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Sometime You Can’t Help But Make Money from Stocks. Is That Time Now?

The BSE-Sensex is down almost 1,000 points over the past 3 days alone. Newspapers have started shouting out – “India, tottering and sputtering”.

Some are calling this crash a “tragedy”, while there are others who are describing it as a “disaster” for investors.

And then, of course, there are many who are predicting that the future is going to get worse and that investors must stay on the sidelines till the dark clouds disperse.

Anyways, before we move further, here is a snapshot of the 4 major falls – the tragedies and disasters – the Sensex has seen over the past 15 years.

This first major drop came after the dot com boom bust in early 2000. The Sensex dropped 56% in a matter of 19 months.


Data Source: Ace Equity

This second major fall started in May 2006 and lasted for just 26 days. But during this period, the Sensex came crashing down by 29%!

The reason – heavy selling by foreign investors, Indian investors, and an overall weakness in global markets.


Data Source: Ace Equity

Then came the ‘depression’ of 2008, which saw the Sensex falling by 61% between January 2008 and March 2009.

This time the blame lied in the subprime and credit crisis in the western world, especially the US.


Data Source: Ace Equity

Finally, we are currently in the midst of the fourth major fall. The Sensex has already dropped 24% since November 2010, and there are fears of a capitulation going forward.

This time the fingers are pointing to the European ‘disaster’ economies and a possible bankruptcy of a few of them.


Data Source: Ace Equity

Anyways, across all these crashes, one thing comes out clear – one key reason for all these falls has been a crisis in the global markets that got transferred to Indian stock prices.

But even then, if you see the next chart that shows Sensex’s movement over the past 15 years, which covers all these 4 major falls as discussed above, the average returns a long term investor would have made during this period stands at around 12%.

This isn’t a poor rate of return by any standards, considering the grave situations the world, and Indian stock markets have been through all these years.


Data Source: Ace Equity

Anyways, here is a chart that I’ve plotted, and which shows a possible move of the Sensex over the next 15 years.

What I’ve done is trace the daily gains/losses of the Sensex of the past 15 years, and extrapolate the same into the next 15 years.

Using these numbers, the Sensex is expected to rise to around 87,000 levels by December 2026!


Data Source: Ace Equity, Safal Niveshak Research

Based on this chart, see where we are today, and see how insignificant today’s fearsome volatility would look like when you look back from 2026.

See, the point I want to make by showing this future chart of the Sensex is not to predict the future – I’m very bad at that – but to show you why you must not worry much about the short term market crashes, and instead use them as opportunities to buy stocks for cheap and generate good wealth over the long term.

Sometimes in life, you can’t help but make money
One of the best investing lessons I’ve learned in life is this…

There are times when you’ll make money from stocks from simply existing – just being in the right place at the right time (like by just being there and investing in late 2001 and early 2009).

And there are other times in life when, no matter hard you work, no matter what you do, you won’t make any money from your stocks.

In such times, you’ll do the wrong thing at the wrong time (like buying expensive stocks before the dot com bust in late 1999 and before the current crisis began in late 2007).

If you want to use such market volatility to make good money from stocks over the long term, you need to do 2 things:

  1. Recognize those good moments – the moments when you can’t help but make money – and capitalize on them
  2. ‘Know’ that those moments ‘will’ end. Know that stock markets will fall, and that day-trading or whatever-is-the-next-big-thing, won’t last forever.

I have seen many investors paying heavy price for ignoring the ‘good moments’ to invest, and then ignoring when such good moments turned into ‘bad moments’.

Wait, I’m not asking you to try and time the market, my friend. That’s impossible!

All I’m trying to tell you is that:

  • Sometimes you can’t help but make money from stocks, and
  • Sometimes you can’t help but lose money on stocks

Just realize which moment is which…and you’ll do well as an investor.

So far, 2011 has been one of those times in the markets where, no matter what you do, you’re not going to make any money.

