@LarryWink

Fighting froth. Froth these days carries a little different meaning and connotation. Earlier the oft repeated example of froth was when your Paanwala starts giving you tips on what to buy, its peak of froth. Or when we have wild moves in kachra stocks, its froth. To me, it simply means stock prices running way way ahead of their fundamentals. And valuations reaching astronomical levels and still being justified. We have seen similar things happen during the chemical boom in stocks like Clean Science, Tatva Chintan, or few years back in Kitex when it used to command historical valuations accorded to Page Inds.

Currently we are in a frothy overall markets where a lot of things are taken for granted. Especially post the State election results, it seems a foregone conclusion that we will have a stable govt at the centre come next election. But this is only one cog in a wheel. There are various other factors to consider and it is assumed that everything including inflation, interest rates, economic boom, exports, global stability etc will fall in place or has already fallen in place.

For me the simple explanation to the bull run in small and midcaps is that we had a severe bear market in this spaces from 2018 to 2020, and post that we had the start of a multi year rally. But as we know with markets its not about anything that is balanced. It always has to be extremes. So currently the pendulum has swung to the extreme of optimism

But in frothy (often termed as bubbles ) market, a lot of money can be made in quick time if you are nimble and agile and know how to ride momentum. So we have two choices Either to sit out this period of frothy environment or join the ride with an eye on the kind of risk that is entailed. It depends on the investor’s mindset The cautious guys who might feel that they have made enough returns and do not want to take any chances can very well sell out and prefer to sit on cash. It can often be frustrating to sit on cash while you see markets continue to go up and stocks you sold continue to go up. But that’s the price that is to be paid for peace of mind. Momentum guys can enjoy the party with an exit plan ready.

2. Fundamental fotitude. When the floor becomes slippery as you so aptly put it, everyone slips to varying degree. The fundamental investor who knows his business well will be able to sit out the pain period during corrections, however painful that period maybe.

3. Perfect timing. Perfect timing is like a perfect spouse. Its a myth. If you know that a big correction has begun, its better to exit as soon as you can. Shoot first and ask questions later.

The problem most investors face when corrections begin is of panic and paralysis. Taking action is often difficult. When you have seen a stock at 500 rs goes down to 450, you always hope it will go back to 500 and beyond. And then when 400 comes, you start regretting and fuming. And still don’t take action. I have experienced this thing in past corrections. And hence during Covid crash, I sold off most of the portfolio even though I was a big late. The way it helped me was that it gave me clarity as to what I wanted to buy and that led me to some big winners.

My strategy during this market has been to start watching out for signs of froth/weakness in my portfolio stocks, and take appropriate action. And I would be okay to sit out some part of the froth rally even if I have to do so. Except for core portfolio stocks (where also exits would be contemplated at an appropriate point) in my techno funda bets, I am happy to book profits with smaller gains as compared to earlier.

Having said and planned all of the above the execution part still seems difficult and is always a work in progress. Sometimes what you plan and what you do is different. I just hope I can put my plan into action and maybe sell at an appropriate juncture. Who said investing is easy.

Greetings,

Presenting, our report No. 1!

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Do scroll at the end to find a surprise over and above the research report

Looking forward to many more,
The Analysis Wing (2023 – 24),
FinCell, St. Xavier’s College (Autonomous), Mumbai.

While prospects for these companies are good. valuation is very high. even 1 quarter of underperformance can get the stock prices down.

Source : A Safer Way to Make 12% Returns – Shankar Nath’s Substack