If I start talking about yesterday, Sensex closed 758 points lower from its day’s high of 36,810. No, I am not trying to time the markets here and neither guide you on markets ups and lows. What I am trying to point here is that markets are volatile, and it may continue to be that way for a while.
So, considering such volatile times, how should you invest in the stock market in the coming days?
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 comes with two benefits:
- It makes quality 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.
- Money put to work during times of crisis or market downfalls downturns produces higher returns as compared to bull run.
Let’s look at how the markets performed during times of crisis and the time taken for recovery.
Here, the numbers say a lot! If you look at the above historical data, you can see that markets have been through many crisis, and irrespective of that, they not only recovered but also delivered positive returns over a longer term.
From the data in above table we can infer that the average % of fall is 53% and the average recovery rate of Sensex from its lowest point during times of crisis is 74% after 6 months, 117% after one year and 140% after 2 years.
Now let's compare this data with the current bear market.
From a high of 42,273 in Jan 20, the Sensex has corrected to 36,051 as on 15th July 2020, which is a correction of approximately 15%.
I don't want to time the bottom here, but considering the muted earnings growth during the Q1 of FY2021, there can be a scope for further fall in the market (although limited). The whole point here is that irrespective of the time taken, markets will eventually recover as seen in the case of previous bear markets.
How to Invest in Stock Markets During Such Times?
- Accumulate quality stocks: An investor 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 valuation. During uncertain times only two things can’t go wrong: Patience and Research.
- Stay away from news: The headlines change every single day, with little or no impact on an economy. For e.g. sentiments surrounding the India-China border clash were so different a few days back. As we always say, 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’. Check out why too much news is bad for your financial health.
Obviously, considering the volatility in the markets, it poses a lot of questions to investors, which are impossible to answer with certainty. No one knows when business activity will resume back to normal, making it difficult to assess the impact on the economy. However, one thing we can say for certain is - High quality, credible leadership, rapidly growing businesses can deliver impressive returns to investors if they are held for a long term. So, the focus should be on accumulation of such businesses, especially more important during uncertain times or market downfall. If you are thinking about how you should proceed to find such quality businesses, don't worry as our research team has already done all the hardwork and prepared a model portfolio of 15-18 high quality stocks with the potential to outperform over the next 4-5 years.
You can simply start your wealth creation journey by investing in these high conviction stocks.