I remember that in school, when we went to the local science museum, there was a machine that calculated our weight on the Moon, Mars, and many other planets.
It was fascinating to see that our weights differ! I still remember that our weight on the Moon was 16.5% of what we weigh on Earth.
Someone who weighs 100Kgs is only 16.5Kgs on the Moon :-) That was a very interesting titbit. It still psyches me though... The concept of gravity. How gravity is different on different planets, and so our weights change based on that.
We were taught of Earth as the "Goldilocks" planet as it had a stable atmosphere, viable oxygen supply, the right amount of sunlight, and water for the sustenance of organisms.
That, we were told, was why we could only live on Earth and not Mars...or anywhere else.
Well, now, let's take that analogy and move into the stock market:
We are seeing a sudden fall in the stock markets - lots of reasons, some relevant, some not so relevant.
Quite a few stocks have corrected in the last few days. Certain themes have taken a tumble of 5-10% in this week alone.
A lot of story stocks were trading at 100x P/E and some even more when there are no earnings, but only projected earnings...
100x P/E means you are extremely sure of earnings growing rapidly for many many years ahead and are supremely confident of the quantum and trajectory of growth... I've always wondered how you can be sure of something 20 years down the line when you are unsure of what happens a week or two from now.
People change, companies change, directions change, and all sorts of things can happen. How can someone be so sure. Where is the margin of safety??
Anyway, I'm digressing.
At the end of the day, the way you value a business is by estimating the future cash flows it would produce, and discounting it back to today.
Essentially, we are looking at two variables -
(a) What the asset would produce yearly -- Cash flows
(b) What is the rate at which the cash flows get discounted -- Interest rate
With feds and central banks finally looking at curtailing inflation, rate hikes have come in. With (b) going up, the value of assets needs to come down. Interest rates are like gravity. Higher the rates, lower the asset value...
You see, gravity brings down the weight?
Though it is to be expected, it is always the lack of visibility of earnings, extra caution creeping in, and a sense of the unknown which causes liquidity to disappear, leading to prices falling indifferently.
Who knows how to perfectly value future cash flows...
Anyway, nobody knows how much something falls. The future is always uncertain.
But, as we're taught in school... Oxygen does make all the difference for sustenance. Oxygen typically in the world of stocks is the availability of easy money.
Nobody thinks of oxygen, but it makes all the difference when it is not present. It is the same as liquidity to the market. Nobody cares about liquidity as long as it is abundantly available.
When liquidity tightens, uncertainty gets heightened due to a sense of pessimism. One becomes less certain of future cash flows.
That is our problem today. Both these together create issues. Uncertainty creates doubts.
We start looking at everything during times of uncertainty. Government policy (China-US), Oil price, Covid (still?), and Ukraine-Russia issues (last I checked, they were <2% of world GDP) among others.
All of these do cause uncertainty. Some of the factors are more relevant - Oil prices for example, which a country like India is heavily dependent on; more than others...
But, all of these affect the way we perceive the future unfolding and with it, the movement of interest rates, and the certainty of future cash flows.
What can we do?
We humans always love to hear a story. Who doesn't like a story with that fantastic twist at the end? Something that will change the world.
I certainly do like a good story. And so do you. But, we also know that change and growth are usually slow. There are always bumps on the road.
It is better to look at realistic storylines of companies as the future always holds a range of possibilities. It is better to stick with a future that is conservative, but directionally positive. Something that might not change the world today or tomorrow - but, over long periods, will lead to a massive difference.
What am I doing?
Usually, when I have made a good purchase, I just don't want to do anything. Most of my errors have been in doing something - typically selling early. Notional price movements should not always dictate actions. Sometimes, not doing something stupid is better than doing anything at all.
Again, Earth is a Goldilocks planet due to a combination of factors. Of course, Gravity and Oxygen are key ones, but many others are needed like the right amount of water, sunlight, environment, atmosphere, etc, etc.
Many a time, stock portfolio construction is also a work of art. This needs to have the right amount of order and balance.
Deploying extra cash I have, sitting quietly and deeply looking at any potential themes, and not unduly changing anything... is what I am trying to do.
Well, here is an old clip of Buffett that seems to so succinctly summarize the situation:
