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Buy The Fear: Is It Time To Follow Buffets Advice?

Mar 30, 2023

Buy The Fear: Is It Time To Follow Buffets Advice

Last week I was reading my favourite financial author Morgan Housel.

He narrated a beautiful anecdote on fear and how it clogs our thought process and impacts decision making at large.

The narrative was perfect for the current scenario in the stock markets.

The Brooklyn Bridge was the largest structure in the Western Hemisphere when it opened in 1883.

It was a matter of pride for Americans as it was twice the size of any long suspension bridge in the world.

However, back then and even till date and I am sure in the future too, whenever something unimaginable is created the public at large always casts doubts.

The same was the case then, when Americans doubted its safety.

The most common question asked back then was...

"Is the bridge stable"

"Will it collapse"

Well, the fear of a bridge collapse was so widespread that the chief engineer PT Barnum who built the bridge was asked to parade a herd of elephants across the bridge to prove the strength of the bridge to onlookers.

But the doubts regarding the safety of the bridge still remained.

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About a week later, when a woman crossing the bridge tripped and fell down a wooden staircase that served as a pedestrian exit, another woman screamed in fear.

Someone then screamed that the bridge was collapsing.

Panicked bridge-crossers rushed for the exit, crowding the pedestrian exit leading to a stampede.

More than a thousand pedestrians were crossing the bridge at that time.

In few minutes, 12 persons were killed while 7 were injured seriously with dozens having minor injuries.

This is exactly what happens when you listen to the collective wisdom of crowds.

In hindsight, firstly, the accident was caused due to just one women tripping at the pedestrian exit.

The bridge was absolutely safe...

It was fear and crowd thinking which led to this accident.

Did anyone see the bridge collapse that they sparked such a rumour?

The problem was not the bridge but the narrow exit which was chocked with people that led to the stampede.

Now for a moment lets shift focus to the stock markets.

The last month has been news heavy with markets reacting to all the negative news right from SVB Bank to the fall of Credit Suisse.

If you look at the last 12 months return of the headline indices Nifty and Sensex, the returns have been as flat as it can be.

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However, that is an eye wash,with the small cap and mid cap stocks in most of the portfolios down by at least 30% lower from their peak just a year ago.

Let me give you some statistics to substantiate my point further.

  1. 25% of NSE-500 stocks are down by more than 20% in 2023 itself.
  2. 60% of all BSE stocks are down by 40% over the past 18 months.
  3. 60% of the NSE 500 stocks are below their 200-day moving average.
  4. Nifty has declined consecutively over the past 3 months.

Fun Trivia: The Indian Stock Markets have never been down for 4 consecutive months- Not even in 2008 and 2020.

So, if you go by history, looks like April and May could favour the bulls.

The question is that while the indices are barely 10% down from the peak, portfolios are down by 30-40% over the past 1 year.

The sentiment too is pretty bad as is measured with the market mood index.

Below is the current market mood indicator in the Indian stock markets.

While the reading shows Fear as on date, the reading just 15 days ago was in the extreme fear zone.

As per ticker tape which publishes this data by gauging the market sentiment, anything below 23 shows extreme fear in the market.

On 14 March 2023, the reading showed a level of 12.98 which meant extreme fear in the market.

Last such reading was seen in March 2020 during Covid.

It stands at 41.4 as on date which still indicated that there is fear in the market.

Now here comes the important part...

Data from March 2012, shows a success rate close to 65-70% when an investor buys in an extreme fear zone.

The 1 year and 3 year returns from an extreme fear zone have been positive.

The above holds true for good quality Nifty stocks.

I started the article with how fear and group thinking led to a stampede at the Brooklyn bridge.

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In my view, the same is the case in equities at the moment.

There is so much fear and negative sentiments around the world that investors quite often can't separate the chalk from cheese.

The mistake which a lot of people make is they let the fear and thinking of the public at large affect their judgements which clouds their own independent thinking.

While I am not a magician to predict where the markets will be 6 days or 6 months from now.

What I can tell you is that history and statistics both suggest that buying stocks when there is blood on the street, buying stocks when the valuations are at or below their 10 year mean and buying stocks at bargain prices (mid and small caps) is the best time for an investor to build a portfolio.

The Nifty can fall even a further 10% from here or it can reach all time highs too in the 6 months, but my point is good quality companies especially mid and small caps won't be available for cheap for a long time.

Warm regards,

Aditya Vora
Research Analyst, Hidden Treasure

PS: Do watch out my latest video where I have analysed a leading theme park operator and why good times are ahead for the company.

It is during such times, investors should pick up solid companies with strong cash flows while the industry dynamics are in an uptrend, just like the theme park company in my video.

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