It’s the bear market which makes you wealthy in the long term as you get to buy stocks at low prices.
By Dinesh Thakkar
Most investors love a bull market, even I do, but still I pray for bear market early on than later on. Confused? Let me clarify. Let us take an example; you are investing Rs 20,000 per year. Currently, the market is giving a negative return of 5% every year. With each passing year, Rs 20,000 helps us in buying more units. This goes on for 10 years. Now for the next 10 years, you don’t invest and market gives an average return of 12% every year. So your investment of Rs 2 lakh becomes Rs 5 lakh in a span of 20 years.
Now let us see the reverse scenario where usually investors start investing when the market is in a bull trend. We have a bull market for the next 10 years and average growth is 12% and the next 10 years we witness bear market where average growth is negative 5%.
So in this scenario when we are investing Rs 20,000 every year, naturally our purchase of units each year would be less than the previous year as the market is going up. The end result is your investment of Rs 2 lakh ends up being Rs 2.10 lakh.
Remember Warren Buffet’s letter to Berkshire’s shareholders in 1997. He stated that if you plan to eat hamburgers for life and are not a cattle producer, should you wish for higher or lower beef prices? Similarly, if you are going to buy cars from time to time and are not an auto manufacturer, would you want prices to be higher or lower? And now for the finale, if you are a net saver during the next five years, should you hope for higher or lower stock market returns during that period?
All of them would say higher price right? But you are getting it wrong. Even though you are going to be net buyer for years to come, you are happy when stocks are rising? You are planning to eat hamburgers for years to come and yet you are elevated at higher prices of beef?
Of course, it is easier said than done as none of the investors would continue to invest for 10 years when average growth would be minus 5%. Such a bear market could shake the faith of even hard-core investors. I too, would try to keep part of my investment in the market knowing that the market goes up and down.
Do not invest too much if you want your investment within a short time—three to five years since we do not know how long a bear market could last. To sum up this in one line: the bull market makes you happy because you are seeing your investment increasing but it’s the bear market which makes you wealthy in the long term as you get to buy at low prices.
(The writer is CMD, Tradebulls Securities)