Here is my attempt to answers a few key questions I have received from Safal Niveshak readers on the current turmoil in the stock market.
You won’t find perfect answers below, but this is just my attempt to help you get over your fears, which may otherwise lead you to act in haste, which can cause some damage to your process of long term wealth creation.
Let’s start right here.
1. Why is the market crashing?
It hasn’t crashed…so far! The BSE-Sensex is down just 6% from its peak this year. BSE-Smallcap is down 14%. BSE-Midcap is down 11%. This isn’t a crash!
If you think it is, you maybe be suffering from ‘denominator blindness’, which is the tendency to focus on the absolute number then the percentage decline. Or you just seem to have been spoilt by rising markets over the past few years and were not investing in 2008 when the last real crash happened. That was painful for people who experienced it with their money (and not just their eyes and ears). We have not seen anything like that since then.
Okay, while I see that since their record highs in late 2018, the midcap and smallcap indices are down around 25% and 35% respective (which unofficially may be termed a bear market in such stocks), most high-quality small and midcap stocks still trade around fair to rich valuations.
We also need to understand that the stock market moves in cycles, and thus fluctuations are inevitable. Like you enjoyed the upcycle for a long time till it turned down last year, you need to happy accept the current part of the cycle too.
Remember what the Bhagavad Gita says – the very texture of life is of duality – pain and pleasure, success and defeat, birth, and death. Investing, with its bull and bear markets, cannot get away from such duality.
You may hold on to the hope that you would isolate your gains, take them home, and throw your losses out. This has been the hope of every ambitious investor, but up to this day no one has succeeded. Anyone who goes after gains (pleasure) must not complain when he comes across losses (pain). Markets serve this reminder frequently, and we must accept this.
2. Ok, not a crash. Why is the market falling?
If you go by the news, people are talking about poor budget, FII outflows, domestic slowdown, poor corporate results, P/E derating, poor monsoons, higher taxes on the rich, bad loans, cheating managements, fragile financial system, etc. But the reality is far more complicated I believe. It’s a mix of all these factors and some more.
My best guess for why the market is falling is that that (more) people are selling more stocks than they are buying. And this seems because there are more people with less stomach to withstand such temporary setbacks.
3. Are we headed to another 2008 like situation?
Ah, whether this situation is like 2008 is impossible to predict. You may be hearing some predictions on business television, but then as I mentioned, predicting is futile and I am not an expert in it.
All I can say is whether this turns out to be like 2008 or not is unknown. But it seems that things could remain difficult for some time to come…and can get more difficult if you continue to watch and read those headlines in business media that has a habit of taking things out of proportions.
So, if you wish to curtail your worries, first please stop watching/reading such media. That will give you ample time and sense to think calmly and wisely through this situation.
After the latest decline, stocks are a little cheaper than they were before it all began. But they could get a lot cheaper still before this is over.
4. Oh, so you are saying the market is still risky?
First, you must learn to differentiate between ‘risk’ and ‘uncertainty.’
Risk is when we don’t know what is going to happen next, but we know the probability of various outcomes from that event. Rolling dice is an example.
Real risks in investing are that of losing money, and missing opportunities. Sadly, we ignore the first risk when stock prices are rising, and the second risk when they are falling.
Uncertainty, on the other hand, is when we don’t know what is going to happen next, and neither do we know the probability of various outcomes from that event. Genuine uncertainty occurs in complex systems, where lots of actors interact over time – the economy and stock market are examples.
Real opportunities for profit only exist in the face of uncertainty, like something we have now. Which means that if we want to invest for success, we not only have to deal with uncertainty, we must seek it out, and then adapt to it.
5. Can’t help…I am still worried! Should I sell and cash out before the market falls further?
Investing is very personal, so there is no single advice that would apply to all. But just understand this that if you are sure of your job (cash flows) for the next few years, you have a monthly surplus, and your goals are far away (say, beyond ten years), just continue investing.
If you are becoming agitated with such a correction (not crash!), then you must be worried. In fact, you must seriously reconsider your decision to be in direct equities.
Remember what George Goodman aka Adam Smith once said – “If you don’t know who you are, [stock market] is an expensive place to find out.”
A long-term view requires an ability to stomach extreme short-term market volatility. If you can’t do that, you may want to move your money to other instruments like bank fixed deposits and liquid/debt funds.
Jason Zweig wrote in a post on WSJ – “In order to capture the potentially higher returns that stocks can offer, you have to reconcile yourself to the certainty of horrifying short-term losses. If you can’t do that, you shouldn’t be in stocks—and shouldn’t feel any shame about it, either.”
