“If you are not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you are going to get”

Charlie Munger

Crisis impact us on several levels irrespective of its nature.

Even when it’s not personal, it creates fear that has the potential for bringing out the worst in us in terms of behaviour.

The Great Depression of the 20’s or the great financial crisis of 2008, each created a unique experience, for the generation that lived through it.

Generally there are 3 distinct parts to this experience:

  1. I experience the crisis personally- losing a job; suffering a loss in business; health
  2. I experience the crisis voyeuristically-I see businesses closing down; someone known has suffered etc.,
  3. Personal Finance suffering damage

The fear that a crisis creates whether due to a personal experience or through someone else influences how we project the short-term to the long-term.

Most of the time the crisis is out of my control, what decisions others will take is not a known variable, however my fear is personal.

The only way to safeguard myself is risk-aversion of all kinds.

Today for example everyone is wearing a mask, gloves, sanitising constantly; maintaining social distancing, working from home etc., etc.,

The fear of losing money is also real.

We turn to experts, watch TV channels-no one knows a thing (because they really don’t) and so I start believing the worst case.

There are special interests that create doomsday scenario, look at this for instance,

Clearly this writer has a vested interest in gold prices going up, however all I need is a validation of my fear, to make changes to my personal portfolio, that might now serve my long-term interest.

I have only considered a small set here of some businesses that were considered great businesses then and are considered great businesses even now.

All of these businesses suffered tremendous losses in share prices from 30% to 60%, however they were considered good businesses and those who held unto them have come out ahead.

What’s a Good Business

  1. Revenue generating (even if not Profit making for now); with positive cash flow, industry beating RoE, Margins
  2. Stable Management that’s competent and ethical

What Should you do?

  1. Maintain Equanimity
  2. Review your holdings and determine whether it’s a good business/Good manager (if it’s a fund) that you would hold irrespective of the situation
  3. Check your asset allocation sand how that’s got impacted by the market
  4. Rebalance to get back to your ideal asset-allocation

Finally remember 

“The big money is not in buying the selling, but in the waiting.”

Charlie Munger

Stay the course

#coronavirus; #marketcrash; #personalfinance; #assetallocation

Manish Verma

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