We have seen unprecedented pandemic outbreak in last couple of weeks . The Novel Virus – Corona has already taken thousands of innocent lives and still shows no signs of weakness.
As for the markets, the pandemic of coronavirus has shaved off nearly a third of the global market cap. India is no exception . Our Markets have corrected by nearly 30% . And it was in short period of time .
It is quite natural for an investor to get panicked and get anxious .
When market drops , that financial loss fires up your ‘amygdala’ – part of your brain that processes fear and anxiety and generate famous “flight or fight” situation . So it is normal , just accept it .
In fact , the brilliant psychologists Daniel Kahneman – Nobel prize winner and Amos Tversky have shown that the pain of financial loss is more than twice as intense as the measure of an equivalent gain . Which means that the magnitude of loss of Rs 1000/- is more than double that the magnitude of gain of Rs 1000/- .
Losing money is so painful that many people ,terrified at the prospect of any further loss , sell out near the bottom or refused to buy more.
The ideal way of sailing through such situation is : not to act in panic . Observe the situation & let it evolve on its own . It is perfectly ok to have no opinion or views on the same. Because no one knows. It is unknown territory .
Lot of damage is already done across markets in anticipation . No one has any clue on how things will unfold in coming day.
However , past experience of market gives the evidence that things come back to normal sooner or later ….be it Tulip Mania 1673, South Sea Bubble 1711, Spanish flu in 1917 , great depression in 1929 , Black Monday 1987 , Asian crisis 1998, Financial meltdown 2008 and many more . The reason , the magnitude and the recovery may differ from event to event . But it comes back to normal .
Indian market have also experienced such shocks earlier . Some of them have shown below in tabulated form .
The data suggest that a long term horizon is essential to profit from equity as your losses can be undone if you simply stay put .
One can argue that this time it’s different …but it is quoted as most dangerous words in investing by Sir John Templeton, legendary investor.
There is no argument that COVID-19 has no national boundaries , no social bounds.It’s already disrupted the economic lives of billions of people. It doesn’t care what you believe or who you pray to or how much money you make. It is hitting hard to everyone .But, as saying goes , it is not what happened matters , what matters is how we respond …whether it’s life or investing .
Equity valuation has come to good and attractive level . We suggest to add more in equity , rebalance your portfolio . However, we need to make sure that one has to have enough surplus to take care of next at least 10-12 months liabilities and household expenses . This is anyways the first part of financial planning i.e. Contingency planning . However, you revisit it your numbers before you commit any money to equity .
And Don’t worry about further downside of 10-15% but think of missing out future potential upside of 40-50% .
Sharing the extract of Warren Buffett 1987 letters to shareholders describing Benjamin Graham’s the famous parable of Mr. Market
He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.
Even though the business that the two of you own may have economic characteristics that are stable, Mr Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains.
At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.
Mr. Market has another enduring characteristics : He doesn’t mind being ignored . If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.
Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence.
Benjamin Graham writes in his book “The Intelligent Investor” –
Basically , price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market.
In equities , darkest times offer the brightest opportunities. Albert Einstein said it rightly “In the midst of every crisis , lies great opportunity.”
And finally everything is not about money, markets and investing. Stay safe. We wish you and your families the best of health and happiness at all times.