As things stand now, stock indices are falling as there is no tomorrow and there is a stampede at the exit door. This time the fall is not restricted to mid or small caps or few sectors, everything is in the red. Thus, we are compelled to ask, is this the right time to invest?
Stock Markets always look ahead, and the long-term smart investors are the ones who will put money to work at this juncture. Making lumpsum investments into an equity fund with 3-5 years view will definitely be a smart move.
The major reasons for the current scenario are mainly, A) The extent of the impact of the COVID-19 pandemic and its effect on various economies is unknown. B) As yet, there is no medicine/vaccine against the COVID-19 virus and C) Crude Oil price has fallen ~60% in the last one month, expecting an economic slowdown around the world and has impacted various economies.
However, we need to look beyond the headlines. Investing with discipline with an eye on a long-term perspective, remembering your investment horizon and keeping calm in times of distress are the keys to long-term investing success.
So, what should we keep in mind? In the next 3-5 years, equities are going to stack up as the best asset class to invest and have the potential to generate good long term returns. Also, the Small Cap segment is poised to generate maximum returns followed by Mid-Caps and Large Caps and has the potential to beat large-cap returns by a wide margin on 1,3 and 5 years basis.
Thus, when fundamentals are strong, and the market valuations are at the lowest point in two decades, it becomes an excellent investment opportunity.
We can prepare ourselves in this situation for a better tomorrow. Nobody knows the bottom of the markets and the extent of the impact of COVID-19, but we can prepare for brighter days ahead. Investing now and waiting it out for the next few years is the only possible way you can be successful.
Speaking from personal experiences, the last three decades of investing have taught me four valuable things which have been proven right, time and again.
Firstly, respect valuation. When the market valuation is very attractive, you have to bet believing that the current economic/ market situation will normalise. Currently, all equity market indices are trading at rock bottom valuations even when compared to global financial crisis periods. Second is to look for triggers.
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Look for possible upside triggers at this juncture. When valuations are expensive, look for downside triggers. Thirdly, markets bottom out amid a scare and peak in the midst of extreme optimism. They generally bottom out at the thick of the problems. So, cutting all noise and focusing on long term investing makes a lot of sense.
And the last is that investing in a bust and selling into the booms is very important to make big returns. This is the learning from all great investors like Warren Buffett, Seth Klarman, Charlie Munger, Benjamin Graham etc. We see a market bust situation, so it is an attractive time to buy.
Mistakes to avoid
During the panic time, investors do make mistakes which they would not have made during the normal time. Unlike the 2008 Lehman Brothers crisis, this time the worries are on health as well as wealth, so the panic got accentuated.
Few mistakes that investors should avoid during this period:
- Don’t throw the towel at the wrong time. This is not the time to redeem your investments. Stay calm and be the smart money mover who invests or doubles up your investments at the bottom valuations.
- Don’t mix Risk and Volatility: Risk is high when you invest in an expensive market valuation scenario and therefore, permanent loss of capital is more likely. Today the market valuations are quite attractive, and the relative valuation risk is quite low, which is conducive for an investor. Volatility is the rapid movement of markets in a short time, which need not be a concern for a long term investor.
- After every crisis the sector leadership has changed: What has worked in the previous cycle (last decade) most likely won’t work in the next cycle. We have seen in the past, that the sector that loses fancy does not regain soon.
- Don’t make decisions based on hearsay, rumours and baseless assumptions. Stick to basics -Fundamentals, valuations, sentiment and triggers of the market. India still would be the fastest growing country in the world with the best demography, so fundamentals are intact.
(George Heber Joseph is the CEO and CIO, at ITI Mutual Fund)
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