It has been just a few months since most of us would have gone out on social visits, yet it seems like ages.
So yesterday I decided to pay a visit to a cousin of mine who stays just a few blocks away.
He was happy to see me because believe it or not, in the last 110 odd days he hadn't seen a single new face apart from his family members. And that is because he never went out even to buy things during the lockdown. He would order things online or on the phone from the local retailer who would leave the items he ordered at his doorstep.
When I asked him the reason for this extreme level of caution, he said he was very much worried about contracting Covid-19.
Is this irrational or excessive fear only limited to the pandemic? Well, the world of stock market investing is no different. When the stock market hit their lowest point on 23rd March 2020 from highs in Jan 2020, many scared investors dumped their stocks for huge losses anticipating a further fall in the market. As if the world is going to end, very soon. As if there is no tomorrow.
The level of fear among such investors was so high that the majority of them never re-entered the market.
On the other hand, there were others who once the markets came down from the 12,000 levels to the 7,600 levels, held on to their investments very close to their hearts saying things like "I will sell off my investments once I recover the losses." What's the rationale I often ask. The answer I most often get is: "I don't like to sell my investments at a loss."
So, what we can see is that whether it is a reaction to Covid-19 or investing in stock markets, different people behave differently, unfortunately at either extremes. I'm trying to draw an analogy of the reactions of people towards the Covid-19 crisis and reactions of investors towards the stock market, which can be briefly classified into five categories.
Five common categories of reactions of people towards Covid-19 crisis and stock market investing
Category #1: The fearful one
People who belong to this category actually go overboard by exercising extreme caution by avoiding coming in contact with others, not going out and sanitizing anything and everything they buy. Even in the case of coronavirus threat getting toned down, people in this category are likely to remain extra cautious for the next one or two years.
Now in the world of stock market, investors who fall in this category have more often than not, burnt their fingers in the stock market at least a couple of times by investing in bad stocks or exiting their investments for a loss during a market correction. Like the scared category of people who go overboard with their fear of Covid-19, this category of investors having bitten once, stay from stock market investments by going with the safer traditional investments like bank FDs.
Category #2: The happy-go-lucky
People belonging to this category understand that Covid-19 is a moderate threat and follow necessary safety measures like frequent use of sanitizers and the use of face masks and face shields. However, they do not feel that it is essential to avoid unnecessary travel or follow other safety measures like social distancing. People in this category are the ones who are open to travel, eating out or go to public places like theatres and gyms as and when the facilities open up.
Drawing parallel to the stock market, this category of investors invests in the right type of stocks but exit when they see minor gains or losses. As a result, they are unable to create wealth from the stock market. Like the people who consider Covid-19 as a moderate threat, rather than a severe threat, this category of investors looks at their stock market investments to make some quick money instead of sustainable wealth creation.
Category #3: The ignorant
People in this category believe that Covid-19 is just like a typical cold and flu, which does not require any serious attention. They lead a careless life, devoid of safety measures such as face masks, frequent sanitization or social distancing, thereby putting themselves and their family members at risk. They believe that they are immune to the virus and can never catch it. It is this category of people who are responsible for mass-spread of the virus. Sounds dangerous?
Even in the stock market, many investors indulge in reckless trading based on stock tips or rumours. Like the category of ignorant people who are careless about Covid-19, this category of investors ends up losing their hard-earned money and blame their luck or the stock market for their losses.
Category #4: The ones busy with news
This category of people is always glued to their television sets in an attempt to catch the latest updates. And when they are not in front of their television, they will be hooked to the internet to find the latest news on the virus. In the stock market as well, some investors are obsessed with stock market-related news and updates from business news channels, business newspapers, internet and social media groups which result in analysis paralysis. Analysis paralysis can be described as the state of over-analysing a situation so that a decision or action is challenging to make. As a result, they end up doing nothing.
Category #5: The well-informed
People who fall in this category, fully understand the dangers posed by Covid-19, embrace the risks associated with it and do everything possible to avoid getting infected. Measures undertaken by this category of people include staying at home by avoiding unnecessary travel, frequent use of sanitizers and using face masks and shields. People in this category are at least risk, as they follow the best possible safe practices.
And when it comes to the stock market, we have the well-informed ones, who have a detailed understanding of stock markets and undertake in-depth research before investing in any particular business. These investors understand the risks associated with stock market investing and invest only in fundamentally sound stocks for the long term.
Best Practices For Wealth Creation
Different people are indeed entitled to different opinions. As aptly said by Leonardo Da Vinci "The greatest deception men suffer is from their own opinions".
- Irrespective of whether it is dealing with Covid-19 or stock market investing, the only category of people who will emerge victoriously are the well-informed ones.
- In a nutshell, the well-informed accept the new norm of living with COVID19 and rather than waiting on the sidelines, they start accumulating good stocks in a staggered manner with a long-term perspective.
- Besides, they invest only that portion of corpus that is not needed in the immediate term. They have an investment horizon of 3-5 years while investing in businesses.
- They avoid getting distracted from information overload from news and social media.
To battle the pandemic you need a adopt a systematic approach and take all measures to mitigate the risks, the same is the case in investing. These are uncertain times. These are volatile times. We are dealing with a global health crisis.
But such uncertain times (crisis), present to us great wealth creation opportunities. Obviously, you need to follow best practices of wealth creation as mentioned above.
Think of the Global Financial Crisis in 2008-09, markets had crashed by 50-60%. Imagine the state of these 4 investors:
- Investors who exited at any level below the level of Sensex being at 14,000-15,000 levels and invested all their remaining money in FDs ever since.
- Investors who were still buying at Nov-Dec of 2007 thinking the mega bull run has just started.
- Investors who started buying when after the fall, the markets were a bit stable in Dec 2008 to Jan 2009.
- Investors who held on to the stocks that were classified as diamonds in every portfolio - I am talking of stocks like DLF & Suzlon and are still hoping for them to recover.
Investing during such times in an extremely dynamic process. One needs to keep a continuous eye on not just the markets - but on each and every stock one owns.
With this, also comes the role of an active portfolio manager. As Jaspreet Singh Arora, Chief Investment Officer, mentioned in a recent webinar- It is essential to build a concentrated portfolio of 20-22 stocks, and for now, I am going with large caps contribution around 67% and mid-caps of 33%.
"We recommend higher allocation to large caps during such times because these companies have witnessed many such down cycles in the past and have come out of it unscathed. We will increase exposure to mid-caps & small caps when we believe the risk-on mode is back but will remain below 50%."
Before I end, I have a small message for you - this may be the right time to take a plunge in the stock markets - but one must understand the risks involved. If you're finding the task of understanding the right portfolio that suits you and your risk profile, it is always a good idea to hire an expert who can guide you in your journey. With the experienced and credible expert at your side, the chances of making wrong decisions reduce drastically. Get professional support in equity investing by clicking here now.