You might be wondering if you’d done better by simply moving to cash and gone holidaying for the year.

But times will change for the good, and you need to be prepared for that.

Back in March 2009, people thought the world was coming to an end. But then, no matter what investments you bought in March 2009, chances are, you doubled your money within two years.

I believe we’re fast approaching a moment like March 2009, where no matter what you do, you’ll make money over the long run.

Stocks are starting to look cheap. The question is – for how long would they remain cheap, and could they get cheaper?

I don’t know the answers to these questions.

But I know one thing for sure – We’re getting close to one of those times when, if you are prepared, you can’t help but make money from stocks.

Remember, you miss 100% of the shots you don’t take, so getting fearful and getting to the sidelines is not a profitable plan.

Staying in the game always has been, and always will be, the way to profit.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Agreed with you that sometimes it is impossible to not make money. But our valuations are still not as cheap as they were in March 2009 (PE=12). Currently we are around 17-18. But yes, there are a few pockets in equity universe, which deserve investments now. These are companies which have earning visibilities as well as the strength to withstand the present crisis.

    Interesting analysis of markets till 2026 🙂

  2. Parashuram Hallur says:

    After reading this article, this question came to my mind – do you think we can sell off all the stocks now and sit on cash to buy stocks at cheaper price?

    • Hi Parshuram,

      As I wrote at the end of the post – “You miss 100% of the shots you don’t take, so getting fearful and getting to the sidelines is not a profitable plan.
      Staying in the game always has been, and always will be, the way to profit.”

      We’re definitely getting close to one of those times when, if you are prepared, you can’t set yourself to make money from stocks over the long term. For that, you must be prepared with a list of good quality stocks and cash to invest in them at the right valuations. Selling everything and waiting for stocks to correct and then re-invest wouldn’t be an appropriate step, because you’ll be paying unnecessary broking fee plus you won’t be sure when to get back into stocks again.

      I hope this answers your query.

      Regards,
      Vishal

  3. Hi,

    If you had surplus funds would you invest it in equity say today or tomorrow or in the next one week. Your reply should be restricted to a yes or no. ofcourse you may choose to not answer 🙂

  4. Just an SIP because you see tougher times ahead. why not say 50% of the funds ?

    • Investing in the current markets is like catching a falling knife. Your need to get your hand down as you catch the knife.

      In the same way, given the extreme volatility that is expected to unfold in the global financial markets, and India’s own macroeconomic issues, stock prices have a great chance of continuing their fall.

      So an SIP is always a better option. And if you are very much convinced that the valuations are extremely cheap now (of the stocks your wish to invest in), the SIP amount can be higher.

      Say, instead of 10% of your surplus funds that you would have invested in other times, you can go ahead and invest 20% now, but only if you are very much convinced about the story.

      My experience suggests that discipline (that an SIP brings) must always trump conviction.

      • agree. thanks. uncertainty is ruling the roost as of now.
        debt has moved from relatively efficient private hands to an ever willing Govt (may be they made to agree by the rich and famous) hands in many economies. public hands with money, in general, are not the most efficient hands. the outcome of this will haunt for quite sometime.

  5. Dear Vishal,

    In addition to what you have written as 15year average returns from sensex, I would like to add that if one had invested systematically from 1st July 1995 to 1st July 2012 lets say an amount of Rs. 1000/- without bothering any noise from market, the returns would have been as follows:

    Amount Invested : Rs 205,000.00
    Worth of Amount Invested : Rs 1,984,605
    SIP Return (%) : 23.18% pa

    The above figures are based on actual returns provided by Franklin Prima Plus Fund.

    Amazing returns right! There is a real serious money could be made in long term through systematic investing. Only discipline and patience is required to achieve that return.

    Regards

Trackbacks

  1. […] Before you start thinking that I am really a permabear, I suggest you read a couple of my posts (here and here) that I wrote sometime in December 2011…the time when stocks were about to go down the […]

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