Those investing now will smile 5 years later

Till December everything was fine. The economy was growing at 9% plus, corporate earnings were healthy at 25% growth rate and with the Sensex nudging 21000, the stock market was our darling.
We couldn’t have enough of shares, mutual funds and systematic investment plans. And why not? Yes, there was that bit of extra risk but hasn’t equity been known to outperform all other asset classes over time? So, we weren’t worried, because, you see, we were the long-term investors.

The Sensex on November 5, 2010, was 21005 but that really doesn’t matter to the long-term investor because, you see, the long-term investor is in the game for the long haul. Cut to three months later. February 1, 2011. Sensex at 18022.

It’s as if all hell’s broken loose. The phone won’t stop ringing. However, each time it’s answered, the voice on the other side shouts the same word: Sell!

Each one of these investors had nodded their head vigorously when asked before investing if they are in the market for the long term. All of them without exception had said they were willing to hold the investment over the next five years to get the best out of equity.

However — three months — three months was all it took to break down the long-term investor. It just required a fall of 14% to completely wipe out the tribe of the long-term investor. Overnight we have been overcome with self-doubt. Is the market doomed? Will this correction be more severe? Oh my God! What do we do now?

This article seeks to address the last question —What do we do now? For starters, I suggest we look in the rear-view mirror. An average equity fund has returned 16.5% p.a. over the last five years. In terms of numbers, Rs10,000 invested five years ago would have grown to Rs21,460 today. Take away 14% and there is still over Rs18,400—roughly 84% appreciation—left over at the table.

So where is the carnage, bloodbath, mayhem and whatever other metaphor that the media could think of?

Actually, the current situation reminds me of a story. It is said that emperor Akbar once demanded from a chief minister that he come up with something to change his mood. If the emperor was sad, he should be made to feel happy and if he was happy, he should be make to feel sombre again.

The deadline: One week or severe punishment. 

With this impossible task at hand, the minister approached Birbal, known for his wisdom and wittiness. Birbal smiled and told him not to lose heart — after all, they had a week to think up of something.

Finally, the D-day arrived with no remedy in sight. Akbar summoned his minister who approached with dread.

On the way, Birbal slipped a piece of paper into the chief’s hands and told him to present it to the emperor. Totally clueless, the minister did as told. On reading the chit of paper, the emperor’s face lit up and the minister was congratulated.

The words scribbled on the paper were: ‘This too shall pass’.
This ancient bit of wisdom is certainly apt in today’s market scenario.

Think about it. The market was on a steady upturn. The great India growth story, strong corporate earnings and a fundamentally strong economy kept the FIIs begging for more.

Within no time, the market takes a downturn and all these factors are forgotten. This column is not about the factors that led to the fall—I am sure in the days to come, reams of newsprint, not to mention millions of sound bytes would be devoted to that hyper-analysis - but suffice to say that at the domestic level, the government has had to take measures to tighten interest rates to fight rising inflation.

Increasing rates are bad for everyone and especially so for corporate earnings. Internationally, the unfolding crisis in Egypt has led to a spiral in oil prices. Expensive oil leads to an overall increase in costs - once again not too good for businesses and consequently for stock markets.

So, the coming few weeks or even months are going to present a fantastic opportunity to those investors who recognise it as such.

Because such investors are going to get another chance to buy low and sell high. However, as straightforward as this may sound, I know from personal experience that it is one of the most difficult things to do. For the simple reason that it goes against basic human instinct. When the good times are rolling and the indices steadily creeping upwards (as they were sometime back), the first impulse is to try and join the party. So you go and shop around for shares.

And the first part of the above rule is flouted. Eventually, the inevitable happens when the bull-run ends and the valuations cool down. Panic sets in and shares are sold in a hurry. There goes the second part.

In the end what happens is that one ends up doing just the opposite—buying high and selling low.

And history keeps repeating itself till one makes a conscious effort to come out of it. And that requires courage, gumption and, more importantly, the conviction of buying low and selling high.

Know this much—five years down the road, it’s only those smart investors who are actually buying in the market currently who will be smiling. Don’t take my word for it — take history’s.

Which is why, many a times, on a clear night, when I look up at the stars, I can’t help but wonder whether there is intelligent life out there—or are they just like us?

The writer is director, Wonderland Consultants, a tax and financial planning firm. He may be contacted at sandeep.shanbhag@gmail.com