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Home / Opinion / Views /  Investing lessons the market cycle in 2020 threw up

We entered the year 2020 with concerns over India’s economy and news about the outbreak of covid-19 virus within and around China. In January 2020, the rising stock market was not representing the true state of the economy and seemed to be de-linked from ground reality. It peaked on 17 January, as S&P BSE Sensex closed at 41,945.37.

The beginning and uncertainty: There were many first-time equity investors into direct equities and mutual funds between 2015 and 2019. The folio count of the mutual fund industry increased by 94% between March 2015 and December 2019. These investors mostly saw the market rising from 27,500 to 41,000. Till this stage, returns looked reasonable across the period (see graph). After the peak of 17 January, Sensex was trading at a price-earnings (P-E) ratio of around 26 times and remained range-bound till February-end. Few investors took a tactical call and exited partially from equities at this stage.

Also read: India can’t make up its mind on PSUs, 30 years after liberalisation

The fall and opportunities: As the global spread of covid triggered massive panic selling, more investors started to exit. This was the first time when most equity portfolios started turning red. The market receded quickly and within 18 trading sessions from 25 February to 23 March, Sensex lost 14,300 points or 35.5%. This is where the real risk of market investing came to the fore as returns turned negative (see graph).

market cycle
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market cycle

A lot of investors witnessed a correction of this magnitude for the first time. Such market conditions act as a real test for investors. During this sharp drop, investors took either of two extreme routes. Some held their nerves and continued with their investment, while others decided to exit. While panic and nervousness due to market movements is natural, selling in a falling market is certainly not the right thing to do. In fact, such occasions should be used as opportunities to add more equity to the portfolio, if possible, and that is what experienced investors did during the market correction from March to May. The valuations of stocks were very attractive with PE of Sensex in the range of 15-20 times then. These investments would have generated 30-60% return so far, depending on when they were done.

The recovery and FOMO: The recovery was much faster than expected given the magnitude of the crash. Across the world, it looked like a V-shaped recovery and a few investors felt left out as they anticipated markets to dip further. Some investors decided to chip in during the recovery phase out of sheer FOMO (fear of missing out). Investing at the bottom of the market is nearly impossible, hence the learning here is to keep investing during falling markets rather than waiting for the bottom.

By the first week of November, Sensex had bypassed the peak of 17 January and crossed 44,000 levels. The investment return of investors is back in green bringing some relief to their portfolio and smiles on their faces. The patience of holding back paid off.

Is it uncertain again? The current market levels have divided investors again as it appears overvalued, with Sensex PE around 30 times. Predicting the market is not easy, the possibility of an effective covid vaccine can uplift the markets further or increasing covid cases can trigger some correction. In terms of the market levels, we are back to the same levels at present, where we were in January 2020.

For sure, 2020 can be seen as a year of learning in stock market investing. This year has been a complete circle, where equity markets went through the entire cycle, from rising to the peak to plummeting to the bottom and then recovering faster than expected. All this came with loads of learnings on how to handle yourself, your portfolio and your investments in different situations. The key for wealth creation in stock market investing is to ride through the cycle and staying focused on your investment objective rather than market levels.

Harshad Chetanwala is co-founder, MyWealthGrowth.com

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