In a recent conversation with an investor Mr. Sangani, he told us that he foresaw the Lehman Brother crisis of 2008. He had been investing in the markets since he was just 17.
In 2008, he knew things were crazy, and hence pulled out all the money from the stock market when the Sensex was trading at levels between 20,000-21,000. And he came up with a plan to re-enter when the market hit rock bottom.
So here was his plan. He decided to reinvest the ploughed back money in 3 tranches - 33.33% when the Sensex hit 9,000, another 33.33% when the Sensex hit 8,000 and another 33.33% when it hit 7,500. The plan looked like a fool-proof plan to create multigenerational wealth.
The only problem was Sensex never got at the levels of 8,000 or 7,500, even though it looked like it was the end of the world!
When the Sensex hit the low of 8,160 levels in March 2009, he invested his first tranche. Unfortunately, it was his last opportunity to create wealth as he could never invest his remaining surplus of 66.66%.
Mr. Sangani, now also a subscriber of Research & Ranking, told me that when Sensex hit the levels of 8,160, I thought it's a rally which would again die up soon. In his words, "When the markets started to recover, I just thought it was an initial bounce. You know there's this illusion that it's a bull market, but actually the economy's health is deteriorating. I thought it's the same and the markets would again fall back, allowing me to create wealth for the next two generations. Alas, I missed the bus."
Most stock market investors miss the bus
Understanding the emotions of my investor friend, suddenly a question came to my mind.
How many of you are sitting in cash or Fixed Deposits at the moment and are worried about being too late while investing? And, how many of you wish to invest but are concerned about being too early?
What if you invested now and the stock prices continue to decline?
Would the scenario be terrible?
Let's take two cases:
You are able to enter at the bottom
If you would have entered the market the day Sensex bottomed out during 2008 crisis, you would have still made 290% returns, even after surviving the current 20-25% plunge.
Now if you would remember, we assumed that you entered the markets when they were at the bottom, which is practically impossible for even an expert to time the markets.
In reality, most people end up buying early, late or in the worst-case scenario, not investing only.
You invest, and stock prices continue to decline.
In the second case, let's assume you invested when the news of crisis flooded the newspapers. At this point of time, markets just started to take a downhill movement.
Here are how your equity investments would have performed:
After 6 months...it would go down by another 44%
After 1 year, it would recover and give 12% gains.
Three years later, it would be up by 14%.
Five years later, you would make profits of 35%.
Ten years later, your portfolio would be up by 155%.
And coming to the current scenario, you would be still sitting on gains of 117% even after considering the downfall in the stock market.
And this is just one case. There are many such cases. What is similar to all the market crashes is that - All of these crashes have given decent returns, only if you've remained calm and patient.
Now the above example is of the growth in Sensex. The game would change completely if you would have invested in fundamentally solid stocks. Here is a small example on how the returns would look like, if you would have invested in high-quality stocks.
Now you may be having a question - Does this stock market investment strategy always work?
Firstly, I will say it's not a strategy, but a principle of investing. If you're a value investor, you need to stay calm when the tides turn rough.
In life and the stock market, nothing is ever guaranteed, nothing is certain, and there is no such thing as no risk. There's always patience and perseverance.
And patience is typically rewarded in both life and investing if you're able to stay for a longer course.
Coming to the current stock market scenario - Can you get similar results this time as well?
Yes, why not? Just make sure you don't keep on waiting on the sidelines as Mr. Sangani did. In the stock market, 'Perfect time' is the enemy when you are putting your money at work. There is no such thing as 'Perfect time'. To know more about the perils of timing the market click here.
When this uncertainty ends, and the economy goes back to normal, I'm sure you would prefer to regret in the short-term for jumping in late or early rather than regretting for a longer term for not investing at all. Right?
Regardless of when you enter, always remember: Time is your best friend and patience is the biggest virtue you can possess as an investor.