How to Survive Black Monday: Taking Cues from the World's Smartest Investor

It's a Black Monday!

We are living in strange times.

Every few years, some event happens that could be called a Black Swan, triggering a state of flux. And there is no way mere mortals can predict what will happen thereafter.

Trump tariffs, though not completely unexpected, have the traits of being a Black Swan event.

We can compare which countries are relatively better off than others in terms of tariffs imposed, but there are going to be second order effects that are hard to see now.

The thing with second order effects is that sometimes they can be totally different from first order effects.

For instance, the surge of online payments post demonetization in India. This was an unintended benefit, different from the stated goal by policymakers of fighting against black money and corruption that turned out to be a lost cause.

Or consider the recent crisis in microfinance sector in India.

Post Covid, when things started normalizing, the regulator relaxed rules for lending with the noble intent of financial inclusion, providing access to credit to more people and improve their livelihoods.

The borrowing limits for small loans was relaxed. Further, people could take loan from more than one MFI at the same time. And then rates at which microfinance companies could lend were relaxed.

In the beginning, everyone was happy. The borrower could access more credit. MFIs were growing loan books, getting higher yields, and better stock price valuations.

Not long after, the second order effects crept in.

The due diligence and ability to assess repayment capability was compromised amid growing competition for loan growth.

The borrower got undisciplined - taking more loans than they could pay back and diverting funds towards lifestyle improvement rather than putting it for intended use.

The credit recovery mechanism did not match the pace of lending .

The result?

Defaults are now affecting microfinance companies where disbursements have been cut down and loan write offs have surged. Even genuine borrowers are suffering because of overcaution now.

In hindsight, it's easy to connect the dots.

But when it was all happening, multiple parties and stakeholders failed to see the second order effects.

The story with tariffs could take that turn too.

India has been hit with reciprocal tariffs. At 26%, it may seem relatively benign as compared to 34% that competing economies like China have been hit with. But it's too soon to take heart.

For one, despite the high tariffs, ultimately the business will depend on cost of production. And we may not be better off as compared to competing economies in that regard yet.

And then there is risk of economies like China dumping their goods in other countries, including in India, or finding a way to export through other countries which could be a net negative.

Most importantly, with the disruption in supply chains, the end market in the US could witness a demand slowdown and inflation. And no matter how better off India looks now on the comparative tariff chart, it will come to bite us.

So how should you navigate this uncertainty?

I believe it's time to prepare rather than predict.

While markets have corrected sharply, it is still not excessive.

The Sensex is still at a slight premium to its long-term median PE (price to earnings) multiple. The Smallcap to Sensex ratio is still 0.6, a premium to the median of 0.45.

As such, it is not the time to throw caution to the wind and buy stocks left, right, and center.

That said, quite a few India focused businesses have corrected a lot more than the index. Some of these are trading below their median valuations.

Investors can consider taking a staggered exposure in these.

And if you are looking for cues from smart investors, let's see what Warren Buffett is up to.

Buffett is back in the headlines for sitting on a cash pile of over US$ 325 billion, the highest level he has hoarded since in Berkshire Hathaway, 30% of company's total assets and higher than the Federal Reserve's Treasury bill holdings.

Buffett had held large cash reserves before the dot-com bubble burst in 2000 and the 2008 financial crisis. Given the high market valuations and no compelling opportunities (a reason he has cited) and past trends, this signals risks ahead in the markets. Buffett is waiting for that risk to be fully reflected in the markets to deploy the cash.

While things are bad now, they could get worse. It would not be a bad idea to have some cash to deploy when fear pervades further.

We will keep updating you on emerging opportunities as this carnage continues.

To stay tuned, subscribe to Profit Hunter.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)