It?s an old clich? that bad times are better teachers than good times. Like all clich?s, this has more than a grain of truth in it. This is as true of investing as it is in other spheres of life. Amidst the doom and gloom that surrounds the stock investing scenario, there is an opportunity to learn from mistakes, both one?s own and others. The major stock market indices are down about 33% from their peak on January 8, 2008. The Sensex is down to a level it first touched 17 months ago in December 2006. The Nifty is back to a level it first rose to in January 2007. Obviously, this doesn?t mean that all investors have lost this much money. Even if one ignores small companies, there are stocks that have lost a huge part of their value. Take the example of DLF, which is supposedly a bellwether of the Indian real estate industry and has been included by the exchanges in both the Sensex and the Nifty. This stock has lost close to 70% in the last three months. At the other extreme, there are about 30 equity mutual funds that have lost less than the Sensex from that peak. In more conservative types of funds, the losses are that much less. Take the example of equity-oriented hybrid funds, which generally have 50-80% in equity and the rest in safer fixed income assets. Of the 34 such funds that are in operation, more than 20 lost less than the Sensex. A couple of them are actually in profit over this period.
This is the story for investors who buy funds or buy stocks with cash. There are also those investors who were speculating on margins. Many of these people have lost 100% of their investments. Indeed many have lost more than that in the sense that they have had to borrow to pay back their liabilities. Clearly, while the stock market decline has been bad for almost all investors, it has been an utter disaster only for a certain type of investor. In general, most of us have reaped as we sowed. Those who were chasing high returns at high risk levels have lost more. Those who were in safer investments have lost less. The same is the case when one looks at time horizons. Those who?ve been in the markets for longer periods are still in substantial profits. Over the last three years, Rs 1 lakh invested in the average equity fund would be now be Rs 1.8 lakh. Mind you, three years isn?t really long-term in the world of equity investments. Investors who?ve been around for five years are still in serious money. Over these five years, Rs 1 lakh invested in the average diversified equity fund would now have grown to Rs 4.62 lakh. And this after absorbing all the losses that the last few months have brought!
The learning in all this is quite obvious?there have been no surprises. The stock markets have crashed, as they often do after long periods of rising. Riskier investments have lost more money than low risk investments. Riskier investment styles like margin trading have brought gigantic losses to those who got it wrong. Short-term investors have lost money. Long-term investors are still sitting pretty on substantial profits. All of this is conventional wisdom, and all of it has been proven correct. It?s always more exciting to say that conventional wisdom is wrong. However, conventional wisdom became conventional wisdom because it is usually correct.
What that means is that for the future, all of us ought to give conventional wisdom a little more respect. If you want excitement, then by all means go ahead and chase windfalls with a small amount of money. But for the bulk of your investments, stick to the basics by investing regularly and investing for the long term.
The author is CEO, Value Research