The people who bought stocks in 2016 began to think of themselves as geniuses by end of 2017. They were making so much money that they began to attribute it all to their skills. In mid and small cap investing, it seemed like a field day for such folk- because everything was jumping. Mutual Fund sahi hai jingle became the pied piper song that kept drawing money into the markets. Indeed, that tag line should probably be given credit as one of the most productive (for the industry) lines ever!

But come 2018, we are now finding, as Warren Buffet eloquently put it, who is swimming naked! For, the tide started receding from January and hasn’t stopped until now in early October. It has laid low blue chip portfolios, mutual fund NAVs and blasted big holes into mid and small cap portfolios. 25-30% down is now par for the course. If you are batting in that zone, you are probably doing good! How tables have turned! In 2017, if you did not have 50% gains you were no good and now if you are down just 25% then you are damn good!

Companies are doing as bad or as good as they have been. Q2 results may probably indicate that many companies have actually done better! Politics has remained largely unchanged, with the dogs (i.e. opposition parties) continuing to bark at the lion (our PM), the US markets have continued merrily higher. What has changed is that oil has hit the skids a bit and our currency is also on that slippery road. ILFS created some noise while the FM’s action was seen as an attempt to reverse a reform. Not too much of changes, one may say, certainly nothing extraordinary that we have not seen before. But the market suddenly seems to have changed drastically.

Abandoning past practices of sedate and orderly declines, the markets got into a frenzy of over reactions. Single day declines of 50% or more occurred with frequency that one is not used to at all. There is nothing more intimidating to traders and investors than outsized price declines in double quick time. When this hits the seemingly ‘safer’ set of stocks, the impact is higher. When it hits the doorsteps of blue chips and navratnas (HP, BP, Reliance etc), that is the last straw! Sentiment was completely roiled and widespread damage occurred.

Collateral damage is something we associate with military strikes. But we saw a lot of evidence of that occur in the market and that inflicted even more pain. Just as there are a few big banks (SBI, ICICI, etc.) who are part of any large lending consortium, the market too has some big set of financiers who have supported the activities of many operators. When one of the stocks turns sour (for e.g. DHFL), the collateral damage starts occurring in the other stocks being run by the same operator as the financiers start tightening the strings. Financiers are typically a nervous lot and when a typical practice of 50% collateral etc was made a laughing stock with a single day decline larger than that, they get right and properly spooked. What we are seeing currently is a fallout of financial backers downing their shutters on stock operators.

This is no 2008 and hence comparisons with that period are silly. Calling ILFS our Lehman moment is ridiculous. Comparing FII outflow of 2008 with the current (running at about 15-20% of 2008 figures) is an over-reaction. So, when we have a market event that is reminiscent of 2008- the back to back large ranges for two months- then perhaps it is time to think that the market may be over reacting to lesser events. September 18 had a range of 900 points on the Nifty and we are 4 sessions old into October and already have a range of 792 points!!! That should make people realize the extent of damage fear can do.

What really changed from 2016 thru 17 thru 18? Just the trends. It turned from good to super strong and then did a vicious about face to down and then super down in the period. In and thru all these, stock fundamentals remained more or less similar. Earnings didn’t change much, the money flow remained consistent, over all atmosphere around the market remained similar. But the Trends moved 180 degrees. In that lies all the story. It is the TREND THAT GIVES US THE PROFITS AND IT IS ALSO THE TREND THAT TAKES IT ALL AWAY!

We just use the stocks as vehicles to run on the tracks set by the Trends. Sometimes the vehicles run fast and sometimes they slow down. But they cannot go anywhere where the tracks don’t lead! Why beat ourselves up, then, trying to pin down every little aspect about a stock’s fundamentals? Does it really matter so much? At the end, isn’t it something that we use to just console ourselves that we have not done something wrong (I am holding GOOD stocks, so eventually I shall survive this). Does it pay for the pain that one is experiencing now, the difficulties of holding on that one is experiencing now? Do we have to slip into that helpless state every now and then where we cannot do anything- neither sell nor have the courage (even if we have the money) to buy?

Isn’t it therefore time for people to finally realise that it is the Trends that is the Supreme Being of the market and everything else is subservient to it? Value, growth, momentum, top-down, bottom-up etc. etc., are all styles for investing. They do not determine what will happen now or in the future. Every one of those is built on some expectations. But we begin to think of those styles as something definitive, as though they will ensure future outcome. Sadly 80-90% of the market folk don’t pay attention to the Trend, believing that to be something puerile, something trifling, to be dealt with perhaps by technical analysts. Is there really a need to take those big knockout blows to the chin to realise that it is not so?
Time to wake up. And smell the Trends. That’s the only way to ensure our survival.

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