Sitting On Cash? How To Find Alpha At All Time Highs
With markets at all-time high following the Fed's 50 Bps rate cut, where exactly do you find value in the market today?
Hey everyone,
If you track financial markets, all eyes last week were on Jerome Powell- Chairman of the US Federal Reserve as he declared the first ever interest rate cut of 50 bps in over 4 years since the start of Covid-19.
The markets failed to disappoint with indices all over the globe ripping higher as the Nasdaq and S&P 500 set all-time highs, as well as emerging market indices like the Nifty 50 in India
With fears of recession coupled with geopolitical tension in the Middle East as well as the Russia-Ukraine war being the overhanging theme all year long, the interest rate cut was seen as a positive sign by markets on the back of improving inflation data & the upcoming US elections
There have been multiple debates on the optimal strategy for an investor or portfolio manager going forward- whether or not to stay invested in the markets or take profits off the table & sit on cash in hopes of a correction.
Renowned fund manager Samir Arora pointed out in a tweet how it was tricky to hoard cash, even for someone like Warren Buffet with recent disclosures showing that Berkshire Hathaway is sitting on $280B of cash:
So if you’re a retail investor not quite keen to invest at these levels in the market, what exactly do you do?
The popular consensus all year has been to wait for a correction in the market, with some leading mutual fund houses like Parag Parikh Mutual Fund- a $10B fund sitting on $1.7B of cash for the last year, missing the Nifty 50’s meteoric 32% rise so far in 2024
While markets can indeed stay irrational for way longer, it’s pretty unnerving being on either side of the trade, where those sitting in cash get FOMO from seeing the markets go up everyday & others sitting on all-time highs fear a correction.
What Should Investors Do?
While I am far from an expert on investment management, I recently came across a very first principled essay outlining how Michael Burry- the infamous founder of hedge fund Scion Capital, finds stocks at value bargains in the market.
Burry might have made over $100M by shorting the market & predicting the 2008 financial crisis as shown in ‘The Big Short’, not many know that he is a disciple of value investing & follows Benjamin Graham’s principles of ‘Margin of Safety’ when picking stocks & forming his portfolio.
This essay I came across recently is a pretty timeless piece on finding value buys in the stock market 👇🏻
While Burry has been accused of crying wolf one too many times & often ridiculed in the investing community as a ‘One-Hit-Wonder’ for predicting the 2008 financial crisis, these investing mantras stand the test of time & provide a first principles based approach for investing in stocks
And if you’re curious, this is his current portfolio of stocks:
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With holdings like Alibaba, Baidu & JD.com- Burry is clearly overweight on China whereas the rest of the world seeks emerging markets like India, Indonesia & Vietnam as the ‘China+1’ strategy
Being bullish on China is clearly a contrarian strategy & follows the principles of finding stocks that have great fundamentals but beaten down by the market- in this case with the political fear associated with investing in China.
I was pretty shocked to learn that Alibaba- China’s largest Tech & E-Commerce company has seen a 2047 % rise in its revenues in the last 10 years- while its stock price actually fell down by 16 % in the same period 🤯
Can you really find such a comparable stock in the Indian or US markets?
How Can Stock Alpha Help?
Seeing this got me thinking- while we all don’t need to invest in China, there is so much noise in the market today- how exactly do you find value like this in the Indian markets?
I tried asking Stock Alpha: the AI powered Answer Engine a few questions around this, based on Burry’s principles 👇🏻
Query: Give me a list of Indian stocks which have seen their revenues grow in the last 3 years but seen their stock price remain flat or fall
Stock Alpha Answer:
Pretty cool right? Try it out for yourself- https://stockalpha.xyz/
You can screen for stocks by entering prompts like this & dive deeper into 200+ Indian stocks & their filings such as Annual Reports, Transcripts & Investor Decks
I don’t know much about most of these companies, but I guess I have my homework cut out for rest of the weekend :)
Note- This is not financial advice, this screener of stocks is generated using advanced AI models- please DYOR before taking any investment decisions