Handling Uncertainty: Lessons

"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffet.

These words spoken by the investing legend has proved to be true in the present market conditions. The past two decades have seen a few such times of uncertainty and market crashes. Beginning with the dotcom bust in 2000, quickly followed by the 9/11 crisis in 2001 and later the global financial crisis in 2008-09. Time and again, the message to equity investors has been clear.

• Equity markets carry unforeseen risks.

• Markets can be highly volatile in the short term.

• Over long periods, equities are good wealth creators.

These learnings have been reinforced in the current markets. However, for many new investors, especially millennials who have started investing in the past decade, the temporary crash may have come as a surprise. It would be perhaps best if we set ourselves in the right mindset, attitude and expectations. Here are a few things that you must remember with equity investing…

Focus on basics:

Risk comes from not knowing what you are doing. Before starting with equity investing, it would do us good if we understand the asset class properly. Equity is not recommended for everyone and it has to match your risk profile and investment objectives. These are the prerequisites of equity investing and the next step is deciding on your asset allocation. A properly diversified portfolio with proper adherence to asset allocation over time is a very basic principle and strategy for portfolio management. Apart from this, starting early, choosing the right product for the asset class and investing regularly are other basic points one needs to follow. Stock selection and market timing have been repeatedly flagged by experts as futile as they cannot be practised accurately and sustained over long periods of time.

Long-Term:

How much is long-term? Many investors might be wondering. This is really a subjective question and there is no right answer. At times, market crashes can potentially wipe out many years of growth. Looking at returns during such temporary times is not the right thing to do. History has shown us that there are much more ‘positive’ or bullish investors than ‘negative’ or bearish investors by nature. That's why we find the bronze sculpture of the ‘Charging Bull’ or the Wall Street Bull standing on Broadway in the Financial District of Manhattan, New York City. Thus, markets have remained in bull and or neutral market phases much longer than bearish phases. Thus, the probability of profits increases as you increase your horizon. For many, long term is anything over 10 years but every wise investor agrees that it must never be below five years.

Conviction:

Investors who demonstrate conviction, especially during market corrections, have a big advantage over those who do not have such conviction. Typically equity assets change hands in markets when such conviction is tested. Your buying at lower prices means that someone is selling at those prices, booking losses or forgoing future profits. That is the cost of not having the conviction that the person is paying and you are benefitting from. As Indians, we are blessed to have a growing economy with huge potential for growth over the next few decades. It is destined to emerge as a global economic powerhouse within our lifetime. Equities should give us the opportunity to participate in that growth.

Patience:

“If you aren’t willing to own a stock for ten years, don’t even think of owning it for ten minutes” - Warren Buffet. Patience is simple yet very difficult to practice. In a fast-paced world, we expect that our investments too deliver returns within a year or so. Most investors become impatient quickly and either redeem or move their investments if returns are not visible soon or if there is a correction in prices. There is absolutely no need for ‘active’ portfolio management for long-term wealth creation. Many studies point out that it is not very helpful to do so. Only those investors who have patience, stay invested with conviction in equities will emerge successful.

Courage for Action:

All the world’s knowledge and wisdom is futile unless it is put to use. Many investors, in spite of having all the knowledge and even guidance from advisors /experts, fail to take timely and/or required action when needed. The courage to back your conviction is the last impediment to success as an equity investor. Investors to be really successful, have to back their basics, long-term investment horizon, conviction and patience with ‘meaningful’ action to get ‘meaningful’ results. Going forward, we would do well to stay put and perhaps even increase allocation in a staggered and disciplined manner.

Conclusion:

We have summarised almost all the key points necessary to be reminded at current times. We believe that the uncertainty is still not over and we may expect subdued and volatile markets with low economic growth in the coming months. We must stick to basics, not panic and follow the disciplined approach to investing. Covid-19 has made us realise our weakness as humanity and also showed us a mirror in many aspects of our lives. Let us take the investing experience also in our stride and put it to good use in future.