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Foundations

Investing in a Bear Market

How does one think about investing in a bear market?

Value suddenly becomes apparent. So apparent that you feel like everything is value. Value is bitch-slapping you across the face right now. It’s oozing out of places you didn’t know were places. Value is everywhere. Bring it on!

Sometimes it’s hindsight – wow, this company was at 5x this price a few months back (think any real estate stock at this point). That’s obviously not right, because the market was overvalued. But they can’t be 80% overvalued no? Uhem. Kindly look at Freddie Mac and Fannie Mae’s one year stock charts. Yes, they can.

Oh ok, wait, this [random] stock is trading at 2 P/E!! How can the price get lower than that? Let me tell you. When your “E” vanishes, that’s how price also goes lower and suddenly the 2 P/E company is a 100 P/E company and the price is still half.

And then you can go in and dip into company balance sheets. The starting of a recession is when companies lie the most. In India, they get away with it – there is no enforcement. In the US, shareholders would sue – and think of it, people still get away with it there – so what they will get away with here is blue murder.

But there is a lot of value out there, surely. You have to now avoid the value pitches that are standard. Let’s try and debunk the value fundas that will come now and how you should look around them.

People will tell you to look at the land bank. What is a land bank? Can you sell the land? SBI has a phenomenal land bank – and very prime too. But it costs way too much to develop it, and the management just isn’t inclined to do it. So there is no land bank. Real estate companies – they can’t fund existing projects, so how will they ever sell those parcels of land? And if all that land came to the market at the same time, wouldn’t prices drop 90%? Don’t ever bother valuing land.

How about the cash on the balance sheet? Some companies trade at cash value – but you have to analyse all other parts of the business too. What if they have huge liabilities that will drain them of the cash? What if the assets they own are so depreciated they will need all the cash to replace them? What if the promoters siphon off the cash by buying dud companies in random places? What if the cash is left unused and there cannot be a takeover because promoters own too much? Cash is a good asset to have, but it has to be valued in conjunction with other parameters.

Some stocks are evergreen. Like Reliance. Or L&T. Or something else. In the 80s, Bombay Burmah was evergreen. In the early 90s, too many companies that were supposed to be evergreen now have green stuff on their graves. Arvind mills was the next big thing and it’s 1/10th that price today (no bonuses, splits etc.). Today there are stocks which people claim are resilient to everything. But they were trading even BELOW these levels just three years ago – Reliance was at 800, L&T was, suitably adjusted, about 200, and HLL was 160. Prices today? 1600, 990 and 250. Even if you take inflation and take these stocks back to those levels, current prices won’t seem like “value”.

Finally, you get people telling you that you should buy when everyone is fearful. That’s huge survivor bias. When a ship full of people crashes, and the only survivor comes out and says “I prayed to god and that saved me” – the religious folks latch on to this and say ‘See? There is a god!”. But what you should ask is: what about all the other people who prayed to god and still drowned?

When rich people tell you buy when everyone is fearful is not telling you what you really should know – how many people who bought at such times lost their money?

Perhaps the best time to buy in a bear market is: at the start of the next bull market. (Meaning: Wait. Let it look like a bull market first. Meaning: when you only turn on CNBC by accident)

Disclosure: Long Nifty. Yeah, I know, I’m a little stupid.

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