Well, that may very well turn out to be true. True that the mindless money printing can't go forever and liquidity worldwide will become tighter in months and years to come. Governments have to realize that they can't keep pumping and throwing cash like that and keep building their debt - this is NOT going to solve the problem of slowdown, it is only delaying the inevitable: world markets and economies are on steroids and this is NOT a healthy growth, any of which we see, and rather this is cancerous growth and must be curtailed at the earliest. You can't provide easy and cheap money to corporations and allow them to over-produce and foolish consumers to over consume. One day, this "bubble" has to bust and things will then revert to mean (which is healthy, organic growth, just about the right amount humans normally need). Of course, when reversion to mean occurs, it is always preceded by over-reactions and extending too far into opposite direction, simple law of physics that:
- either we slowly revert, without "overshooting" to the other side, i.e., over-damped systems, or
- revert in speed, and the faster the speed (which is generally true since everyone is taken aback by reversal and then there's panic and that causes a positive feedback to come in and speed up the reversal, till there's no more energy to continue reverting), larger the "overshoot" to the other side, i.e., under-damped systems.
OK, enough of macro-economics and physics. Let's get to the point. What is my confusion? Let me write down my worries:
A. Stocks prices and hence my current investments will sharply go down in next 1-2 years when we can see a major sell-off in all asset classes except currency.
B. If prices are going to crash, should we not just sit in cash and wait for the moment when things are much more cheaper and we know things are near the bottom?
C. What if we're on the verge of the mother of all great depressions and we may have several decades of slowdown and deflationary economies worldwide and we'll go back to pre-industrial-revolution times, and many people who're involved in jobs related to products and services that're NOT essential for a basic living, like an iPhone or a luxury car, will lose jobs, and agriculture will again become the most sought out profession?
I read this today morning and earlier during the weekend, Vishal send me this to read to relieve my concerns and confused state of mind. Well, very true that I was thinking of possibilities, without considering the probabilities. Now that I've recalled this very important rule of thinking in terms of probabilities, here's my assessment of what can happen and what are the chances that something will happen:1. What is the probability that stocks (good quality, in my portfolio and watchlist, and not sensex) will crash by over 90% in near future?
ANS: Low, I think here are the probabilities:a. Less than 5% chances that prices will fall by more than 90%
b. Upto 15% chances that prices will fall by up to 70-90%
c. 30-40% chances that prices will fall up to 60-70%
d. Good chances that prices will fall up to 50%
2. What is the maximum likelihood time period from now for which such "crashed" prices would remain?
ANS: I think depressed stock prices will remain here for next 2-3 years and this has a good probability of occurrence. However, chances that prices (and hence fundamental business performance) will remain deeply depressed for next 10 years is quite low, probably less than 5%.3. What is the probability that you'll sell majority of your portfolio in this period? Instead, what is the probability that this period will be your accumulation period since you'd not need the money from your portfolio?
ANS: NIL to very low, unless a financial crisis occurs. My job is a bond where risk of a major fall in income is quite low, and even if something dramatically wrong goes with my current employer, I've fair chances to get a new job. Hence, I won't need to liquidate major part of my portfolio in next 10 years, which is also my accumulation period. In fact, a good deal of chances are that I'll keep accumulating stocks (provided things remain normal) for next 15-20 years, and only sell over-priced stocks in my portfolio from time to time to balance it.So, in summary, there's no reason for my worry "A" and confusion. Let's look at worry "C" before "B". Well, capitalism works on the basis of greed and fear, and the world has seen many such credit bubbles, and a very good summary of these bubbles is in this book, which I want to read for a long time. However, the summary is "The Rise of the Fallen" in literal sense :)
So long as we live in a capitalist world, we'll have to see such bubbles boom and bust, and we're probably facing the bust of an even bigger, possibly largest credit bubbles of all times, more so because of highly increased financial leverage across the world. But we can't be more worried about it. So long as we pick good businesses, they'll continue to perform well. Again it'd be a low probability event that businesses with healthy balance sheets, lots of cash in hand and large market shares will collapse easily. Yes there'll be pain, but as long as we continuously monitor their business performance, we can manage the risks associated in their investments. Hence, I'm convinced that my worry "C" is also unwarranted and it's futile to spend time and energy, not to forget stress due to something which is very low probability and simply out of my control.
Finally, what about my worry "B", which simply spells about market timing? This is an area I'm still exploring and trying to find answer to the next big question: "Have times changed such that market timing is now more important even for Value Investors?" Well, let that be the topic for my next post and I'll very soon come back on it.
Until then, may my little mind rest properly and go back to sleep every night peacefully and not with worry of what would happen to the world economy next morning. Enjoy the beautiful day :)
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