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March Madness!

It's that time of the season when NCAA Basketball have their March Madness tournament in which college basketball teams play to win National Championship and millions of brackets are published. At one time, Buffet announced  $1 Billion prize money to anyone with 100% accurate bracket - no one won it. It's just impossible probability (one in 9.2 quintillion). But it's fun - This year my ranking is close to half-million in CBS Sports Men's Bracket Challenge even with 30 correct predictions till now.

March also brings another interesting aspect about markets - in last 15 years, markets have reached bottom 2 times during March. March 9, 2009 during housing bubble crash and March 23, 2020 during pandemic induced crash. So we may be in for repeat of this pattern when S&P reached short-term bottom on Mar 7 2022  (at 4170).  Based on how most of the indexes recovered since then, it feels that way. Even Chinese stocks seem to have reached bottom on Mar 15, 2022 and roared back with 30-100% gains since then in just few days. For example, DIDI went down below $2 and roared back to gain more than 100% in just 4 days.

So what should an investor do? My 2 cents advice: Just invest in index funds/ETFs regularly and don't try to time the market for individual stocks. 

But if you are itching to find next winner(s) similar today's mega-cap tech companies (e.g. AMZN, Netflix, Apple) post dot.com bubble bust or big banks post housing bubble bust (BAC, Citi, MS) or big energy companies during depths of panic of Covid Pandemic (XOM, CVX, VLO), I would recommend to follow some simple rules before jumping in.

As we had seen during pandemic bubble bust, most of the hyper-growth stocks have come down to earth due to gravity of big growth during pandemic and lack of same post-pandemic. If you look at stocks of Zoom, Netflix, Peloton and many other similar companies, they are at same level as pre-pandemic after touching sky-high valuations. So how do we discover value in these hyper-growth stocks? 

Here are some simple rules we can follow:

  • Don't ever buy hyper-growth stock near it's 52 week high
  • When hyper-growth stock starts coming down, don't buy till it's down by at least 75%
    • When it's down by 75-90%, you may want to consider as long as
      • Still growing at double-digits
      • Price-to-sales come down to single digit
      • And most importantly it has enough money to survive till it becomes profitable
    • If it's down more than 90%, stay away since it's possible that it may go out of business if it's not able to raise enough money to survive. There would be few survivors but it's big gamble
  • Simple fact:  When a stock comes down 75% from its 52-week high, it needs to go up 300% just to break even. On corollary, when you buy at 75% discount, you could make 100% even if it's down by 50% from its 52 week high.
  • Resist the temptation to buy when it's down by nearly 50%...there is more downside to such stock. After all there is saying on Wall Street - "Don't catch a falling knife"
Now that markets may have reached short-term bottom, you could do your own research based on above criteria if you must buy individual stocks. My advice - Don't and instead stay with index ETFs!

Happy Holi!

/Shyam

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