Surviving the Storm: Why You Must Swap "Wet Sponges" for "Rubber Balls" in a Geopolitical Crisis

Survival of the Fittest: Why Your Portfolio Needs "Rubber Balls," Not "Wet Sponges"

Author: Surendra Jauhari

As geo political issues are escalating it is natural tendency to feel panicked when “everything is down”.

When news headlines scream for war, supply chain disruptions and rising inflation, the immediate human reaction is to freeze everything and hold on, hoping for the rapid recovery of their down portfolio.

However, during the crash of holding portfolio requires cold and rationale assessment of what you holding. Critical difference of high quality (fundamental) stock and weak stock (non-fundamental) should be taking into the consideration and this is not the question of how fast they fall, but their likelihood of recovery.

During the crisis and in this current environment, kept holding of weak fundamental stocks is not just uncomfortable, it can lead to severe underperformance or permanent capital loss.

Let’s understand with the example of Sales employee in an organisation, their performance reward them for incentive, not for those who underperformed. Same way people buy weak companies, it includes weak PSU stocks also on the basis of news headlines or hope of future performance. Buy companies those who are performing in all parameters, those fundamental companies have inherited strength to perform and come back even they down due to crisis. 

Key Talking Points

The “Rubber Ball” vs “Wet Sponge”

Panic selling impacts everything during the crisis and hit the market badly. Yet high quality fundamental companies and weak companies act very differently after they hit the ground.

Fundamental/Moat Company (“Rubber Ball”)

These companies have strong fundamental, they are the leaders in the market with strong cash flows, low or no debt, high margin growth and a “moat” (brand, technology and pricing power). Whenever market crash either these stocks get thrown down hard or may be lass down (price down), have the inherited strength to comeback/bounce back to their previous highs quickly.

Let’s take the example of Bajaj Finance, in March 2020 it was trading between 4500-4900 and got hit down to 1780 in March 2020 due to covid panic selling. By 14^th  Dec 2020 it has made previous March high in just 298 days, 15^th Dec 2020 was the record date for all time high, stock closed at 5112, marking a full recovery and a new high.

Weak Companies (“Wet Sponge”)

These are the companies which do not have fundamental strong, with no moat, high debt and low margins. When these companies hit and get thrown down, either they do small recovery or stay there. In many cases, they never come back to their previous high, because crisis has broken their fragile business model.

The Goal: Never hold wet sponge in your portfolio, and expect it to fly.

The “Recovery Time” Difference (Crucial)

Holding weak stock with the hope of “break-even, can be biggest mistake during the downturn market.

Study of historical data shows that high quality stock and weak stock may fall by similar percentage during the crisis and panic selling but they do not have similar recovery. High quality companies may recover between 150 days to 300 days but weak companies may take more than 950 days or may take more years to recover, if they do well, sometimes not possible to recover.

The point is by holding weak companies and waiting for the market to improve, you are potentially losing your capital and killing your time. Due to this mindset, you even locking up your capital for years and missing those who have faster recovery and perform better.

Why weak companies may not recover after geo-political shocks

The simple reasons, when tensions escalates and it hits crisis like a war, disrupting oil, sanctions creating inflation, oil imports at higher prices and depreciating currency due to high cost of imports.

Strong Companies will sustain due to cash surplus, pricing power and moats to absorb these costs.

Weak Companies will struggle with high input prices, high debt and low margins. They either face insolvency or need to raise capital at low prices, which wipes out existing shareholders.

Companies may struggle to make interest payments due to the crisis and low demand for their products, while also lacking the pricing power to pass high input costs on to consumers.

Wealth Creation vs Wealth Preservation

It is termed as (Growth), focus on increasing your net-worth. Wealth creation means aggressive and strategic growth.

In other way, we can say wealth creation is not timing the market, it is more about time in the market in high quality and growth-oriented companies.

When we think about wealth creation, immediately strategy change and we stop looking at 6-month chart and start looking at the 10-year/ 20-year horizon, then geo-political “crisis” become noise. These are actually entry points for growth assets.

Identifying Growth Assets These are the “Rubber Balls” companies or assets that own the future, and it can be included with (AI, Infrastructure, Energy, and Healthcare).

“You are not buying stocks; you are buying a company’s future cash flows. Where businesses are fundamentally strong, a price drop is a gift, not a threat.”

Wealth creation might be boring most of the time but it involves the “calculated risk” of doing nothing while the world panics.

Wealth Preservation (Protection) Building wealth is like a part of journey, and preserving it ensures that hard earned money which you have built, should not erode the fortune due to temporary market volatility. It involves shifting from a pure growth mixed set to a balanced tax-efficient approach.

Wealth is created through intense focus and effort, but it is preserved through discipline and structural systems.

It involves setting up trust, writing a will and having adequate insurance (health, life and liability), it establishes funds to cover 6-12 months emergency funds, overall protecting the core portfolio.

It focusses on risk-managed returns rather than high returns, it involves moves from high-risk assets to mix of stocks, bonds, debt and high quality, less volatile income generating assets as one approach retirement.

The Bottom Line: Restart Your Growth 

Don't let your emotions tether you to a sinking ship. Rational investing means admitting when a company no longer has the "bounce" required to recover.

Cut the Wet Sponges. Move that capital into the sector leaders—the Rubber Balls—that have the pricing power and balance sheets to survive the storm. This isn't just about saving your money; it’s about positioning yourself to catch the next wave of growth.

Key Talking Points for Rebalancing:

• Is my company debt-free or low-debt?
• Does it have pricing power?
• Is it a leader in its industry?
• If the answer is no, it's a "wet sponge."

 Disclaimer: This is educational commentary, not direct financial advice. Always analyze your portfolio's fundamentals.

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