Playing The Right Game In The Right Conditions !!!
Cricket & Investing - Adapting Your Strategy To The Format & Conditions
When I was a kid, I couldn't understand why cricketers, coaches, and reporters spent so much time on pitch reports. I thought, "Just play good cricket!" But as I grew older, I realized how crucial the pitch report and the toss decision—whether to bat or bowl first—really are.
In many Indian grounds, especially during the IPL, pitch reports seem almost irrelevant. The game heavily favors batsmen with flat pitches that offer little help to bowlers. The ball comes nicely onto the bat, making it easy to score 200+ runs in 20 overs.
However, outside India, pitches often favor bowlers. These pitches allow for swing and seam, making it tough for the same team to score 200-300+ runs in 80-100 overs or even last 50+ overs in Test cricket in places like Australia or England.
Same Players, Same Talent but a Different Story : The game changes dramatically because the environment and conditions have changed.
There are two important points to focus on here:
Which Game Are You Playing - T20 or Test?
Whenever players start playing slow in T20 cricket, commentators and viewers start blaming them, saying, "Why is he playing so slow? Why is he even in the T20 team?". In T20 matches, you should be prepared to hit sixes from the first ball. It's common to get out quickly, but that's part of the game. The goal is to score as many runs as possible in a short time, even if it means risking wickets.
Conversely, whenever players start playing aggressively in Test cricket, commentators and viewers start blaming them, saying, "Why is he playing so fast and taking so many risks? If he gets out, everyone will say, 'Why is he even playing Test cricket?'". In ODI or Test matches, staying on the pitch for a longer period is more important. Runs will come eventually if you remain at the crease without losing your wicket.
Understanding the type of game you are playing is crucial.
Both approaches are Ok if you understand which Game you are playing but Problem will arise when you will start playing Test with T20 approach and T20 with Test approach.📝
What Are the Conditions - Pitch or Weather?
If you're playing Test cricket in overcast conditions on a pitch that favors bowlers and you start playing aggressive cricketing shots without considering the team's situation, Sunil Gavaskar and all the viewers like me will say only three words: "STUPID, STUPID, STUPID."
Let’s comeback to Investing now :)
The Environment :
Just as Cricket format, pitch and weather conditions in cricket determine how you should play on a given day, assessing the market environment is crucial when making investment decisions.
Bull Phase: 📈Optimism is at its peak. Stock prices are rising, and investors are highly confident.
Good news is prevalent. Many companies are posting strong results, and the number of IPOs, NFOs, and QIPs is at its peak.
The market and most stocks keep making higher highs and higher lows.
Most investors focus on returns and often ignore risks.
In a great market environment, even those without a strategy can make money. This phase can make investors impatient and attract them towards quick money.
Stocks keep hitting new all-time highs. Most technical breakouts sustain, and you can make good money in positional trading/investing by just drawing some lines with volume on chart.
Base Effect - Because of previous Bear/Sideways phase, Base will be low so most of the companies will post strong numbers because of low base.
Good result will trigger more rerating and take valuation higher, bad result will not derate stock that much. In case of bad news, investors will simply say, "The worst is already behind."
Sideways Phase: ➡️
Market sentiment is neutral.
News is mixed, with no clear trend. The number of companies posting good earnings will start to slows down. IPOs, NFOs, and QIPs start to slow down.
Stock prices fluctuate within a range, showing no significant upward movement or slowly showing signs of downward movement.
The market and most stocks start forming lower highs and lower lows.
Price fluctuations create confusion in investors minds. Investors start doubting their investment decisions.
Most investors start thinking about risk before returns.
The number of stocks hitting new all-time highs reduces. Most technical breakouts do not sustain. You will start seeing selling whenever stocks approach breakout levels.
Base Effect - Because of previous Bull phase, Base will be high so most of the companies will not able beat last year numbers because of high base.
Most of the good result will not able to take prices higher and valuation derating will start, investors will simply say, "Result is already priced in and valuation is too high". Bad result will trigger very fast derating in stocks. In case of bad news, investors will simply say, "More Pain ahead”.
Bear Phase: 📉
Pessimism is at its peak. Stock prices are falling significantly, and investors are reluctant to invest.
Bad news is prevalent. Very few IPOs, NFOs, and QIPs come to market. Very few companies post good earnings.
The market and most stocks keep making lower highs and lower lows.
In this phase, many investors are driven out of the market. People start saying how much better fixed deposits are compared to the stock market. Investors move towards fixed-income instruments, and very few want to stay in the market.
In a bad market environment, even those with the best strategies make very little or no money.
Very few companies will be able to post good numbers and then also very few stocks will react to good numbers. Initially, most of the stocks will get punished because of overall selloff. As this phase get matured and valuation derating happened at very high level, stocks will start looking very attractive. This is the time when we should keep eye on stocks growing well & trading at reasonable valuations.
Base Effect - Base will be very low and when this phase will get matured you will start seeing very good numbers & attractive opportunities because of low base.
Don’t try to average down last bull market winners because most of the times, new bull market arrives with new winners.
Keep eye on sectors and companies hitting first 52 week high & start tracking their Fundamental triggers because these sectors and stocks could become leader of next bull market.
