...the tough get going

Markets go up and down and then up again; that is their nature. Investors get euphoric, and then they get panicky. That is in their nature. After decades of observing the Indian markets, I have noticed that this cycle has played out regularly, though the timing is never predictable. Just look at the recent pattern - after climbing relentlessly for a long time, the Sensex has shed nearly 7.5 per cent in barely five weeks, triggering the usual chorus of doom-laden predictions. Is this the beginning of a prolonged bear market that the pessimists have warned about, or just another brief correction in a long-term upward journey? The truth is, nobody knows - and that uncertainty itself is part of what makes markets work.

Suggested read: The cycle inside your head

Yet, the story reads very differently for the patient investor who can look beyond these short-term gyrations. The same Sensex that seems so worrying today has nearly doubled over the past five years, delivering a 98 per cent return to those who stayed the course. This is the paradox of equity markets - they must fall periodically to rise sustainably. But there's an important caveat here that every investor must understand.

The critical difference lies in what exactly is falling. Broad market indices like the Sensex eventually recover and reach new highs, but that's a century-long pattern unlikely to change as long as India's economy keeps growing. But individual stocks? That's a completely different story. The graveyard of the Indian stock market is littered with once-mighty names that never recovered from their falls. Remember 2008-09? While the Sensex recovered and went on to multiply several times over, many of the era's favourite stocks - from real estate to infrastructure - are just skeletons of their former selves.

Suggested read: True and false lessons from the 2008 crash

This divergence in destiny that market crashes reveal creates two distinct paths for investors. For those who approach the market as researchers, analysing business fundamentals and competitive positions, market declines are like seasonal sales at their favourite shops - opportunities to buy good businesses at marked-down prices. Their focus remains on the underlying business rather than day-to-day price movements, allowing them to act rationally while others panic.

In contrast, there's the momentum-chasing punter, riding on the wave of market sentiment. When the tide of momentum goes out, as it invariably does, they're often left holding stocks propelled more by fantasies and hype than business reality. The same stocks that rose the fastest in good times usually lead the race downward - and many never recover. This is why serious wealth creation in the stock market has always been the preserve of the business-focused investor rather than the momentum player.

Suggested read: Punting is not investing

For real investors, this is an exciting time. Stocks that appeared overpriced a few weeks ago are now entering the zone of reasonableness. The fundamentals of India's best businesses haven't changed in the past month - their revenues continue to grow, their market positions remain strong, and their prospects are as bright as ever. What has changed is merely the price tag the market has temporarily assigned to them. When quality merchandise goes on sale, smart shoppers don't run away; they reach for their wallets. So serious investors are doing something quite different - they're methodically examining individual companies to discover what has become good value. My Value Research Stock Advisor team is burning the midnight oil on that. They're not trying to predict if the Sensex will fall another few per cent or bounce back - and guess what? There are plenty of such stocks already.

This is a psychological game. It's a time that separates the truly conviction-driven investors from the pretenders. It's easy to talk about buying on dips when markets are rising; it's far harder to do it when they're falling and every bit of news seems negative. The investor who has done their homework, who understands what they own and why they own it, can act decisively in such times. Those following the crowd or buying based on tips and trends will find their conviction evaporating precisely when they need it most.

Also read: When investing, do less to do more