In trying to optimize short term performance and also long term performance simultaneously is a very hard game to play.  We can choose to be smart in the short term or in the long term – but can’t choose both.  It’s a rare genius that can trade short term and invest long simultaneously.  Most people who claim they can do this lie about their returns.

Expressing surprise at a sharp upward Index move, despite a poor economy, ignores 2 fundamental truths

• A fair price is the value of discounted long term cash flows.   For well-run companies with growth prospects and a strong franchise, cash flows of less than 3 years out are less than 15% of their market value.  After panicked selling, prices may just be finding their true fundamental value.

• The fair PE for a company depends not only on growth, but also on Cost of Capital, which in turn is linked to interest rates.   The 10 yr. US G Sec is about 0.7% at present and has the real possibility of going into negative territory.  What is the fair PE multiple for Equities when the opportunity cost of investing in debt is to earn no returns?

Similarly, trying to use market trajectory during past crisis as a guide could lead one down the wrong path.  Every crisis is different – there is no one play book/template.  

• In the 1930s, period of the great depression, the US had an erroneous initial policy response as they cut spending instead of stimulating the economy.  This worsened the economic situation

• In 2008, policy response came almost 3 months after Bear Stearns collapsed.   Response was much delayed while credit markets froze and economic activity halted

• In 2020, not only has the aggregate stimulus been much higher than 2008, it has been much faster and has also come with a message of “whatever it takes” to salvage the economy.

• Further, the US Fed has directly started buying Junk Bonds to ensure Credit markets don’t freeze (current situation in India). 

• It may interest readers that the Japanese Central Bank has been buying Equities for many years.   Could the US Fed start buying Equity ETFs?

We don’t believe one should trade in and out of markets if you are investing for the long term.   80% of all returns are made on 20% of trading days.  If you miss a sharp move, long term returns are significantly compromised.   And while selling is easy, timing re-entry is not as no one rings a bell at the bottom and markets turn long before the economy does