A jungle fable

As I write this article on Thursday, March 26th, the Indian equity markets are in the middle of a buying panic which seems to be as strong as the selling panic that was raging a couple of days ago. Inevitably, this will again turn into a selling panic as something else happens tomorrow morning and back again in a couple of days. Conventionally, one can justify looking upon the equity markets' movements as a kind of a judgement on what will happen to the economy. Those expectations must be set aside now. We're deep into blind knee-jerk territory right now and will stay there for a long time to come.

Even in normal times one should pay zero attention to what the stock market does on any time scale less than a few months. Right now, the logic of ignoring the markets is even stronger. Does that mean that there is some other indicator that you should watch? Well, I can't stop you from obsessively watching the progress of the disease across the world - I find myself doing it all the time. However, this is not the time to find clues to try and read the tea leaves in newer and newer ways. Instead, let's go back to the basics that we already know.

Here's a favourite of mine, which I'm shamelessly recycling from something I wrote a long time ago: One day a man appeared in a village and offered to buy all the monkeys that the villagers could supply for a thousand rupees each. The villagers caught all the monkeys around and sold them. Soon, another man appeared and offered two thousand rupees for each monkey. However, there weren't any more monkeys around so the villagers couldn't sell the man anything. However, they figured that for some reason, the demand for monkeys was going up so they looked for the first man and bought back all the monkeys for Rs 3000 each (which was the least the man was willing to take). Unfortunately, this stratagem was a failure and the buyer never reappeared, leaving the villagers stuck with the animals.

Nearby, there was another village, where the same story was repeated except here, it was about goats. Here too, the final buyer never appeared and the villagers were stuck with the goats. However, there was a big difference. The monkeys were a nuisance. They were noisy, troublesome, and dangerous; and they stole food all the time, so the villagers eventually abandoned them in the forest. The goats, however, weren't so bad. They were easy to keep, grazed on grass and gave milk. When they grew older, the villagers slaughtered them for meat. All in all, buying goats was not the bad deal that it looked like in the beginning.

The moral of the story, as applied to investments, is so clear that I need not explain it. However, there's an important difference from the time when I had narrated this story originally. At that time, the context was that of stock markets that were in the grip of a bull run. The risk at that time was that of buying monkeys instead of goats because the monkeys looked just as useful as goats. Now, the risk is opposite. There are a lot of goats that look a little bit (or a lot) like monkeys nowadays. Companies that have robust, well-run businesses that will survive and recover this crisis have seen huge cuts in their share prices and are available for great bargains. Many of these have actually fallen more than the monkey stocks because the goat stocks were overpriced to begin with.

Now, I completely understand if you decide that discretion is the better part of valour and would like to stay out of the whole mess. In that case, just ignore what I'm saying. Otherwise, focus your energies on identifying the goats.