One thing to constantly ask oneself is –

a) could we have known this and

b) how did we react to this ‘knowledge’

Let me be brave and say there were signals, but we did not know how to react.

Let me give you an example from a visit to Tadoba (a forest with tigers). I was standing over looking a water hole which had some sambhars (deer variety). One sambhar was nicely lazing in the mud. I had information (not just data) that a tiger with 3 hungry cubs was about 700 meters from the deer. Awesome information? Sure.

We waited there for 2 hours – knowing that the tiger would attack. However nothing happened..and we had to leave. Within 5 minutes of my leaving, the tiger struck. Killed the Sambhar and feasted on it along with its 3 kids. I have seen a tiger kill one small deer only once – and this would have been a great opportunity. I missed it.

Bad timing? perhaps. Luck or skill? Just luck I guess. No issues, I live to tell the story, and will see another tiger, another day perhaps when I have less information!

Now come to equity investing. What was visible to me –

Berkshire Hathaway sitting on tons of cash.

Indian markets going up – in a very narrow rally led by a few (perhaps manipulated) shares. Some of them I love to hate, because I can’t understand their business balance sheets.

HOWEVER, do remember that BH has been sitting on cash for 10 years, and even though I have patience, I do not think I will sit on cash for 10 years. My cash would be put to use – in equities of course – even if I have a 2 year view. In fact I do not have any cash requirement which I can’t meet out of my current income. I am an investor on a monthly basis anyway.

I did not like the rally led by a few shares – and that scared me. Simple algo based buying -and people dumping money in Index funds was worrying. I knew this was going to fail, and so I was in more cash, and had reduced my investments – especially in the large cap. I rarely buy large cap any more – I have enough of them anyway.

I could see BH, Apple, etc. sitting on cash, but I also saw companies like Softbank burning money. Honestly I have no clue how to react to money burning companies. Seriously. The borrowing in the world is almost 4x the global GDP. Such a vicious fall will make most of the low quality American corporates. Also there are 2 Americas – the top 2% and the other 98%. Remove the top 2% and it looks like a not so rich country. Similarly in the US corporate sector I am worried about the companies which are not in the top 25. You will see amazing panic there. I have no clue how the seniors in the US will handle their pension requirements. I can understand why the FED panicked.

Now let me stick my neck out. Not exactly what to buy, but how to look at businesses.

1. Banking – clearly the strong banks – Psu and Hdfc bank – will get stronger. Personally I have enough of Hdfc bank, and have not sold ENOUGH to bother to cover what I sold. However, if there is far greater fall, I might change my mind.
2. Value funds have also fallen – I Pru Discovery and Templeton value fund. This actually means they were not really ‘value’. So no I will not start a sip here, but I am not STOPPING my sip in these funds. I expect there to be some value discovery to happen.
3. I do think that if the govt does privatise BPCL (they have no choice), we might see tremendous value ‘come-back’ in IOC, Hpcl,..etc. For some of us who saw PSU value creation about 15 years ago, that is a fond hope.
4. Companies which are supplying entertainment to you ONLINe will benefit – read Airtel, Voda, Jio – at least 2 balance sheets are easy to understand and one is a heavy weight in the index. Caveat: I have all 3 – one inspite of the fact that I do not understand the balance sheet.
5. When the buying was mechanical – ETF, index – are dumb money, so would the selling be. However like it was vicious on the way the rise could be fast.
6. VIX at 80 is not something that has not happened earlier. The worry is the speed at which it happened.
7. Funnily we see the ‘fall’ in say Icici bank – because it was recent. However we can’t see the percentage fall in Sun Pharma which is down to 380 from Rs. 1200.
8. I spoke to one big Nbfc – he said “forget the fall, worry about the fact that people may not borrow at all over the next 2 quarters”. H
9. The Nbfc also said “we expect weaker Nbfc to come to us as they have liquidity crisis”. So damn true.
10. Cash – and business – may shift from the so called Pvt sector banks to the Psu banks.

Optimistic, but cautious.