Market is falling …Again ???

– By Meghashyam Sinkar

If you are a member of active equity investors group or watching the business channels or following any brokers or any particular reports by experts , then you are bound to follow everyday market movement & end up looking at your portfolio to become more worried and anxious . Latest news senses that terrifying things are going to happen around due to poor budget, FII outflows, automobile and other industries slowdown,  poor monsoons, higher taxes on the rich, bad loans & so on . One news talks about the probability of 2008 type crisis hitting to the markets  .

First, Let us tell you that this is not the first time it is happening . For the new investors and just to brush up for our old investors , please read our earlier blogs during such challenging times .

  1. market-crashed-be-happy . written on August 2011 – fear over European Crisis 
  2. It’s different this time …….Time will only prove it !!. written on July 2012 – fear over a prolonged recession signals from developed nations and no sign of improvement at Indian Economy .
  3. Part II : ” It’s different this time …….Time will only prove it !!  Written on September 2015 –  fear over a slowdown in China.

It is always said that markets have short term memory and hence the investors .

We need to understand that the stock market moves in cycles, and thus fluctuations are inevitable.  Bhagavad Gita says – the very texture of life is of duality – pain and pleasure, success and failure , birth and death. So investing can’t be left out . It also has duality – Bulls and Bears , ups and down .

What should you do now ?

  1. Go back to your investment objective and time decided for that investment . If you have come to equity for 1 to 2 years to get quick returns …. Then loose , suffer , learn ,  and then come back as matured investor . If you have invested for long term ( Say 5 to 10 yrs ), then need not to worry .
  2. For direct stock investors – If you have bought the stocks based on the news like jet airways will be takeover by someone, Yes Bank can’t be doomed  ,Modi has got a strong mandate then particular industry and stock will outperformed , the stock is trading 52 weeks low and you got into it , your relative or friend given you a TIP ,So you can pocket  handsome profits in really short time…… Then loose ,suffer, learn , and then come back as matured investor . But if you have bought a stock at reasonable price with sound analysis and that stock is available at lower price than your purchase price , then go & buy more if you have funds or else need not to worry . Just hold it for reasonably long period of time . You get your rewards .
  3.  For MF investors specially regular investors , it is anyways good as you can buy the units at lower price (NAV) . In fact SIP investors should pray for such periods . Because they make more money in cyclic movement of markets and make less returns if market is straight northward direction.  If you are the SIP investors who have come to market after seeing the returns of 2017 – basically 1 to 2 yrs old SIP investors then continue it for more than 5-7 yrs because equity is for long term . Understand the risk in equity and learn to manage it . Read more on the risk in equity and how to manage it here .
  4. If you are still worried and nervous , then simply sell everything and go back to bank deposits or post office . Equity is not meant for you . Because a long-term view requires an ability to stomach extreme short-term market volatility.

If you wish to curtail your worries, first please stop watching/reading such media.  That will give you ample time and sense to think and you will wisely sail through it .

Market always swing between irrational exuberance to unjustifiable pessimism and this is the only reason you can make superior returns in equities . Certainly does not bring superiors returns from any asset class . Please note that if everything is certain , your returns will shrink to normal or below normal level .

If you think you get out of the market now and re-enter at lower level as it is going to fall , then you can try it that way but make sure you enter back to market . Time will prove whether the decision is right or wrong . If get it right , then don’t try it every time . It was just a luck . Don’t succumb to over confidence bias or illusion of control . If get it wrong , then loose ,suffer, learn , and then come back as matured investor.

Don’t accept anything at face value. The future is uncertain and that is only certainty about it . Listed some of the forecasts that have gone down in history books for the wrong reasons.

  1. A famous cover story run by Business Week magazine in August 1979, after the United States had struggled with about a decade of high inflation, low growth and poor stock market returns. The story appeared three years before the market set off for an 18-year rally, a period in which stocks multiplied 15 times.

27forecasts2- business week

2. The August 2000 edition of the Fortune magazine ran a famous story picking 10 Stocks to Last a Decade.

Ten years later, a portfolio comprising the 10 stocks  lost 70 per cent of its value, with only one stock posting a gain, while two firms on the list went bankrupt, one of them being Enron.

27forecasts6

3. “We’re going to reach a point where stocks are correctly priced, and we think that’s 36,000… it’s not a bubble. Far from it. The stock market is undervalued.” by James Glassman, author of the unfortunately-titled Dow 36000, who made the bold call when the benchmark was at 11,500, in October 1999.
Ten years later, the Dow was still hovering around the 11,000 mark.

