Let us understand the value of patience by comparing the performance of 3 investors in the midst of the market correction in January 2008, when the sub-prime crisis broke out and impacted the Indian markets.
Investor A – Decided to just sell his entire equity portfolio and wait for the correction. The investor believed that since the correction was more structural in nature, he would be better off buying much lower. So he booked a loss of 10% on his portfolio and sat on cash. In March 2008 when Bear Sterns crashed, the investor saw that the correction was the right time to enter the market and committed his entire funds into the equity market. The move appeared to pay off for some time but in September 2008 Lehman led to another 20% crash in the market and the investor quickly booked losses of 20% and stood aside. When markets actually bottomed out in March 2009, he had little appetite left to time the market and just decided to allocate his corpus to debt funds.
Investor B – Was a slightly more passive investor but he was quite clear that if he held on to his equities then he would eventually make a profit. By March 2009, his portfolio had a notional loss of 45% and it was almost 2014 by the time he could break-even on his portfolio. Of course, by 2018, he was sitting on a tidy profit. He showed a higher degree of patience and surely managed to perform better than Investor A.
Investor C – This investor did two things differently from the other two investors. Firstly, he decided that will not be able to time the market with any degree of certainty. However, he was also of the view that markets would be extremely volatile over the next 2-3 years. He therefore sold his entirely portfolio and booked a 10% loss like Investor A. But this money was invested in a debt fund and he structured a Systematic Transfer Plan (STP) to regularly transfer a fixed sum of money into an equity fund over the next 2 years. The 10% loss was adequately covered by the returns on the debt fund while the STP ensured that he had spread equity investments in a phased manner to get the best price. By the time the market retraced its previous highs in 2015 Investor C was already sitting on a big profit and had vastly outperformed the market by 2018
What are the key takeaways from the experiences of Investors A, B and C. There are 3 key takeaways:
Trying to time the market is a futile exercise. It is not only that timing the market is not possible but it is also futile. As Keynes right said, “Markets can be irrational much longer than any investor can be solvent”. That is what Investor A learnt the hard way.
The second key takeaway is that you cannot afford to panic in the market. If you panic, then you subsidize the other investor who does not panic. Being patient and keeping a cool head is extremely important.
Patience does not really mean passive patience. Investor B was patient but that was just too passive. That is where Investor C scores over the others because, while being patient, he also had an alternate plan of action in place.
How to be patient in volatile equity markets?
It is easy to say that one must not panic in equity markets. How exactly to do that in practice? There are 4 mantras to achieve that..
Consider a hands-off approach. Yes that really works when you need to be patient. The problem with all hands-on approaches is that it becomes a direct conflict between your investment skills and your mental equanimity. When you are hands-off, you are rest assured that your portfolio is based on broader well-set rules and therefore your downside risks are low over the longer time frame.
Take advantage of opportunities. This is not too complicated. When the P/E of the Nifty is in the range of 10-12, history has proven that the market is underpriced. The Sensex is up 350 times in the last 40 years and during this period it has gone through the Afghan War, the Iran-Iraq war, near RBI default in 1991, political turmoil, the collapse of the Soviet Union, economic liberalization etc. Make the best of these low priced opportunities, but have the patience to wait for them.
Phased approach works best. That is what we learn from investor C. He not only is patient with the market but admits that he cannot time the market by opting for a phased approach. In the process, he turns out to be the wisest investors of the lot without putting in too much effort.
Keep your investments in perspective. Remember that volatility and instability are part and parcel of the equity market. At the end of the day, the equity markets are just a representation of the fundamentals of the economy as a whole. For an economy that is growing at above 7% and could be soon growing at 8%, economic growth is never the worry. It means that stock market corrections are not the end of world. If you are invested in good stocks, have the patience and can switch to a phased strategy; then wealth creation is yours for the taking!
Investing in volatile markets is all about getting the basics right. Here is how to deal with stock market volatility and here is how to invest in stock market volatility!