Market Volatility And Circle Of Competence by balajithinks, Beowulf Capital
The markets have been roiled these last few days to put it mildly. Dow Jones has been down 8.5% in the last four days. Indian Sensex is down 7.8%. Lots of individual stocks are down a lot more. There are a lot of investors wondering what’s in store next. Will the market fall another 10%? 20%? We have a very profound answer. We don’t know. And we don’t try to act or predict on something we don’t know.
However, whenever there is a sale, we are usually in the background looking around trying to see if something catches our eyes. When market goes down, assets get cheaper. It is akin to a shopping sale for us. If the market goes really, really down, it is a garage sale.
We believe what we do have is what Buffett calls a circle of competence. Limited number of companies where we think we have a good understanding of the fundamentals and what the companies might be worth 10 years from now. The intrinsic value of some of these companies is getting very interesting. We do not know what Mr Market will value these companies one year from now and even two years from now. However, we will still be okay if these companies go down 10-20-30% down after we buy it as we think the probabilities are high that the companies that we are investing in will be bigger, better, stronger ten years from now and that knowledge is our competitive advantage that enables us to deploy capital now when there is uncertainty and volatility around in the market. Once the capital is deployed, the key is to be patient and wait for the market to move from a voting machine to a weighing machine.
We are deploying some capital and watching to see if further bargains open up. Our war chest is ready. If none do, we just go back to whatever we were doing before and wait for more shopping festival seasons. If some bargains do further open up, we will be there buying things we understand.