What did Warren
Buffett mean when he said, “You only find out who is swimming naked when the
tide goes out?”
Clearly, he is
talking about two things: Quality of
Stock, and Price Paid for Them.
When the share
market is in the midst of a “Bull Run”, the market value of your portfolio will
certainly cover-up all mistakes made in selecting the company and the price
paid for acquiring the shares; every stock in the portfolio shows a blue tick, and a unrealized gain,
prompting the lay investor to falsely believe he is a great investor, bestowed
with abundant investment wisdom.
No wonder, the
seasoned value investor’s portfolio too, is showing significant growth – may be
on par with the benchmark index, like BSE Sensex, or surpassing it or
underperforming it – nevertheless it’s value has certainly grown. However, the “value investor”, trained
unceasingly in keeping the emotions under strict control, is Stoic.
In fact, you can
observe a distinct deviation in her behavior, either she is very parsimonious
in investing in stocks or has given the market a total miss; instead, preferring
bonds or other fixed income securities. On
rare occasions you may observe that the value
investor had sold shares of a company or two, at handsome profits of
course, which had recently gone through some fundamental changes, which are not
to the liking of the investor or which are contrary to value investing
principles.
On the other
hand, our lay and ignorant investor, who is under the false credence of superior
investment acumen, is continuing to pour money into the stock portfolio. Drunk with “Greed” and “Overconfidence”, he
might be investing even borrowed money.
The markets are
on a roll, in the meantime, lulling the investor community, the so-called “Experts”,
media, regulators and political leaders into a false sense of everything-is-going-good feeling.
At last, the time
for reckoning arrives! Some catastrophic
Global Event like Lehman Brothers
triggers a market crash. Portfolios
world over start bleeding. Margin Calls
and unilateral squaring up of traders’ positions accentuate both the market
fall as well as lay investor pain.
Euphoria, which was prevalent, not so long ago is replaced with
gloom.
The tide is
going out fast, and you find out who is swimming naked - who is safe and who getting washed away in
the tide.
