Investing in the shadow of uncertainty
Investing in the shadow of uncertainty - an article that was featured in the Times of India.
- What if a new variant comes out?
- What if the situation in Eastern Europe escalates?
- What will the Fed do?
- The market has already gone up a lot, how high can it go?
There is always an excuse to avoid investing. Doubt and uncertainty always seem to be around the corner. It doesn’t help that human nature is hardwired to pay more attention to negative news.
However, even when uncertainty looms large, there is still hope for the seasoned investor. Here’s looking at some strategies that may help investors come out on top.
Keep a sense of optimism
It’s too easy to shy away from the market when panic kicks in. It’s on the news, social media and even some of the “experts” tend to beat to the sound of the same glum drum. It is hard to see the silver lining and sometimes the fear leads us to sell down our positions at low prices. However, while it is hard to see at the time, the stock market along with the human race has overcome much worse, and while this current decade has had a whole lot of “unprecedenteds”, we are hopeful that we will continue to overcome them.
Not as though you have just left the bar, but by averaging into the market. When there is uncertainty, a number of people tend to say:
- I’m waiting for the dust to settle and then I’ll make my move.
- Prices will get cheaper and then I will buy.
- Who wants to catch a falling knife?
And more. But they tend to regret these in hindsight, for when the dust does in fact settle, prices reflect the new rosier paradigm. One way to counter this is to stagger in and keep your discipline. As long as you have the next tranche of funds, you can continue to average into the market even if the market falls further.
Invest in what you know
It is very important to understand the intrinsic value of a company. For that is the foundation where your conviction is built. As Seth Klarman says, “Value investing is at its core a marriage of a contrarian streak and a calculator”.
One shouldn’t just invest because a stock looks cheap. It can always get cheaper. Just ask those who bought into DHFL, Nokia and other one-time Blue Chips.
When markets are uncertain, having an understanding of the intrinsic value can help you determine whether the company is worth investing in and help you through troubled waters.
Ensure that you are not over-exposed or leveraged
Investing even in relatively calm times can be tough on the stomach. But during uncertain times, it can really hurt, especially if you have over-invested or leveraged. Even the smartest minds and Nobel Prize winners like those of LTCM can be taken to the task if they over-extend. So, it’s better to invest what one can afford to lose. You will still lose sleep if there is heavy volatility, but less.
The market will whiplash. While this can be daunting, these movements are hopefully temporal. Think of yourself as an owner of your investee companies and as long there is no structural changes to their businesses, then there should be no material change to the intrinsic value.
And lastly, while investing in the stock market is not for everyone, it is a good way of compounding one’s money and making it work for you. Volatility and uncertainty are par for the course and as long as one is equipped with the right investment philosophy and temperament, experiencing these periods can help you strengthen your approach, for “smooth seas do not make skillful sailors.”