What I Am Learning As I Lose Money In This Bear Market
Bull markets are all about earning money. Then what are bear markets about? Losing money? Sad but true! Especially for a typical long term investor like me...
There are two ways to react to a loss: 1. Put up a bold face 2. Cry about the loss. Unfortunately both do little to alleviate the pain! I also went through similar emotions. Recently talking to my life coach, while I was lamenting about all the portfolio losses suffered by me and my clients, I realised that bear markets are inevitable. And, in a way, necessary
as they bring about unique learning - the kind that never happens in a bull market.
Let me share five things I am learning, both as investor and advisor, during this horrific, world-is-coming-to-an-end bear market. And today I want to tell all my clients - seeing losses in your portfolio hurts more than seeing losses in my personal portfolio. And I can never thank you enough for the trust you have bestowed on me...
1. Bear Markets are as Real as Bull Markets: The world is going through one of its worst crises. People are getting sick and some are unfortunately succumbing to the illness. All the necessary lockdowns are impacting the economy, disrupting the cash flows of businesses and leading to job losses. World is already in a recession. The stock markets are down, reflecting all of this crisis that the economy will have to withstand. None of us called for it but it is here. We may hope that it ends soon, but it will follow its own course. Even when a storm recedes, the damages are still there...
We may want to wish away the nightmares and look for the brighter side. However, the pain is as real as pleasure. At this point, I fail to appreciate how it is an opportunity...In fact, it almost looks inappropriate to think of this as some God-sent opportunity of making quick money. I don’t know where markets will go next week, next month, or next year. What stock markets are representing now is today's reality. 12,000 Nifty a few weeks back was that time’s reality. Now it is history. 9,000 Nifty is today’s reality. Markets are unemotional and unforgiving. They don’t care about the past - only about the future. While we often anchor ourselves with the historical prices of stocks and benchmarks, future market movements have nothing directly to do with that past. And certainly nothing to do with the price I bought them at!
Bottomline: Today's stock price levels are as real as yesterday’s and most probably it's a reset rather than a blip.
2. Bear markets hurt! Period: All of us know that markets are volatile. We all know that DOWNs are temporary and UPs are permanent. In the history of human civilization we have come out strong after every disaster - whether natural or man-made...Et Al. This knowledge makes no difference when I am amid a bear market as an equity investor. When the stocks are bleeding, it hurts just as much while having all this knowledge than it would hurt without it - may be even more! It hurts an expert as much as it hurts a novice. Just like knowing that people are mortal does not take away the grief of losing a loved one.
Bear markets hurt and take away a portion of our wealth. At the same time, they test our character and make us stronger, provided we can withstand it. For those who can’t withstand it, equity is probably not the right asset class. But Again - a good lifetime learning for them as well! We may still have few who won’t learn even after this experience - they may continue to get the lesson till they complete their learning...
3. Disciplined allocation matters; not my market forecast: Like in every sphere of life, our views and attitudes deeply shape our investment decisions. Since last five years I have had a view that stocks are the best asset class for me because 1) History tells me that they have done well and have been a source of huge wealth creation, 2) I am a long-term investor (no short-term commitments), and 3) I am comfortable holding stocks as I am an expert in this field with a 15 year+ professional experience in equity research and investing. This view shaped my decision to invest all my financial capital in stocks and to be 100% allocated in equities. What I missed is that it was just my view and the future is unknown and unknowable. Everything worked very well till all hell broke loose. Now, seeing my equity portfolio having lost some 20-25% in a month, I am left watching the show as I am already fully invested and can’t buy stocks in quantity at these lower prices.
Forecasting the markets is exciting and most participants keep playing the guessing game. It may be fun as a game but definitely not with life’s earnings at stake! The guessing game leaves all categories of people with anxiety - those who are fully invested, those who are partially invested, and also those who are waiting on the sidelines. The only sure shot way to deal with the market uncertainty is to have an equity allocation policy and stick with it through all times. There is always a risk in equity investing. But there is also an opportunity risk in not investing.
A structure that can support every single investor is to have a fixed equity allocation, preferably between 30% and 70%, and stick with it through the bull markets as well as bear markets. The decision of the exact allocation target should depend on the individual risk appetite (personal attitude + near-term financial commitments). So I don’t know where the market will go. But if I know that I don’t know, I can have an asset allocation policy to cover both sides. The problem arises when I believe I know when actually I don’t. Means I don’t know where the market will go and I don’t know that!
4. When nothing works, equities don’t either; only cash does: My equity portfolio is a fair weather friend - great to hang out when things are going ga ga. It is wonderful to see the portfolio gains benefitting from all the prosperity and growth in the economy. However, when the economy sneezes, the equity portfolio gets fever. It’s the first to start collapsing! I can’t find any solace or any support here... Equity is for investments what non-discretionary expenses are for consumption. When recession hits, all lifestyle consumption like holidays goes out of the window and we are all back focussed on buying groceries.
Cash is the oxygen of the economy. And just like oxygen, I don’t notice it and give it the importance it deserves, until it starts dwindling. In normal times, too much cash makes me uncomfortable. I want to get rid of it as quickly as possible. Either by spending it or by investing it. But it is the only thing that will help me stay alive now, literally. Emergency funds are not to be undermined and not to be dipped in no matter how attractive an investment opportunity is. Terrible things have happened and I can’t rule them out in the future. I can not forecast them but I can always be prepared for them.
5. It is as good a time as any to focus on 10x: I can keep crying over spilt milk but unfortunately it would not help me one bit. Portfolio is built for the future, which is up for grabs, as always. It can go down by 30-40-50 % but I want my portfolio to grow 10x - not to be stable. I am not sure if this is the best time to buy but this is as good a time as any to think BIG. Corona or no corona, my investing will stop only when my life does. Having big goals does not mean being stupid and taking the risks that can wipe me out. But it definitely means looking at things in a new way; trying to find new opportunities to grow and to invest. Crisis itself is not an opportunity but it is as good a time as any to look for an opportunity. If not for other reasons, maybe just to remain sane…
Take Care and Be Safe
Happy Investing!