March 26, 2020
Markets Tumbling, Recovering – What to do??
“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese proverb.
In times like present most people flock towards safety. Most do it because they don’t know how long this doomsday atmosphere will last, some even feeling like there will be No Tomorrow. But hunger for good returns on our investment never ceases. Kin Hubbard satires, “The safest way to double your money is to fold it over and put it in your pocket.”
On investment and earning good money from them, Warren Buffet – the legendary investor says, “If I buy a farm, I don’t know whether there’s going to be drought next year, but I know that there are not going to be 20 straight years of drought, and I know there’s not going to be 20 straight years of great rainfall.”
It is a proven fact that no matter what, in long term best returns come from stock markets only. And as Seth Klarman says, “The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” On these overreaction Warren Buffet advises, “Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”
Present markets are in such a state of folly. Most people are behaving like there will be no tomorrow. Am I underestimating the gravity of this pandemic – NO. But will the civilization cease to exist because of this pandemic – off course a Big NO. Sir John Templeton says,” Bear markets and business depressions are temporary. People do not remain pessimistic forever.”
Why do I believe that? Our mother earth has encountered many such problems in past including world wars, pandemics and natural calamities. Corona so far in about three months period have caused over 22,000 deaths. Many calamities in past century has caused deaths, many times of this number and in much shorter period. In 20thcentury alone over 600 million deaths were caused by pandemics like Spanish & other flu, encephalitis lethargica, cholera etc. World has found a cure to those diseases and moved on. “Fear & greed are probably the worst emotions to have in connection with the purchase and sale of stocks.” – Walter Schloss
Scientists are working hard to find a vaccine to cure this and will succeed sooner or later. And once it is controlled, the economists would be in a position to ascertain as to how much loss the world economy has suffered due to this and how long it will take to recover from there. The worst part of it will uncover if India & the third world countries slips into third phase of this pandemic of community transmission. But still data so far reveals that death rate due to this is between 1-5% of the infected people except for Italy and Spain. And major number of people who lost their lives were 60 years of age or more.
The worst part of this pandemic is that it has brought all economic activities across globe to a standstill. So unless it resumes, we can’t be sure of when the recovery will happen. An informal consensus view among financial analyst forecast world economy to shrink by -2 to -3%. Same flock maintain that growth of Indian economy during this period would be between -1% go +2%. Another positive about future prospects of Indian economy is that India contributes to only around 3% of world manufacturing as compared China who contributes to 24%. This pandemic has exposed global businesses to concentration risk in China in their pursuit of finding cheap goods. Now this world order is going to change and many manufacturing facilities will move out of China. We are very optimist that India will attract good chunk of it and double its contribution over next 4-5 years.
Stock markets never reflect the fair value of any business or economy. It will either be trading at premium to fair valuation during optimism and will be available at discount when sentiments are pessimist. At the moment they are trading at discount because of doomsday like atmosphere created around us. Warren Buffet says, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
It is easier said than done. Sir John Templeton says,” To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”
So is this the right time to buy equity. Are we sure markets will not go down further? At InvestmentMitra, we always maintain that we don’t know how markets will behave over next three months or so. What we know is currently they are available at very good discount and you should invest 50-60% of your long term surplus now. Invest your balance in staggered manner if market goes further down or they start consolidating to move upwards. Otherwise as the famous NHL Hall of Famer Wayne Gretzky says,” You miss 100 percent of shots you don’t take.”
JM Keynes, known for his Keynesian Economics says,” Successful investing is anticipating the anticipation of others.” Which Warren Buffet further elaborates why most people don’t make money, says, “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
So remember the two rules given by Howard Marks, “There are two concepts we can hold to with confidence: – Rule No.1: Most things will prove to be cyclical. Rule No.2: Some of the greatest opportunities for gain and loss come when other people forget Rule No.1”
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