Amid the chaotic environment in our country coupled with the economic slowdown, the Yes bank event, panic amidst coronavirus, the sentiment is extremely negative. Everyone is contemplating the next action and praying for things to fall into place.
Steve Jobs used to tell people to go for a walk and "zoom-out", to change your perspective and to look at the bigger picture. Sometimes it helps to zoom out and detach you from the current situation.
Let's zoom out and take a look at the bigger picture.
Stock Markets reward long-term patient investors
Several people have been asking me and hyping the fact that it's a big deal that markets have fallen 1000 - 2000 points in a day. If you put things into perspective, in percentage terms, these have been about 6-7% falls which have happened many times in the history of the markets.
Stock markets reward patient long-term investors. There's no better way of making money other than owning a great bunch of Indian companies and ignoring the inevitable ups and downs of the market.
Owning stocks over the long-term is a sure shot way to success. In about 20 years from now, a 1000 points drop will probably look like a small 1-2% blip.
Good stocks appreciate overtime and reward investors. Period.
Let's take a few examples, if we look at TCS even during the Great Recession of 2008, it had fallen over 50% over a period of two years.
But despite that, it bounced back from Rs 125 per share to highs of Rs 2284 (per share) by delivering a whopping CAGR return of 30% in the past 12 years. Or even if you look at Bajaj Finance, even though it fell over 80% from 2007-2009, it has been nothing but a wealth creator.
Hence, a pandemic is a one-off which will, in fact, create an opportunity for investors to create wealth over the next 10-12 years.
And we know for a fact that such quality companies will create wealth because even after a sharp decline they have shown strength with their stock prices always inching higher.
In the long run, when things are under control, markets will recover and the same businesses will be fairly priced again.
If we consider our everyday utilities, despite a slowdown we won't stop consuming toothpaste or shampoo. This is exactly where companies like Hindustan Unilever and Colgate come into the picture since they will continue to create wealth as they have been in the past.
Let's see some numbers
See how markets recover after every crisis situation. If you had invested Rs 100,000 at the lows of Swine Flu panic in April 2009 then it would be around Rs 2,10,000 by November 2010.
Similarly, if you entered the market around the lows in January 2016 when the Zika virus gripped the market, it would turn your investment into Rs 1, 50,000 by October 2018.
Time is the best healer.
It is extremely likely that five years from now we will all be looking back at this time as a great buying opportunity.
We don't know if this panic is going to get worse, and we never know in real-time whether the panic is going to be the once-in-a-generation kind, but if we were to take a leap of faith looking at how China has recovered, we do know that it is extremely unlikely. Nearly all panics wind up being "mini-panics" in hindsight, and they also turn out to be fabulous buying opportunities.
They are also viewed with relative indifference after a few years pass. Many people allow their memories of the fear to fade as time passes. Events that seemed important then are relatively meaningless now when filtered through the prism of time.
But they all seemed scary at the time and they were all great opportunities to buy stocks.
A word of caution!
In such times, people have been asking for advice if they should buy stocks that have been beaten down. We firmly advise people against buying stocks just because stocks have been beaten down.
It is important to buy the right businesses that will stand the test of time. Several businesses that are around today may not be around in the next 5-10 years and could lead to further destruction of wealth.
Sometimes people think, it's prudent to buy a stock simply because it has fallen from 1000 to 400 without recognising the fact that stocks can practically go down to zero as we have seen in the case of Jet Airways, RCOM, DHFL, etc over the past few years.
It is important that investors build a portfolio of solid business even though they may appear relatively expensive compared to its pears.
Stocks of great companies are getting sold because the earnings outlook looks bad this year, even when there is little debate about the long-term prospects of the businesses.
Some investors are in fact panic selling out of fear, others are more rationally selling because they don't want to own a business that will have a bad year. This creates opportunities for those who want to buy a stake in companies as long-term part-owners.
We recommend clients and investors invest in a good quality basket of stocks for long-term wealth creation. These basket of stocks are available at great value right now for clients to help them with the right recommendations in the right situation"
During such stressful times, investors generally make the mistake of buying low priced stocks or end up investing in cheap cyclical stocks which is the worst mistake they make.
Such panics are good times to accumulate compounders, which we have already been done through careful research creating a well-diversified basket for long-term wealth creation.
Those who keep calm, patience and accumulate a basket of well-diversified stocks as mentioned above will emerge healthier wealth wise in the long-term.
(The author is Founder & CEO, Samco Securities)