6. Is this an opportunity to buy more stocks?
If you have identified businesses that have great potential, according to your analysis, to be wealth compounders, then yes! Such market falls will look like tiny blips over a 10-year period. Don’t interrupt the compounding unless there is a question about the quality of the compounding machine i.e., the underlying business and/or its management.
But here is a caveat – If you think this a time to be greedy because everybody seems to be panicking, then ask yourself whether your greed is driven by your confidence in rational analysis of the business, or is it actually a manifestation of underlying fear, the fear of missing out? Is this really an opportunity or just a distraction?
Don’t forget, short term market fluctuations are severe distractions for our awareness about long term gains.
The few questions you must ask yourself are:
- Would this fall impact long term cash flows of the businesses I own?
- Would this fall impact the very foundations of these businesses?
- Have I invested using borrowed money?
- Have I invested in stocks based on tips, as I know nothing about the underlying businesses?
- Would I need the money I’ve invested in stocks over the next 1-3 years?
If the answer to all the above questions is ‘no’, then there is no reason for you to panic. Sit back and relax.
7. So what should I do? I want a final answer.
When you have no move, my friend, you do not move. You do nothing! Sit tight and read a good book.
On the other hand, if you have a well-thought-out move on how to deal with this situation, then move! But first, please move and switch off that business channel. Don’t let the experts’ running commentary fool you into thinking that they can help you identify (especially using charts) some exact entry point at which you can know you’re buying back into stocks at a bargain level. The future is uncertain, and no chart or predication can add any certainty to it.
In all, act wisely and never accept anything at face value. And do not indulge in spreading the market crash panic and rumours further. As the Jewish proverb goes – “What you don’t see with your eyes, don’t witness with your mouth.”
8. All this sounds soothing, but I remain unnerved. What do you suggest I should do?
As I said, don’t worry and don’t act in haste.
And please remember, as always, this too shall pass!
9. Should I shift some money to gold? Heard it’s an insurance against bad times.
Being an Indian, I look at gold more from emotional and traditional reasons. You are right that it acts as insurance in times when other assets are cracking. But you don’t overdo on insurance, do you?
I would not have more than 10% of my portfolio in gold, and especially in case I need to gift it to my daughter in the future. I just do not think more than that is necessary. It does not produce the cash flows, plus its price depends on the greater fool theory. But does it need to be 15% of your portfolio? No, that is too much. I think you are better off owning stocks for the long run.
10. By the way, my portfolio manager just gave me some good news. I made a profit of 40% last year, and now my portfolio is down 30%…so I am still net-net 10% in profit. That’s comforting, isn’t it?
Fire your portfolio manager! 100 growing to 140 and then falling by 30% doesn’t become 110. It becomes, hold your breath, 98. So, I’m sorry, but you are -2% down!
11. Oh my God! Well, let me finally confess something. I recently doubled down on stocks and bought a lot based on my manager’s and friend’s advice. They recommended some beaten down businesses in the NBFC space, though I don’t really understand how that business works. Anyways, now these stocks are substantially lower in prices now. What should I do of them?
Please take my advice here. Sell all your stocks, even if in a loss, and move completely out of the stock market. It is not a place for you. Come back only when you are wiser about your investments, know where you are putting your money, and are willing to do your own homework before investing your hard-earned money.
12. What stocks you are buying?
Short answer – Please spare me!
Long answer – See I told you, the stock market is not a place for you. You will ask for my tips, and God forbid, I give you some, you will blindly invest in them. Then, when those stocks fall and you lose money, you will abuse me and tell me what a fool I am.
So, let me tell you upfront that I am a fool with no good stock tips to offer. Plus, I have been wrong many times in the past. As Jesse Livermore is supposed to have said – “Tips! How people want tips! They crave not only to get them but to give them. There is greed involved, and vanity. It is very amusing, at times, to watch really intelligent people fish for them. And the tip-giver need not hesitate about the quality, for the tip-seeker is not really after good tips, but after any tip. If it makes good, fine! If it doesn’t, better luck with the next.
“It has always seemed to me the height of damfoolishness to trade on tips.
“Tips are just that. Tips. Following blindly is setting you up for epic ruin. First of all you have no idea what position that tipper is in. He may not even hold the stock he is recommending. Even if he is, you have no idea when he will unload his lot. Suppose he is selling his stock to you. Then you would be forced to dump it to someone else for a higher price.”
Got it? No? So again, please spare me!