These phases are inevitable, and anyone looking to make money in the market must navigate through them by adapting to the prevailing conditions. We need to adjust our expectations and Strategies according to market environment. Having basic understanding of Valuation from Fundamental point of view & Technicals triggers from technical point of view, Will help you to decide when to go aggressive & when to go slow in taking bets.
Long Term Investing (ODI / TEST Format) :
Bull Phase -
During this euphoric phase, you will see many companies posting good earnings, most of the sectors will be going through tailwinds, Many stocks will be making new 52 week high / ATH. With a favorable market environment, look for sectors with tailwinds and identify stocks with promising prospects for the next 1-3 years that are trading at reasonable starting valuations.
Good market Environment + Sector Tailwind + High Growth + Reasonable Starting Valuation + Fundamental Catalyst + PATIENCE = Long Term Investing Journey !!!
Sideways Phase -
In this phase, many companies will start posting weak numbers, with only a few standout performers in quarterly results. Most important thing to do in this phase is ADJUST the return expectations and Increase your patience level. If you think, Stocks which you are holding are trading in extremely overvalued zone then there is no harm in taking some profits off the table in this phase or in bull phase. Good stocks will hesitate to move up and mediocre/Overvalued stocks will not shy away from falling like anything.
Adjust the return expectations + Risk Management + Be choosy + Try to Find reasonably valued business + Sector Tailwinds + TONS OF PATIENCE = Long Term Investing Journey !!!
Bear Phase -
This is the most challenging phase for long-term investors, but it's an inevitable part of the market cycle. Both good and bad stocks will decline due to low market liquidity. Companies will continue to post poor numbers, and even if a few manage to report good results, their stock prices may not react much. Bad news will dominate, and any good news will likely be ignored by the market. During this phase, many stocks will trade at very attractive valuations, but only a few experienced investors will seize this opportunity.
When whole world is pessimistic, Be little more optimistic because only optimist can buy pessimism.
This is the best phase for long-term investors to accumulate good stocks at attractive valuations, setting the stage for great returns when the market eventually turns into a euphoric bull phase.
In bear market, Its ok to lose some capital but don't lose your CONFIDENCE because if you lose your confidence then it will take you very long time to comeback. - Amit Jeswani
Be optimistic + Find first few Sectors & stocks hitting 52 week high / ATH + Sector Tailwind + High Growth + Reasonable Starting Valuation + Fundamental Catalyst + TONS OF PATIENCE = Long Term Investing Journey !!!
Bro Tip :
Don’t try to average down last bull market winners because most of the times, new bull market arrives with new winners.
Keep an eye on sectors and companies hitting first 52 week high & start tracking their Fundamental triggers because these sectors and stocks could become leader of next bull market.
Surround yourself with like-minded individuals who have a positive long-term perspective on the market.
Short Term Trading/Investing (T20 Format) :
Bull Phase -
During this euphoric phase, all the resistance will break and breakout will sustain. Market environment is good, Search for good theme, Find out reasonably valued stocks and set alerts at 52 week / ATH and you are all set to make good money and all credit goes to Liquidity :)
Good Market environment + Good Theme + Fundamental Catalyst + Technical Breakout with volume + Higher high Higher Low = Best Phase to do Positional / Short Term Investing
Sideways & Bear Phase -
As you already have habit of making quick money because of previous bull phase, you will slowly start getting disappointed because high fluctuation in market and prices will start trading in a range or go down quickly. Many stocks will not able to break the resistance and breakout will not happen.
When NOT to trade is as much important as When to trade.
The same Technical patterns would work wonders in bull market but will fail very badly in this kind of market. As a short term trader / investor, knowing when to be in the market and when to be out is more important than whatever strategy you pursue. One can't be a momentum trader/investor in a Sideways / bear market where the success ratio drops significantly.
In Sideways / bear market, most of the resistance will act strongly & fall will start from resistance. It is always important to understand what kind of market we are in.
Sideways / Bear market + No or Low liquidity + Lower high & Lower low = Avoid Short term Trading / Investing
To summarize this newsletter: -
Understand the Environment:
Just as Cricket format, pitch and weather conditions in cricket determine how you should play, assessing the market environment is crucial for investment decisions.
Different Phases of the Market:
Bull Phase: Optimism is high, stock prices rise, and good news is prevalent. Investors focus on returns and often ignore risks.
Sideways Phase: Market sentiment is neutral, with mixed news and fluctuating stock prices. Investors start thinking more about risks.
Bear Phase: Pessimism is high, stock prices fall, and bad news is prevalent. Investors become reluctant to invest, and even the best strategies may yield little or no returns.
Adapt Your Strategy:
Long-Term Investing: Adjust your expectations and strategies according to the market environment. Use fundamental and technical analysis to decide when to be aggressive and when to be cautious.
Short-Term Trading/Investing: Know when to be in the market and when to stay out. The same strategies that work in a bull market may fail in a sideways or bear market.
Patience and Flexibility:
Both in cricket and investing, understanding the type of game you are playing and adapting to the conditions are crucial for success.
Opportunities in Adversity:
In a bear market, while many investors may leave, it can be the best time for long-term investors to accumulate good stocks at attractive valuations.
Disclosure: I am not SEBI registered. The information provided here is for education purpose only. Hence, always check with your financial advisor before acting on any contents of this newsletter.
Excellent articulation and connecting to Cricket is a wonderful attempt