For many of us, periodic drops in stock prices is actually good news
07-Feb-2011 •Dhirendra Kumar
Whenever the stock markets fall, people behave as if it’s necessarily a bad thing. A statement like that must sound like a joke to many investors. After all, we are intensely conditioned to accept that a general fall in stock markets must be a bad thing. A couple of days ago the Nifty had stayed below 5,500 for most of the day and then closed above that level. Later, I heard an analyst say on a business channel, “We’ve managed to defend 5,500 today.”
I wondered who the ‘we’ was. Analysts? The media? Investors? Perhaps the people of India as the whole? I don’t know. Anyhow, the sense of achievement, of a battle fought hard and won deservingly was very much there in the statement. It is unfortunate that we all absorb this attitude. The reality is that such falls in stocks is irrelevant to all long-term investors. Warren Buffet famously said that it wouldn’t matter if the stock market closed down for ten years. The day-to-day shenanigans of punters is of no great importance to anyone who is interested in investing carefully in good companies and taking a long-term now.
In fact, for many of us, periodic drops in stock prices is actually good news. If you are investing regularly, either directly in stocks or through an SIP in an equity funds, then you should welcome volatility. It’s only when stocks fall that long-term investors are able to invest at good value. For example, the whole benefit of making SIP investments regularly comes from investing when the markets are down. If the markets were to deliver the same returns while rising smoothly, SIP would actually deliver lower returns than making a lump sum investment.
Eventually, the huge crash of 2008 ended up as a great way of improving returns. What looked like the end of the financial world at one point actually delivered some a bonanza for those who kept the faith and continued their SIPs throughout the low period. Investments made during the period when the markets were low gained by a huge margin when they shot up in 2009. Now, when it looks possible that we may have a somewhat poor year, investors should remember this. Short-term traders will keep repeating the mantra that any decline is a disaster but we know better.
This column first appeared in The Economic Times on February 7, 2011