a couple of bullets. Hmmm? You know… You know what I’ve noticed? Nobody panics when things go “according to plan.” Even if the plan is horrifying! If, tomorrow, I tell the press that, like, a gang banger will get shot, or a truckload of soldiers will be blown up, nobody panics, because it’s all “part of the plan”. But when I say that one little old mayor will die, well then everyone loses their minds. Introduce a little anarchy. Upset the established order, and everything becomes chaos. I’m an agent of chaos. Oh, and you know the thing about chaos? It’s fair!”

Compare that to the stock market. Investors who entered post-Covid have only seen a one-way rally in the prices of stock. They haven’t seen a major correction, till maybe the month of October 2024. Headlines of bear markets, fragmented world, global fault lines started creating panic. As always the narrative of prolonged pain for equity investors, calls for investment in gold & fixed deposits were made. The media that harped about the power of DIIs & retail investors suddenly started talking about the relentless FII selling. The rally in Chinese markets & sell off in Indian markets made people doubt the China +1 story. People dug out the poor GDP numbers, rising employment, taxation & so on to justify the fall.  What led to this reversal in the narratives & noise was:

Uncertainty. 

As humans, we are prone to recency bias. We forget the past and give more importance to the current events. We fail to remember what happened just before or during COVID-19 times. We conveniently forget how the market reacted albeit for the short term during the start of the Russia-Ukraine & Iran-Israel conflict. We forget how the market tanked before India’s elections & then recovered back. 

What was slightly different this time around was that the portfolio kept bleeding daily then weekly and then for the entire month. Grey market premiums of IPOs kept falling and some even listed at a discount. Narrative setters dug out their old tweets where they had advised their followers to stay in cash. However, all this uncertainty is not an exception but the norm. The market is the barometer that gauges the sentiment of the investors in the short term. As in the words of Benjamin Graham market is, a voting machine in the short term & a weighing machine in the long run.

Veteran investor Howard Marks addressed the market’s behaviour in one of his recent memos. 

Here’s what he said:

Why is it that stock prices rise and fall so much more than the economies and companies that underlie them? And why is it that market behaviour is so hard to predict and often seems unconnected to economic events and company fundamentals? The financial “sciences” – economics and finance – assume that each market participant is a homo economicus: someone who makes rational decisions designed to maximise their financial self-interest. But the crucial role played by psychology and emotion often causes this assumption to be mistaken. Investor sentiment swings a great deal, swamping the short-run influence of fundamentals. It’s for this reason that relatively few market forecasts prove correct, and fewer still are “right for the right reason.”

So what must an investor do during such uncertainties?

Zoom out & then zoom in.

Zoom Out

If you zoom out & see the larger picture Nifty 50 corrected by hardly 8% from it’s all time high in the month of October.

   Source: Investing.com

Individual portfolios may have fallen more or less than this, but think about your investment goals. Goals linked to equity investments are for the long term and such a correction should not be  a big cause for concern unless you need to cash on the returns now or in the near future. Moreover, a lot of the stock prices & indices falling is due to the narrative and noise rather than due to the business fundamentals. 

Picture this.
If the chairman of Nestle spoke about the shrinking middle class then it was not a phenomenon that occurred in the month of September or October alone. It is a gradual phenomenon which we all have read and even personally experienced. 

Source: The New Indian Express

Source: Mint

There were stories floating about the tax burden breaking the back of the middle class. However, nothing significant has changed in the taxation in the last couple of months.

Hence, it is important to zoom out and focus on your goals, their timelines and the fundamentals of the business. Automatically the worries that you see seem miniscule.

Now that I have covered the zoom-out part, let me explain what do I mean by Zoom-in. 

Zoom In

The best bet for an investor to stay in touch with reality is tracking the business and it’s performance regularly. Listening and reading through the company’s concall transcripts reveals vital factors that impact the business. Majority of the management comment on the demand environment, the geopolitical risks, the headwinds and tailwinds affecting the business. They speak about the reasons behind the fall in revenues or the pressure on margins. They speak about the challenges in winning new orders, raising capital, increasing sales, renewing contracts and so on. Understand how certain happenings say rate cuts have impacted the company in the past. Understand what the management spoke about such an event in the past and in the subsequent concalls.

Let us take the example of KPIT Tech whose stock price fell by 13% in a single day. This was attributed by some experts to the management’s guidance to the lower  side of the revenue band. However, if an investor had paid attention to the concalls of the last few quarters, the stress in the European auto segment where KPIT has the highest exposure was well discussed. 

Source: KPIT Q3 FY24 concall transcript

Source: KPIT Q1 FY25 Concall transcript

Similar is the story of Titan that has now fallen from the highs from the range of Rs. 3800 to the levels of Rs. 3200 before its results. The fear of the impact of lab grown diamond on the natural diamond is said to affect this fall. However, this is not a new phenomenon and was well discussed when the peer company of Senco Gold had listed a year back on the bourses and had announced its plans towards lab grown diamonds.

Source: technopak.com

Another listed player Goldiam was already betting big on the lab grown diamond space.

Source: Economic Times

In addition to the concalls of the business in your portfolio or watchlist, reading those of the peers also helps. For example, analysts in the concalls of large cap IT companies of the likes of TCS, Infosys & Wipro mostly ask questions around the general industry macro trend. In comparison, the smaller players are asked questions specific to their business. Such a top down approach of understanding the sector followed by the actual business helps filter out the unnecessary noise.

You might have heard the famous line by veteran Investor Peter Lynch:

“There is always something to worry in the market”. 

News, narratives and noise keep fueling some or the other worry for the investor. You might have watched the news channels a month back when Iran had launched a missile attack on Israel. Some news channels had already declared the start of the 3rd world war while some had predicted the usage of nuclear bombs, complete annihilation of Iran & it’s allies and also the demise of the entire oil economy in the Middle east. A few weeks later the focus shifted to the US elections and pages upon pages were filled about how a Republic or Democrat win would benefit or harm India.

Quoting from the memo of Howards Marks:

“There simply is no place for certainty in fields that are influenced by psychological fluctuations, irrationality, and randomness. Politics and economics are two such fields, and investing is another. No one can predict reliably what the future holds in these fields, but many people overrate their ability and attempt to do so nevertheless. Eschewing certainty can keep you out of trouble. I strongly recommend doing so.”

Remember, in markets it is futile to predict, but it’s important to prepare. 

“Don’t Predict, Prepare”

has always been the mantra of our team at Smart Sync Services & Zen Nivesh. Prepare for the unexpected as I should have rightly done for my recent travel.  As investors we all must prepare!