Thread by @abadjate

Don't want 2 play party pooper but while small/midcap stocks can continue ringing d cash registers on d long side 4 d nxt few wks, TBH IMHO this is d time to b CASHING OUT - Not d best of times 2 b pyramiding or hunting actively for "breakouts" & "long term buy ideas"

1/n

Sure thing stocks fell vertically by 50-70% and have risen 50-300% frm the bottoms.

But most of them are STILL down for the Yr.

Narrative, flows, liquidity notwithstanding, stocks are SLAVE to earnings grwth

While we may see a near term resurgence in demand

2/n

There is no way of telling hw much is pent up demand & hw much is d new normal. It is v likely tht we may see the new normal (frm a medium term perspective) adjusted lower.

Consider this - most stks were STILL trading at valuations abve their 2009/2013 troughs in Mar'20!

3/n

And this is primarily due to the fact that NSE 500 universe has collectively seen an earnings CAGR of LESS THAN 5% since 2014!

Thats right - less than 5%

And now FY21 is a wash out & while FY22 is likely to be better than FY21 "optically speaking", in absolute terms

4/n

These earnings are likely to come back to FY18-20 levels by FY23/24.

Now call me whtever u want, but "Mkts r a discounting machine" is a much abused term

To me Mkts r nothing but d collective wisdom (or madness) of crowds placing a bid or ask on their favorite stocks

5/n

At different points in time whch is driven by several factors, d most important of which r 2 primary emotions: GREED & FEAR

Technicals (moving avgs, supports , resistances, etc) & Fundamentals (Valuations, CashFlows, ROCEs etc)

R simply there to help build a narrative

6/n

If we are still higher on valuations , earnings outlook over the medium term is still clouded, then if we rationalize long term investing or buying up stocks as they bounce rapidly simply on basis of one single argument

"Don't argue with the Fed"

7/n

Then it's setting us up for severe disappointments in the future (how soon or how far I have no frigging clue).

Untill we don't get confirmation tht the course has changed for d medium term, there is no point in becoming a true believer tht once again

8/n

"The Mother of All Bull Markets Is Upon Us"

Prices create a vicious feedback loop. You will always get a chance to enter back in the mkt and make decent money even if you have to buy stks a bit higher (but with more clarity!)

There is no such thing as "now or never"

9/n

So people will say to me - ok this sounds easy to preach but how to really practice this ?

Well what works for me r some simple broad guidelines:

1. Fundamentals - I wuld like to c a shift in earnings growth & more importantly that should sustain over atleast a few Qtrs

10/n

2. I would like to c if a company is able to improve it's incremental ROCEs / ROEs
3. Debt in some businesses is unavoidable so it's more imp to c if tht debt can b serviced under stress test conditions
4. Basic hygiene chks 2 ensure cos r genuine w/o Corp gov issues

11/n

5. Technicals - basic price action by itself (without getting into fancy indicators etc) will tell you A LOT if there is a turn coming

If stk px make HIGHER HIGHS & HIGHER LOWS on a LONGER time frame (if u love seeing stk charts, simply see them on weekly or monthly)

12/n

That's usually a good sign and u can attempt to go long when a stock makes a higher low and moves above it's recent highs & sustains

Rather thn looking at hw much stks have risen from d lows, focus on hw much u r willing to loose on any investment

Always always always

13/n

Calculate ur "Risk vs Reward" & remember a simple fact: Stocks hve no limit to hw much they can rise but they definitely stop falling at ZERO!

So it doesn't matter if say a Suzlon has gone up frm 1.5 to 4.5 in 5 wks

If u genuinely hve reasons to believe tht d worst is ovr

14/n

And it gives u a confirmation in px action , u will be BETTER OF BUYING the stock at 5 rupees after it corrects from 4.5 to say 3 & then once again climbs to take out it's interim high of 4.5.

When d Stk is at 20 or 25 it really won't matter whether u bot it at 2 or 5

15/n

Making a 10x or 5x is good for cocktail parties but what matters at the end of the day is if you are richer today than you were yesterday. Your benchmark is you, urself - yesterday, 6 mnths, 1 Yr , 5 Yrs back.

After all remember tht d only reason v invest today is to

16/n

Secure our tomorrow .

Hence be careful while investing. Do not succumb to greed & fear & try to be as methodical & objective in ur decision making process

Understand this: Narratives keep changing with d price

so don't take popular narratives prevailing today to b

17/n

Gospel truth and make decisions in haste only to regret these later on!

Today's reality is tht most stks hve most probably been bid up on liquidity & "expectations of earnings growth coming back" (something which has continued since 2014 btw)

18/n

Last but not the least : majority of us hve finite money to invest. We also hve a finite time horizon (betwn Ages 25-50) 2 get our investment cycle right as before 25 u don't hve material capital & post 50 u really can't take too many risks with ur networth. So "long term"

19/n

Investing is really abt catching a few good cycles across companies / businesses in just about d right conditions.

There can b great companies but they may not make great investments through out all investment cycles!

So tread carefully & invest trade slowly & wisely!

~fin~