Many of us, even as long-term investors, believe that we should wait for a clear trend to emerge and uncertainty to fade before we start our wealth creation journey.
If we can use an analogy here – we wait for all the traffic lights to turn green before we take our car out on a long drive.
Is that practical? Is that possible? Can we time the markets this way? Should we give so much importance to short term and medium term events? Are they not frequent in nature? Can we create wealth this way?
This story talks about how successful investors who made it big never bothered about any events and just focused on buying quality businesses.
One more interesting observation, such uncertain times make these businesses even more valuable. This is because any short-term uncertainty can only drive the prices of these businesses down, but the value still remains intact. And there cannot be a better situation for a value investor to take advantage of such a situation by investing in quality businesses available at cheaper valuations.
Let’s look at how the markets performed during these uncertain times.
Here, the numbers say a lot! If you look at the above historical data, you can see that markets have been through many uncertain times, and irrespective of that, they not only recovered but also delivered positive returns over a longer term.
Now let’s look at the current year events such as LTCG, the upward swing in oil prices, etc., many companies irrespective of the growth in PAT witnessed correction in stock prices due to PE contraction.
As you can see, due to the change in sentiments, these stocks are now available at cheaper valuations (low PE multiple) but better earnings visibility. That is where the value investors get the most out of the opportunity by investing in value company available at lower prices but displaying strong fundamentals and balance sheet metrics.
How To Invest During Uncertain Times?
The headlines change every single day, with little or no impact on an economy.
For e.g. sentiments surrounding the oil prices were so different few weeks back. With oil prices reaching $80-a-barrel and then sanctions on Iran, everyone was worried and then these sentiments changed overnight. As we mentioned, stock markets over longer term follow the GDP growth. However, in the short to medium term, they are driven by sentiments which are hard to forecast.
It is important to remember the five golden words of investing: ‘It’s never different this time’. Media channels and leading tabloids often magnify situations. Everything is transformed into a crisis.
For e.g. the debt-pile up of IL&FS was made to look like the next Lehman Crisis. In short, if the markets correct, then a crash is inevitable. If the markets are swelling, then it is overvalued and a crash is around the corner.
Despite all the hype and chaos in the markets, we are enjoying one of the best times of prosperity, growth and transformation that India has ever witnessed.
Indian economy is burgeoning on account of favourable demographics, consumption-led growth, revival in corporate earnings, unclogging in manufacturing activities and infrastructural growth.
And lastly, equity investments are risky. Well, here’s a surprise…
Actually, equities is a very simple asset class, growing at a CAGR of 14-15%.An investors with a basic understanding of stock market is aware that the uncertainty will come and go and that the economy is growing and markets are compounding. If this investor knows how to stay calm by avoiding the media noise, events, ups and downs, then the person can accumulate immense wealth. Till then, any correction during uncertain times should be rather viewed as a buying opportunity to accumulate fundamentally sound stocks at a cheaper valuations.
During uncertain times only two things can’t go wrong: Patience and Research.