InvestorQ : What do you mean when you say that I need to be flexible in the stock markets?
Nishant Chandani made post

What do you mean when you say that I need to be flexible in the stock markets?

3 years ago

Flexibility is most needed when you are looking at disruptive technologies. Being patient with Nokia in 2008 would not have served any purpose. The need of the hour was to be flexible and pick up the cues coming from the smart phone market. Are you missing out a disruptive technology or idea? Bharti in 2003 had a limited market and high tariffs. But the disruption happened when the network started feeding on itself and revenues multiplied even as tariffs fell to rock bottom levels. When there is a disruption, be flexible and learn!

When you have to wait too long for your conviction, it pays to be flexible. Classic example is L&T in 2010. The capital cycle was negative and order books and margins were getting constricted. Even after 4 years, the stock was nowhere close to its 2010 prices. Rather be flexible than patient. In these cases, patience alone with not work. Of course, ultimately you will be right but you do not know how long you may have to wait. And you are not even sure if the wait is really worthwhile. That is the time to be flexible and revisit your conviction at a later stage.

Is there any subtle trend you are missing out? Look at how Nokia missed out on the Smartphone trend in 2007. Apple and Samsung took away market leadership. Look at how Educomp lost out to Treehouse in education or how branch banking lost out to ATM banking. Be flexible when trends shift.

Patience may not be the best virtue if you are dealing with a company that is deep in debt. From the days of Polonius, debt has been a four-letter word and it still holds for companies. When a quality company is too much in debt and having unfavourable coverage ratios, stay off the company. You may have conviction but it is time to be flexible on your beliefs; and pragmatic too. We have seen a lot of high debt companies in the infrastructure space destroy wealth in the last 10 years.

Always keep your eyes beyond equities. It is not the only asset class available in the market. You have to be flexible on asset classes. Equities are not the best performing asset class always. In fact, more often they underperform debt. Be flexible to shift substantially into debt or even gold if the situation demands. Equities have their cycles and you do not have to participate loyally in the downside. Be flexible enough to shift to other asset classes. Taxes may be an issue but tax is never such a big issue that it can hamper your asset allocation decision.

Patience and conviction will not work when the macros are a tad too wobbly or they are horribly going against you. When the macros are turning negative, it is time to be flexible on your convictions. In the 2008 crash, the indications of liquidity pressure were visible as early as 2007. It is just that Indian investors thought, India was different. A global contagion spares none. You have to be flexible with your philosophy. When Lehmann struck in September 2008, the warnings were there for at least 6 months. If you were patience and lived on false hope then you only have yourself to blame. The need of the hour was flexibility.