A swing of 1% up or down is a decent move in the stock market during normal times. In the US and European markets a 3%+ swing is now becoming the norm. If you have been looking at these markets, you will realize that the volatility of these markets has gone up.

The European debt crisis and other issues are causing a surge in the volatility . The Indian market, though not yet impacted to the same extent, is beginning to feel the effects. It is easy to feel dizzy and disoriented by such large daily swings.

The most common reaction to such swings is to look for explanations and the common source for it is usually the news channels. We have the talking heads trying to make sense of it on a daily basis and giving us one silly reason after another after each up or down in the market.

What if there is no explanation

It is quite likely that we do not have any specific reason to explain these wild swings on a daily basis. Almost everyone in the market is equally confused and just reacting to the news flow on a day by day basis.

One option for all of us have is to ignore the daily chatter and get on with our daily lives. I am trying to follow this option. It is not easy, but I am definitely trying hard to ignore the noise as it is easy to get overwhelmed by it and do something silly as a result

Head in the sand?

Does that mean one buries his or her head in the sand and just ignores what is happening around us. I don’t think that’s a smart option either. The line between keeping your eyes open and getting swamped by the noise is however very fine

There are a few scenarios which look more probable every day. It is now an accepted fact that Greece is close to bankruptcy (if not already so) and sooner or later will have to restructure its debt in some shape or form.

It is difficult to figure out the chain of events that will follow from this event.

Will this lead to defaults in other European countries and consequent failure of banks? Will this be a repeat of 2008 and more? There are many opinions, each supported by its own logic and each sounding as plausible as the other

My thought process

I will not add more noise to the mix. My thoughts are good as anyone’ else’s or maybe worse as I don’t have any special macroeconomic skills.  As I cannot forecast what is going to happen, the prudent approach is to position myself for the possible storm.

The usual recommendation is to go into cash, hunker down and avoid all equities  till it all sorts out. If  you have been reading this blog for sometime, you know I will hardly recommend that and will not follow that course of action J

I actually have a very simple plan which I can break it down into a few points

          Keep 25-30% or more cash as part of the portfolio to take advantage of a collapse in the market, if it happens. Ofcourse the market could rise and my returns could suffer.

          Keep analyzing companies and identify some attractive ideas before hand. If the market drops, these companies could be available at cheap prices and I need to only pull the trigger. Ofcourse one needs ample amounts of courage at such times

          Keep 6-9 months surplus cash in form of expenses at hand. If there is a contagion and a loss of job, the last thing one should do is to liquidate your investments to pay the bills.

          Have some popcorn and coca cola ready for the entertainment on CNBC and other channels – need to have a sense of humor during such dark times !

Isn’t it déjà vu ?

It is tempting to think that this is a repeat of 2008 again. The market could collapse and the brave would go riding in with their cash. They may have to wait for 6-9 months and then we would see a sudden turnaround as we saw in 2009.  It may turn out that way and then maybe not !

As the saying goes – History does not repeat, but rhymes. We may have a similar crash, but it also quite likely the rebound may not be as quick. The last time around, the central banks and governments released a flood of liquidity which did the trick. This time around  the lenders of last resort – the governments are themselves the problem. There is no superman around this time to save the day. As an equity investor one needs to be prepared for the long haul.

One thing which will not change is the reaction of people around us. A lot of people will be shell-shocked and scared. One advantage of writing for 6 odd years is that I can go back to my earlier posts and look at the comments and see the thought process of a lot of people.

You may find some of these posts interesting. Do read the comments (some may be yours too) to see how we looked at the crisis as it was unfolding

Time to get busy – this was after the Lehman bros collapse and markets started dropping. I started getting excited way before the bottom (as always)

Buying in bear market –As I spoke about buying into the bear market, a lot of people and their friends were advising otherwise. See – nothing changes !

Analysis: Lakshmi machine works – this is one of my favorite posts. The company sold for close to cash during this period. This is the no.1 textile machinery manufacturer in India. I just could not see this company going bankrupt. Still, a lot of people had doubts. I still hold the stock and will add if the stock drops 15% from current levels ( stock tip 🙂)

My portfolio details in 2008 – Needless to say it got hammered during the drop as I kept buying.

Don’t catch a falling knife – As prices dropped, everyone felt that it was dangerous to invest till the bottom was reached. There is no bell when the bottom is reached. One knows about the bottom only in hindsight. Another similar post here on NIIT.

Hoping for a quick rebound and Bear market to end soon –  These posts were meant to be jokes, when I predicted that the bear market will end by April 22nd 2009. Interestingly it did rebound in April – though I was off by a few days. If I have such a flash of inspiration this time too, I will let all of you know when this bear market will end 🙂

Are you feeling excited – With perfect hindsight, March 2009 turned out to be the bottom.

It was quite a rollercoaster ride then and i expect it be a similar one, this time around too.

One Comment

  1. tony clayton says:

    Hi,
    I’ve got a value investing question I was hoping you might be able to answer although it’s somewhat unrelated to your post so if this bothers you then obviously feel free to delete this and move right on.
    Alternatively, I’d appreciate some insight regarding Leucadia National. I’m relatively new to value investing and LUK clearly have the whole “mini-Berkshire” thing going on though there are a couple of clear differences to be sure.
    What I’m wondering mostly though, is what their P/E ratio is? Basically, the NYTimes business site as well as Yahoo and Google Financial all put it around 2 or 3 while a number of other sites put it at around 7 or 8.
    Is this just me or am I missing something important here? Furthermore, if it is actually around 2 or 3 then surely even with the few difficulties they’ve had, the management of LUK can’t have become useless value investors overnight and this must be a very good price for guys and a company with such a great history of honest, competent management.
    Any input on this would be much appreciated if you should decide to respond here or via email.
    Best Regards,
    Tony Clayton.

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