In October-November 2008, there was excessive pessimism around. That period could take the cake for being one of the most challenging periods for equity market investors.
When not just equity markets but also bank accounts were no longer considered safe. Every day you heard noises of fixed maturity plans, liquid funds and even banks going bust and how the financial world would end soon.
In fact, the only safe way was to hoard cash. One currency expert even went on air saying he was closing all his accounts at private banks and stashing his dough at State Bank of India.
Suddenly people queued outside SBI branches and SBI started collecting several thousand crores of deposits every day. It was outright foolish to do so but the herd mentality was at work and the headlines and experts were screaming doom.
One smart investment banker redeemed his FMP midway, falling prey to such rumours and at a discount. The FMP is up 11 per cent now.
He regretfully says now, "Sometimes, it's dangerous to know many things. I would have been better off not knowing many things." I told him I disagree, as it is all about your ability to think rationally during such times and not following all the bull thrown at you. I told him I know of smart people who know things as well as people who do not know much about investing, who have made amazing gains because of their ability to filter the noise.On the other hand, in October 2009 one is witnessing euphoria all around, with the stock markets having crossed several milestones. However, how many people have really been able to take advantage of this rally? Not if you have been waiting for a correction.
There are a lot of people today still waiting for a huge correction, who will not enter on corrections but will enter immediately if the pain of staying out of the market becomes a bit too much.
Yes, markets are up by 100 per cent from their lows of last year and in early March 2009. Experts who were shouting 6,000 Sensex levels in March 2009 and that 21,000 was five years away have come back with some more crap. There is no point in listening to any holy predictions, as no one knows how the stock markets will behave the very next moment.
Some people still believe the recent run up is a bear market rally and more pain is on the way. Yes there could be pain, as the western world is still not out of the woods.
There are many other negatives that could play spoilsport.
However, the bottom line is, missing a huge rally of this magnitude is a huge blunder committed by most people. There are four key lessons or principles that our equity markets have once again taught us and they can surely come in handy when we face a similar situation next year or later in our investing life.- Beside investing regularly in equities, invest when no one wants to even listen to the word equity. The whole world was full of insights, research, inputs and so on about the death of equity as an asset class.
There were media reports on the poor data coming from every possible front and to top it, there was the Satyam scandal which made a lot of foreign and local investors doubt the integrity of Indian managements.
Everyday you read about the next set of companies who could be in trouble. A friend who wanted to invest in equities just could not because all around he read that we were headed for doom. By the way, he is still waiting. If you see a situation like this the next time, put a sizeable portion of your debt and cash investments in equity.
There is no way to know that the stock market has bottomed out, but it's during such times of excessive pessimism that the market does turn around.
- Do not obsess over earnings and wait endlessly for clear data points. Stock markets always try to anticipate the future and are actually well ahead of significant changes in earnings and other data points.
It is quite possible that earnings are lousy or take a lot of time to catch up. However, a lot of people obsess over this and miss out on huge up-moves. We are now entering the second quarter results and as usual, there will be a lot of focus on this for a few weeks.
- Governments and central banks around the world today have the power to inject immediate policy changes and dole out incentives to get the economy back on track.
Starting late last year, one saw a spate of interest rate cuts by central banks around the world, injecting liquidity in the system. Besides this, there were many bailout packages and policy changes that were quickly implemented.
All such actions have the potential to turn things around and before actual change is visible, stock markets change direction.
- Finally, once you have taken a call to invest, just do it. There is no point in meaninglessly waiting for corrections. In strong bull markets , corrections are often elusive and generally do not happen till the market has rallied significantly. From March 9, the markets are up by 100 per cent, whereas you saw only a couple of minor corrections, with one caused during the budget week. Invest in a staggered manner but do it.
The key points to look for are dirt-cheap valuations, excessive pessimism and governmental intervention. History repeats itself and you will get plenty of opportunities to make spectacular returns, provided you are prudent enough to spot these pointers and invest in such times.
The writer is director, My Financial Advisor
