“What is happening with the stock market, Vishal?” my very concerned trader-who-thinks-he-is-an-investor friend Ravi asked me on phone.
“Why Ravi, what happened?” I asked in my usual show of ignorance.
“Hey, aren’t you seeing the stock market crash?”
“Okay, so you know what is happening with the stock market. It is crashing!” I said jokingly.
“Stop that Vishal!” Ravi scolded me. “I have already lost all my profits in this crash, which I made during the past three years.”
“So how can I help you my friend?” I asked.
“Tell me if you have any clue where the stock market is headed?” he asked.
“Sorry, I have no idea where the market is headed.”
“So what are you doing these days?” he asked. “Staying on the sideline?”
“No. I am studying businesses as usual, and trying to find opportunities to invest.”
“Wait! But you said you have no clue where the market is headed. What if you buy now and it crashes further?”
“How does that matter Ravi when I am looking at the next 15-20 years?”
“Oh! How can I forget I am talking to an eternal optimist!” Ravi said. “But you still may have some clue where the market is headed in the next few months?”
“No, I have no clue Ravi.”
“I read in the Economic Times today that experts are advising to buy stocks because they see corporate earnings growth getting stronger going forward.”
“That would be great Ravi, but believe me, no one has any clue where the market or corporate earnings are headed in the next quarter or year.”
“How can you say no one has any clue! These are experts, and have seen various cycles like these.”
“I am not doubting that Ravi, but there is no point making or believing in predictions, especially when they are about the future.”
“Stop you, Vishal! It’s a serious matter and you can’t stop joking!”
“What’s so serious about a market crash Ravi?” I said. “For long term investors, these are happy times.”
“You are a sadist, I know,” Ravi said. “But coming back to what the experts are predicting, they say that since the market and the Indian economy have not done much for the past eight years, the only way forward is up.”
“Well, that’s a reasonable way to look at the situation,” I said. “But the economy and stock market don’t follow fixed patterns. A down period will mostly be followed by an up period – law of averages, you see – but no one can predict with any degree of certainty when the cycle turns, and whether the turn is sustainable.
“So how do you invest in such times when no one can say anything with any certainty?” Ravi asked.
“The rule is simple. Buy simple, high quality businesses that your understand, when they are available at reasonable or cheap valuations, and be willing to stick with them as long as they remain high quality.”
“That’s the same, old boring advice, Vishal. You don’t have anything new to suggest?”
“Well, my advice is like you. It just doesn’t change.” I said with a smile.
“Okay, but still, what kind of return do you expect the market to give in 2016? I just heard on CNBC a smart stock analyst predicting a 10-15% return this year, and with limited downside. What’s your view?”
“Well Ravi, if I ever had a view, I would’ve been on CNBC too!”
“Forget it Vishal! They won’t ever call you on CNBC with your kind of ignorance. Anyways, I also read in the ET article a very respected fund manager saying that this is the time to go marginally overweight on equities and by the end of the year, fully overweight.”
“Hmm, so effectively that fund manager is predicting that the market is likely to crash even further!”
“How can you say so? He never said that!”
“Well, I reasoned that you should buy more stocks i.e., go fully overweight, only when they are very cheap. Right? That is exactly what the fund manager is implying, isn’t it?”
“I don’t know Vishal, but I am scared to invest in this market where no one knows how much further it can fall.”
“You should stop investing in stocks directly, Ravi,” I said. “Better start SIPs in a well-managed equity fund, in case you find one. But not direct stocks.”
“Why do you say so! I have made so much money in stocks in the past 2-3 years.”
“Well, Ravi, making money in stocks when everyone is making money in stocks isn’t a big deal. Rather, it’s the ability to handle good and bad times with equanimity, and stay true to your investment process that matters, because you are looking at the long-term growth of businesses and not short-term stock price fluctuations. And since you seem to be making clear that you don’t know how to handle scary times, you should stay away from, or reduce your exposure to direct stock picking. And by the way, these aren’t scary times anyways. We have still not seen the capitulation or vertical declines like we have seen in the past big crashes…”
“Hey, you are trying to scare me more. You aren’t a true friend Vishal!”
“I am your true friend Ravi, as I am trying to save you from the agony that comes to people who don’t know that they don’t know what they are getting into. And as the noted financial writer George J.W. Goodman wrote this in his wonderful book, The Money Game – “If you don’t know who you are, this is an expensive place to find out.” By “this”, Smith meant the stock market.”
“I don’t want to talk to you anymore on this subject, Vishal!”
“Well, my dear friend, I too have nothing to add.”