Way Forward

Legendary investment guru Peter Lynch once said “ I've found that when market’s going down and you buy funds wisely, at some point in future, you will be happy. You won’t get there by reading “Now is the time to buy. These things never go off that way.”

The atmosphere is one of gloom and doom. No one you meet today at gatherings ever gets to talk about the markets.  Just like equities have become pariahs for investors. Inflation does not come down, high interest rates hurting businesses, fiscal imbalance of Eurozone (and in India) does not improve etc. are some news reports which do not alarm anybody.

Now is possibly the most stressful situation that Indian equity investors have ever faced. Not only is the equity faring badly, but the overall business environment is also not too encouraging. The pessimistic outlook about the market is overplaying itself. The period 2008-2011 is the most forgettable period and everyone who has some market related investment knows very well what they have lost and would like to put that behind them as soon as possible. Our effort at representing the pain through some numbers will be neither interesting nor useful.

Unfortunately many people including those so called experts who dish out market strategy on a daily basis---see as many problems looking forward as they do when they look backward. This is not the first crash that we are witnessing right now. Sensex has seen several bear phases since 1986. The current scenario appears depressing since we look at it through the narrow sphere of 1, 2, 5 years. Apply the concept of rolling returns to the economic conditions of India. Take any 10 year period over the last 60 years and compare the situation in the beginning with that at the end. Were things better in 1990 or 2000? The answer is obvious—the latter. 2000 or 2010? The answer is the same every time. When you stand back and take a 10-year perspective the growth in the economy will be apparent. For example between 2005-2010 the Indian economy doubled in size. This growth has trickle-down effect on every constituent of the economy. This is also evident from the demand for real estate and cars that is seen at the ground level. In short the economy never regresses during any 10 year period.

I think it’s now time to be a little contrarian and give a re-look to equity. For long term investors the market slump like the present one (though not the first one) is an opportunity to buy. The India story is too strong to be crippled by external turbulence or incompetent political leadership (ironically though headed by a person who ushered economic liberalization) internally—but that’s a different story altogether.

Just as a high tide lifts all the boats, the reverse is also true in investments. If a booming market lifts all boats, then a receding tide sinks all boats. The atmosphere of gloom and doom has been around for quite a long time now. An economy growing at 6%+ rate is bound to reflect in stock prices sooner rather than later. So the worst thing an investor can do at this juncture is to focus on the short term volatility and not buy into the reasonably cheap valuations—because you are not going to receive a “tip” to go out and buy. For the long-term investor, equity is not good despite the occasional crash. It's good precisely because it crashes!