Missed the Sensex 40,000 Bull Market? Here's How You Can Make Up for it - Views on News from Equitymaster

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  • Jan 17, 2020 - Missed the Sensex 40,000 Bull Market? Here's How You Can Make Up for it

Missed the Sensex 40,000 Bull Market? Here's How You Can Make Up for it podcast

Jan 17, 2020

Rahul Shah outlines the action you can take if the bull market of 2019 by passed you.

Here's more on investing in small caps


What has been the performance of your stock portfolio in 2019 or 2018 for that matter?

Well the answer to this question would depend on the kind of stocks you invested in. So if your portfolio had a large cap bias or you were predominantly invested in blue chips in 2018 and '19 there's a very strong chance you would have done well in these two years combined.

The Sensex, after all, was up more than 20% in 18 and 19 combined. And if you had a portfolio with a predominantly large cap bias, you would have achieved similar results.

Or maybe even better. On the other hand, if your portfolio was made up of mostly small cap stocks and had mostly small cap bias, your performance would have been a tad Disappointing. This is because 2018 and 19 saw the small cap index plunge around 30% in these two years combined, and it was not uncommon to find stocks that were down 30, 40, 50 or even 60%. So there's very strong chance that a portfolio with a small cap bias would have bled or gone down significantly in 2018 and 19.

I am sure you would be thinking why did I not take bigger exposure to large caps. Or why did I not in invest in large caps in 2018 and 19? You could be even cursing your luck.

But I believe that's all in the past. We will have to let bygones be bygones. There's very little that one can do about it. What you can try and ensure is that you do not commit a similar mistake going forward. And one of the most effective ways to do this is practising what I believe deep and complex thinking.

Now there are two kinds of thinking. One kind of thinking is simple and superficial and another one is deep and complex. As far as the stock markets are concerned, I think deep and simple thinking is pretty much useless. It gets you nowhere, and we should try and practise as much deep and complex thinking as possible when it comes to the stock market.

What I mean by this is if you take the performance of the two indices as an example, a person with the simple and superficial thinking and someone who would have invested in large caps in 2017 and stayed invested in 2018 and 19. He would think that 2018 and 19 have given fantastic returns in large caps. So, let me stick with large caps. Because 2020 also they will give you great returns because 2018 and 2019 have been good. Now that's simple and superficial thinking in my view.

A deep and complex thinker, a smart investor would have thought that okay, 18 and 19 large caps have done well, their valuations have gone up, which means that they have become over valued and the possibility of them out performing in 2020 is now lower than what it was in 18 and 19.

Therefore, it will not be a bad idea to move some money out of large gaps into another asset class.

That's deep and complex thinking and the right way to approach investing from my perspective. Similarly, someone who had invested in small cap in 2018 and 19 would think that my results have been disastrous you know. My wealth destruction has been huge and therefore, after the wealth destruction of 2018 and 19, I no longer want to stay invested in small caps and I'll move to large caps. That's again simple and superficial thinking in my point of view.

Because the very fact that small caps have gone down means that they have now become attractive and there's every chance that they will rebound and do well in 2020 and 21. Therefore, a smart investor and deep and complex thinker would actually increase his exposure to small caps and not reduce exposure to small caps. So this is deep and complex thinking where you're taking decision based on the valuation and the relative underperformance and outperformance of the two indices and not taking decision based on what the asset class has done recently in the past one or two years, that simple and superficial investing and that is not gonna work.

What is gonna work is relative under performance and out performance and valuations. So with the large caps relatively out performing in 2018 and 19 means that there now going to underperform. They have run up more than the small caps, and therefore they may fall in 2020 and 21 or may not perform as well as a small cap index. Therefore, a good strategy would be to reduce allocation to large caps and increase allocation to small caps. Now, of course, there is a lot of data that you can use to fine tune your strategy and to, you know, invest in the right stocks at the right valuations and take the right exposure.

But this kind of thinking- deep and complex thinking will often get you in the right asset class at the right time, and I think will certainly help you be on the right side of trades more often than not.

So when it comes to the stock market, my simple suggestion would be to practise as much deep and complex thinking as possible and not get involved in simple and superficial thinking. That's going to be counterproductive from a long-term point of view as far as my opinion on the stock market is concerned. So be a deep thinker, be a complex thinker and this quality will serve you for a very long time to come. Thank you.

Rahul Shah

Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.

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Feb 28, 2020 09:09 AM