Investing During a CRISIS

Financial Advisors, investors don’t tire quoting the adage “Buy Low, Sell High”.

Most however become indecisive when presented with the opportunity.

According to the “prospect theory” humans fear a loss more than the pleasure from a gain.

This perhaps explains the outflows from equity mutual funds between January-March, 2009 when the bottom had already got established.

March 09, 2009, Nifty 50 hit 2573, which was the bottom and a fall of over 60% from the market peak achieved in early January-2008.

Investor risk-aversion didn’t ebb till July-2009 even though the markets were already up 62% from the bottom at that point.

It wasn’t just the rationality of humans that took a hit. Efficient market theory, which says humans act in a rational way and make the right decisions because they have access to all available data, also took a hit.

Investors of-course realize that the economy will not go down to “0” still the paralysis created by the recent losses make them incapable of making sound decisions and for the time-being it seems-everything is over forever.

What does the data suggest though?

I looked at what would have happened to the value of INR 1000 invested every month beginning starting from January-2008 till March-2009 by the end of December-2010:

** This is where we are today-around 30% down from peak.

Even though the market fell another 31% from July 2008 levels, the investor who invested in 2008 still ended up making a CAGR return of 18.5% over the next 2.5 years.

The investor who was already invested from January-2008 ended up making almost 16% CAGR.

The investor who invested in March, 2009, made 12% CAGR over 12 years.

When fear grips, its difficult to “stay the course”.

The issue is not of who’s “smarter” but who is “braver”.

And the “BRAVE” are the one who win the world.

So here are some tips:

Review your portfolio:

  1. If you are holding something that you would not hold in good times too, get out of it;
  2. If you are holding a quality business (business with track-record of going through cycles successfully), a quality fund (A fund Manager who has outperformed the market through cycles)-hold it
  3. Be dispassionate, don’t look at losses, look at the possibilities;
  4. Strengthen your portfolios by increasing allocation to businesses you thought were expensive earlier;
  5. Buy good businesses, that you missed earlier, at favorable risk-reward
  6. Position yourself for success not for “REGRET”


Manish Verma

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