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How to love market crashes: 7 lessons for investors

Gautam Chikermane’s tweets


With the 1,625-point, 5.9-% fall in the BSE Sensex today, it is time to revisit the timeless lessons of investing. True, the fall is a big event. But for investors, it is nothing beyond a blip. This is not the first time that markets have crashed and it won’t be the last. The only constant in an otherwise volatile world of markets is how we react to such exigencies. The following seven lessons, gleaned out from experts the world over, for investors across geographies, stand firm today as they did yesterday and as they will tomorrow.

Lesson 1: Invest, don’t speculate.

Speculators perform an invaluable function — they provide liquidity. Their second-to-second trading tactics on a stock exchange converts those transactions into a price that more or less pretends to carry all the information about the underlying company in it. It is only because of such trades that investors can buy in or cash out.

Unlike speculators, investors have regular day jobs — they are executives, government servants, army personnel, entrepreneurs, builders, doctors, lawyers, teachers. They are jacks, if not kings, of their trades. For them to ‘play the market’ is like a stock broker wanting to deliver a knee replacement. Surely, he is not equipped to do it.

So, use the liquidity that speculators bring to do what you want — grow your wealth by buying when you want and selling when your financial objectives are met.

Lesson 2: Invest for the long-term.

Headlines driving the news pages are focussed on the intra-day fall of 1,741 points, that it is the third-highest fall, that more than 200 stocks have hit their 52-week lows and so on. Some will take a few extra steps and place the India-specific information in a wider context — that the fall in the Sensex puts India at the No 3 slot among major stock exchanges. That’s why we have journalists and reporters in the first place.

But when you invest, you need to look beyond the day’s headline. True, the Sensex, like most indices across the world, has taken a beating today. It has wiped out all gains over the past month, three months, six months, even a year. But look beyond the immediate. Over five years, its compounded annual growth rate stands at 7%; over 10 years, the number is 13%. Get into managed funds and many of the performances are unbelievably higher. In the long life of ups and downs, a small blip is nothing.

You didn’t get an equity exposure because you wanted your money to double overnight. Likewise, you’re not going to sell if the value of your portfolio falls by 5%. You invested in equities because you wanted your money to grow and finance a life’s goal, such as your daughter’s education four years on, your retirement two decades away and so on. None of those have changed. And since you’re not going to sell all your holdings because the market has jumped 5%, why should you bother if it’s the other way around?

Focus on your financial goals and allow your wealth to grow.

Lesson 3: Invest regularly.

As an average household, there is an income that comes in every month. You spend part of it and invest the balance. Now, there are two things you can do while investing. First, you could put aside the investing money first and spend the balance. And second, you need an instrument to put your investments regularly. These could be the traditional low-risk products like government post office schemes and fixed deposits. Or these could be medium-risk instruments like equities.

Speak to your financial planner and see if you have an appetite for equities and a little risk in your portfolio. If you do, choose a portfolio of mutual funds and get into systematic investment plans — Rs 2,000 per month in this fund, Rs 3,000 per month in that.

Because you don’t know (nobody does) when the markets will rise or fall, keep investing regularly. Equities work because the products of underlying companies are largely inflation-proof. The resultant growth that comes to companies gets factored into their stock prices, which a good fund manager harvests for households.

Lesson 4: Use experts.

When you get malaria, you go to a doctor. When there’s a leak in the kitchen, you call a plumber. When you want to learn Sanskrit, you go to a Sanskrit teacher. So, why should you not go to a fund manager when you want your money managed?

For every story you hear in the park about how your neighbour made a killing on a particular stock, there are umpteen stories of loss that you don’t hear of. Irrespective of how much you love real estate and gold, equities give the best long-term returns, period. But you won’t get those returns by investing in individual stocks and tracking 500 companies — you could if that’s all you did. You will get those returns by investing in mutual funds that have armies of fund managers and analysts who do the work for you and get your money to work.

What you needs is an ‘equity exposure’, not equities. Meaning, you need to have a chunk of your portfolio invested in instruments that invest in equities. Track your funds on Morningstar, Value Research or Mint 50. Better still, work with a financial planner.

Lesson 5: Ignore the noise.

A statistic like the Sensex creates a lot of noise. Earlier, the noise would be of the participants — brokers, fund managers, companies and so on — who would be disheartened by the fall and would seek incentives to ensure the market goes only up. While everyone wants that to happen, and over the long term it does, you must remember that the market is filled with people seeking instant nirvana and the resultant noise.

Over the past few years, a new animal has started screaming — the political activist, with very low knowledge of finance, for whom any fall in the market is a reason to attack the government. It was there when UPA was running the country, it’s there when NDA is at the helm of affairs.

As a result, there are two kinds of noise you will hear. The first will be around economics: ‘The India story is over’; ‘The market has sent its signal’; ‘The fall is a precursor to bigger problems ahead’ and so on. The second is around politics: ‘Modi has failed’; ‘This government can’t manage the economy’ and so on.

Ignore both — the Indian economy is on an irreversible upswing and whatever your politics, be sure to know that politicians are on your side: they want growth, they want a perception of growth.

Lesson 6: Globalisation is here to stay.

In other words, you can’t be selective about economic events across the globe. Earlier, the markets hinged on the US — when the US did an ‘aaah’, global markets reacted with a ‘choo’. The cold relationships exist today in an accentuated form. With the balance of economic power shifting towards the East, there will be a democratisation of shocks and sensitivities. So, if China devalues its currency, the world will be affected and through it its companies, all of which will scratch the stockmarkets.

On India’s part, it is increasingly getting integrated with globalisation — barring convertibility on the capital account, India is as much a global player as say Japan or Germany: foreign capital comes and goes through foreign institutional investors, foreign direct investment is seeking avenues to build and sell to Indians, Indian goods are being exported to the world, the price of oil is easing the pressure on India’s fiscal deficit and so on.

As consumers, we drive cars from Japan, Germany and the US; we use phones made in Finland, China and Taiwan; we send our children to universities in US, UK, Australia and Singapore; the laundry list of India’s globalisation is long. To presume, it will not impact our investments and the Sensex is being naive.

Nothing illustrates this better than today’s crash. While the Sensex has fallen by 5.1%, China is down 8.5%, Taiwan 4.8%, Japan 4.6%, UK 4.4% and so on. At the time of uploading this post, the US markets and the Americas haven’t opened but it is unlikely that they will rise today.

Lesson 7: Embrace crises.

From the Asian crisis of the late 1990s to the economic crisis of 2008, from the US to Greece, from terror to oil, our placid lakes of serenity are now filled with black swans — events that we didn’t think would happen and for which we are not prepared.

But all through, companies keep producing and making profits, their stocks keep rising. Those that don’t make the grade get ejected from a brutal system and a new company joins an index. Look at the Sensex itself — its composition keeps changing every few months such that the best companies remain.

Through all crises, speculators through their trades and price discovery keep the market afloat. Millions of such transactions every day ensure that patient investors keep creating wealth. So, learn to take crises in stride, even embrace them. Every time a crisis breaks out and the markets fall, it is an opportunity for your systematic investment plan to get something at a discount.

For investors, market crashes are opportunities, we need to learn to love them.


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