A portfolio strategy to fearlessly ride Mr Market’s dust-must-lust cycle

A portfolio strategy to fearlessly ride Mr Market’s dust-must-lust cycle

Imagine yourself in a coronavirus-free New Year party, where loud music is playing and all your friends are dancing in full rhythm. Won’t you participate too? But do you want to get drunk enough to lose your senses and get carried away?

On Dalal Street too, you must participate in the ongoing bulls party, but don’t get intoxicated enough to forget valuation metrics or take leveraged positions.

In a bull market, weak shares also see price rises along with the strong ones. If you hold some good stocks and they have rallied quite a bit but do not have the visibility for the future or if the price does not justify the fundamentals of the stock, then holding it can be dangerous for you.

In the stock market, one must always keep the mind balanced. Participate in the rally with mindfulness. Your mind should be active, and not get carried away with the bulls.

Undoubtedly, this market is in an euphoric stage. I have seen such situations in the market 5-6 times before in my 30-year-long career. In fact, I have seen more euphoria than this. There was a time when shares used to go up 30-40 per cent in a day and double in a week.

I remember an instance where a stock was going to merge with another group company, and the price was fixed at Rs 3. In the euphoric market, the stock went up to Rs 12, but came back to Rs 3 after a few months when the euphoria died.

That kind of euphoria is yet to happen. But it can happen. Those who are playing safe always exit the stadium before the match ends. So it is entirely an individual’s call when to exit, depending on what suits her and what kind of regret she is ready to accept. You sell and the market goes up or you don’t sell and the market goes down. Regret is bound to happen, as it is a lifestyle disease of equity investing.

In the stock market, there are three phases of dust, must and lust.

In March, stocks became ‘dust’ as if the world was coming to an end. After July, millions of new demat accounts were opened and a fresh breed of investors got in. People around the world also realised that ultimately Covid is a passing phase and stocks moved from the category of ‘dust’ to a ‘must’.

The third and the highest category is ‘lust’, in which people are not bothered about valuations. In some pockets, such a ‘lust’ situation is now playing out. Just a few days ago, Alkyl Amines announced a stock split and the share price went up from Rs 3,800 to Rs 5,600 in a matter of two days. This is a classic example of madness in the market.

However, some stocks are still reasonably priced compared with their peers. You can still hunt for valuation in some pockets.

A game does not get over till the last batsman is out. We are at the higher end of the euphoria and it could be the beginning of the end. But it doesn’t mean that the bull market is going to end. A new bull market has just begun. When the euphoria fades away, it leads to a sharp correction in the market. This will remove the froth and is good for the long term. If the market is having small upsides, then corrections can help build strength as things go step by step.

But when Mr Market takes the escalator to rise and dumps the staircase, the correction is also equally sharp and one way. It is as simple as Newton’s Third Law of Motion – every action has an equal and opposite reaction.

The problem with euphoria is that it ends overnight and you will not know when. This euphoria will not give you time before it bursts.

You get many signals for a bull market. When a bull market comes, it is with band, baaja and baarat, but when a bear market comes, it is all of a sudden, and it comes crashing down. There have been instances when the market has fallen continuously for 7-8 days and crashed 25-30 per cent in just a week.

I think such a situation will happen in the future, but no one can predict the timing. Only two people know the top and bottom of the market – one is god and the second one is a liar.

Despite believing that this market is going to correct and that too very strongly, I am 96-97 per cent invested because one should stay in a sunrise industry at any cost and stay out of the sunset industry at any cost. Although, I am also sitting with 3-4 per cent cash.

I am structuring my portfolio in such a way that it turns into an all-weather stock portfolio. When the market falls in a crisis, the portfolio falls less and when the market recovers, the portfolio rises more. If you take this theory, even if the market falls, you need not worry about a bear market, because this is the lifecycle of the stock market.

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