James

4. In mid-1999, after earning  117.3% return in just the first five months of the year , Monument Internet fund portfolio manager Alexander Cheung predicted that his fund would gain 50% a year over the next 3 to 5 years and an annual average of 35% ” Over the next 20 years”.  The fund received more than $100 million over the next year.  But $10,000 shrunk to roughly $2,000 after the internet burst .  The fund no longer exits in its original form and is now named as Orbitex Emerging Technology Fund .

5. Silver price prediction touching Rs 100,000 level when it was Rs 70,000 level in 2012 on the ground of industrial use , consumer preference over gold , limitation of supply and so many reasons by all analysts .

There are so many such forecasts like Brexit , US election 2016  , India winning recent cricket World Cup etc .

Instead of getting panic on bad news or overoptimistic on good news , it is better to define your goals , do proper financial planning , prepare cash flow and then invest accordingly .

And remember that “Investing in Uncertain Times is almost always more profitable than investing when everything seems certain”.

Happy Investing !!!

How to manage the Risk in Equity?

– By Meghashyam Sinkar

The general definition of risk in dictionary is : ‘a situation involving exposure to danger.’

However ,Risk in investment decisions is defined as the possibility that what is actually earned as return could be different from what is expected to be earned .

The definition talks the possibility of “deviation”. Deviations from expected outcomes can be positive or negative : Both are considered to be risky .

Let me share a simple day to day example quoted by my mentor . The elevator in any building is “expected” to halt at the same level as that of particular floor . However , it halts slightly above the floor level it will be considered as a deviation from the expected results . And same way if it halts slightly below on another floor , will also be considered a deviation . Both the deviations contribute positively to the risk of the elevator.

Let’s explore the risk in terms of Finance.

There are two types of risk in Finance. 

  1. Pure Risk &
  2. Speculative risk

Pure risk leads to financial loss, if invoked . E.g. Natural calamities like flood or earthqualke which leads to losses only and no measurable benefits .

However speculative risk will lead to either profit or loss or nothing ( no gain / no loss ) if invoked . Investing falls in this category specially in equity market .

E.g. Buying a share may lead to either profit or loss or nothing .

  • How will you manage this risk in equity ?

You can either avoid it completely or reduce it . Unfortunately you cannot transfer it by buying insurance like you do with life , car , health , shop , factory , fire & many more .

Though there is a concept of hedging wherein you can limit it but you can’t completely eliminate the risk .

But can you avoid the risk ?

We are currently living in the country of inflation where value of money gets eroded over a period of time if not earned more than inflation rate .
As time goes by, inflation increases the cost of money while reducing the value of money.

inflation

**Inflation assumed to be 6% p.a. for the above calculations for Illustration purposes.

Equity is one of the assets which gives higher return than inflation. Logically ,it will always give you higher than inflation rate for any business to sustain . So avoiding the risk in equity means putting yourself in inflation risk and fleeing away from wealth creation .

Please refer the below performance of different assets wherein equity is the clear winner over a longer time frame .

Equity returns

And the good part is that you can certainly manage the risk in equity .

The best way to manage is to diversify the risk . You can create the stock portfolio across all sectors if you have enough resource in terms of time , knowledge , information etc or simply invest into diversified equity mutual fund .

Now most of the investors have learned to manage the risk by investing into diversified equity mutual fund but still make losses .This is mainly because of impatience . Equity risk can be completely reduced if you invest it for minimum period of 10 years in a diversified portfolio .

Please refer the below table wherein we have taken the rolling CAGR ( Rolling returns ) across time frame i.e. 1 , 3 ,5 , 7 , 10 , 12 and 15 years . (You can refer the earlier blog on understanding the CAGR returns ; https://pentagraphcapitals.wordpress.com/2018/08/18/understanding-returns-on-investments/)

So , rolling CAGR of  year means the returns you generate exactly after one year say Nov 2003 if you invested on Nov 2002 which is 74.29 % , returns on Nov 2008 if invested on Nov 2007 which is -55.98% & so on  .

Similarly for 3 yrs like rolling CAGR on Nov 2003 if invested on Nov 2000  which is 11.57 % , Nov 2008 if invested on Nov 2005 which is -3.74 % .

And for 10 years like returns on Nov 2008 if invested on Nov 1998 which is 14.13%.

 

Slide21

So , if you stay invested in diversified managed portfolio of mutual fund , you are unlikely to lose money . In fact you will certainly make more than inflation returns .

The easiest way to define the goals with time frame and park the funds in equity diversified mutual fund for the goals which are beyond 10 yrs and above .

Remember the great long term risk of equities is not owning them  .

Happy Investing !!!