Profit from the panic of 20083 min read . Updated: 02 Nov 2008, 09:56 PM IST
Profit from the panic of 2008
Profit from the panic of 2008
We have published several articles on investment in various market situations. In every one of these, regardless of whether the markets looked good, bad or ugly, we’ve given exactly the same advice.
The unchanging way
Indian equity investors are now facing perhaps the most stressful situation ever. Let’s take a look at what we’ve said in the past and how the “Panic of 2008" reinforces the principles behind our advice (for a summary of these, see “Remember", below left).
Today, the natural response of many investors is, “The returns may come back in the future but what about the losses that I’ve made today?" But the only way to avoid the occasional crash is to be able to see the future—if you could, you wouldn’t be reading this anyway. However, the investment approach we are advocating eliminates the need to see into the future.
The past proves the point
The track record of the past decade shows that this approach works. If you had started investing Rs20,000 a month in a Sensex-based index fund in early 1997 and continued to do so without regard to market ups and downs, then today, your rate of return would stand at 14% per annum. In all, you would have put in Rs28.6 lakh and these investments would stand at Rs66 lakh today, after the crash.
During this period, many mutual funds have comfortably beaten the Sensex, so Rs66 lakh is a conservative figure. In a median fund, the last 10 years would have seen your nest egg reach about Rs1.04 crore. And this during a decade which has witnessed two huge market crashes!
Over such a long period, the so-called “safe" fixed-income avenues do so much worse than supposedly “unsafe" equity that there’s no contest at all. Over this same period, you could have earned an average of no more than 8% per annum in fixed income investments. The same inputs would leave you with just about Rs44 lakh, which doesn’t cover even the inflation rate adequately.
The moral of the story: Despite the crashes, equity is by far the safer option in the long run. The real danger to your financial well-being is not market crashes but the insidious effect of inflation.
Crashes are your friends
In the equity markets, you make more money—not despite the crashes but because of the crashes! Let’s modify the above example with the assumption that the tech crash of 2000-2001 never happened. The Sensex reached a peak of about 5,900 in February 2000. It then went as low as about 2,600 in September 2001. It then started rising and reached the previous peak of around 6,190 only in January 2004.
Let’s assume the crash never happened: The Sensex reached 5,600 in March 2000 and stayed at that level till October 2004. Then your Rs20,000 a month would be worth Rs55 lakh instead of Rs66 lakh! That’s right. For the long-term investor, the crash of 2000 was worth a lot of money. How? Because the crash enabled you to buy cheap and thus eventually raised your total returns. If you are investing steadily for the long-term, then intermittent crashes help you make more money, not less.
That is how you will eventually profit from the current market. Stocks are now cheap and will probably get cheaper. The longer and deeper this crash, the more money you will eventually make. If you know what’s good for you, you pray that the Sensex falls to maybe 6,000 or 7,000, and then stays there for a few months or years before coming to life again.
And that’s the secret of equity investing: Volatility is your friend. Volatility is what will make you rich.
Content is powered by by Value Research
Write to us at firstname.lastname@example.org